This cost is not affected by a particular decision under consideration.

These heads make it easier to classify the costs in a cost sheet.

Avoidable costs are logically associated with some activity or situation and are ascertained by the difference of actual cost with the happening of the situation and the normal cost.When spoilage occurs in manufacture in excess of normal limit, the resulting cost of spoilage is avoidable cost.

Such costs may or may not include an element of overheads depending upon the type of costing system in force – absorption or direct. These heads make it easier to classify the costs in a cost sheet. Period cost is associated with a time period rather than manufacturing activity and these costs are deducted as expenses during the current period without previously classified as product costs. The types are: 1. The explicit cost is a cost that will necessitate a corresponding outflow of cash. Sunk-costs are always results of decisions taken in the past;-This cost cannot be changed by any decision in future. The following points highlight the five main types of classification of costs.

It is used in decision making and selection of alternative with maximum profitability. Opportunity cost of good or service is measured in terms of revenue which could have been earned by employing that good or service in some other alternative uses.Opportunity cost can be defined as the revenue forgone by not making the best alternative use. concepts cleared in less than 3 steps. No actual payment of interest is made but the basic concept is that, had the funds been invested elsewhere they would have earned interest.Thus, implicit costs are a type of opportunity costs which cannot be recorded in the books of account but are important for certain types of managerial decisions such as replacement of equipment, evaluation of profitability of two alternative courses of action.The book costs are those which do not require current cash payments.

The following points highlight the five main types of classification of costs. It is fixed in nature and inescapable.The costs incurred prior to the starting of commercial production are called as ‘pre-production costs’.

It is also used in price fixation and tendering. They are not considered in the cost of production for decision making and charged to Profit and Loss Account.The avoidable costs are those costs which under given conditions of performance efficiency should not have been incurred. The direct material cost can be directly allocated or identified with particular cost centres or cost units and can be directly charged to such cost centres or cost units.Raw materials are directly identifiable as part of the final product and are classified as direct materials. Indirect costs cannot be directly allocated to cost units or cost centres and have to be absorbed or recovered into cost units.The costs incurred on materials used to further the manufacturing process, which cannot be traced into the end product and the material required in the production process but not necessarily built into the product are called ‘indirect material’.For example cutting oil used in cutting surface, threads and buttons used in stitching clothes, lubricants used in maintenance of plant and machinery, cotton waste used in cleaning the machinery etc. Opportunity costs represent income foregone by rejecting alternatives. Costs of direct material, direct labour and direct expenses can be directly allocated or identified with a particular cost centres or a cost unit and can be directly charged to such cost centre or cost unit. These costs will just act as a guide for future course of action.The future costs are costs expected to be incurred at a later date and are the only costs that matter for managerial decisions because they are subject to management control. For example, wood used in production of tables and chairs, steel bars used in steel factory etc.

These costs involve cash outlay or payment to other parties.

For decision-making purposes of management, costs can be classified into various types such as opportunity cost, marginal cost, differential cost, relevant cost, imputed cost, replacement cost, sunk cost, normal/ abnormal cost, avoidable/ unavoidable costs, etc.

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All overhead costs are indirect costs.Costs of indirect material, indirect labour and indirect expenses in aggregate constitute the overhead costs and are the indirect component of the total cost. These costs can be postponed at least for some time, e.g., maintenance relating to building and machinery.It is the cost incurred to convert raw materials into finished goods. In this process the costs which are affected by the decisions are future costs. The norms of normal costs are the costs that usually occur at a given level of output, under the same set of conditions in which this level of output happens.Ans: The correct answer is C. Abnormal costs are unusual and irregular costs which do not occur in normal levels of output under standard conditions. These costs are also called as ‘escapable costs’.

A relevant cost is a future cost which differs between alternatives. Operating costs refer to the cost of undertakings which do not manufacture any product but which provide services.It is the cost of a contract with some terms and conditions of adjustment agreed upon between the contractee and the contractor.

It refer to costs which can be reduced due to a contraction in the activities of a business enterprise.

Sunk costs are always results of decisions taken in the past. Rent would then replace depreciation and interest.The shutdown costs are the costs incurred in relation to the temporary closing of a department / division / enterprise.

The format of the Cost Sheet; Classification of Costs 1] Classification by Nature.

Explicit costs are relevant in some decision making problems such as fluctuation of prices during recession, make or buy decisions etc.

The main product costing methods are: Job costing:This is the assignment of costs to a specific manufacturing job.

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