These include selling expenses (such as advertising costs, delivery expense, salaries and commission of salesmen) and administrative expenses (such as salaries of executives and legal expenses). Book costs can be converted into out of pocket costs by selling the assets and having them on hire. Standard cost is a predetermined cost which is computed in advance of production on the basis of a specification of all the factors affecting costs and used in Standard Costing. Revenues from each of the channels come after deducting the cost from sales.Expenses related to individual departments are assigned to respective departmental managers, which is then used to analyze the performance of the manager and develop Now since we have seen the categories of the cost classification briefly, let us examine the basis on which the costs are segregated:As the category itself suggests that this is the expense to be recorded in the way the company bears it, and for the purpose, it is used for, some major categories can be material and labor. Controllable costs are considered so when the decision of taking on the cost is made by one individual. This cost is not affected by a particular decision under consideration. Type # 1.

The explicit cost is a cost that will necessitate a corresponding outflow of cash. It is the difference in total cost that will arise from the selection of one alternative to the other. According to behaviour of cost: Direct Cost – It refers to costs which involve a direct expense and are easily traceable. Accounting costs are treated as expenses. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Interest on capital is common type of implicit cost. Cost Classification by Nature of Production Process.It is the cost of material of any nature used for the purpose of production of a product or a service. Opportunity costs represent income foregone by rejecting alternatives. Accounts are maintained for cost of a process for a period. These costs are recorded in the books of account and can be easily measured.These costs are also called as ‘imputed costs’ or ‘notional costs’. Cost Classification in Relation to Cost Centre 3. The expense which is of importance today may not hold any value tomorrow, so the basic categories in this can be Historical, pre-Determined, Standard, and As much as cost is an expense to the company, it is also considered a tool for future evaluations. (4) Architects, surveyors and other consultation fees of particular job or work.Sometimes, if the direct expenses are negligible or small amount, it will be treated as overhead.Indirect costs cannot be allocated but which can be apportioned to cost centres or cost units. These changes have resulted in higher overhead rates and a shrinking base of direct costs over which to allocate those costs.The historical cost is the actual cost, determined after the event. It is used in decision making and selection of alternative with maximum profitability. 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. How is cost accounting different from financial accounting? Accounting costs are those for which the entrepreneur pays direct cash for procuring resources for production. Standard Costing 6. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. The format of the Cost Sheet; Classification of Costs 1] Classification by Nature. Because cost accounting is used as an internal management tool, it does not have to adhere to any specific standards and varies from one company to another. Cost Classification by Time 4. It is the maximum amount that could be obtained at any given point of time if a resource was sold or put to the most valuable alternative use that would be practicable. These costs are incurred from the initiation of project till its formal commercial production.When a new factory is in the process of establishment or a new product line or product is taken-up, a new project is undertaken, but the commercial operations have not started, during such period all costs incurred are considered as pre-production costs and are treated as deferred revenue expenditure except the costs which have been capitalized. You may learn about from the following articles –Copyright © 2020. The costs of inputs in forming the product viz., the direct material, direct labour, factory overhead constitute the product costs.The period cost is a cost that tends to be unaffected by changes in level of activity during a given period of time. Nonmanufacturing costs - not incurred in transforming materials to finished goods. Sunk-costs are always results of decisions taken in the past;-This cost cannot be changed by any decision in future. Categorizing the costs into appropriate categories allows us to have a clear picture of the whole business model and gives the management an eagle-eye view of the entire process.This article has been a guide to What is Cost Classification & its Definition. For example, cost of material and labour must be incurred if production is to take place.The postponable cost is that cost which can be shifted to the future with little or no effect on the efficiency of current operations. Article shared by: ADVERTISEMENTS: The following points highlight the top six types of costing systems. A variable cost is a corporate expense that changes in proportion to production output. By-product cost is the cost assigned to the by -products.Before uploading and sharing your knowledge on this site, please read the following pages:Read Accounting Notes, Procedures, Problems and Solutions They include things like labour costs and electricity costs.There are mainly four types of cost accounting: standard cost accounting, activity based accounting, lean accounting and marginal costing.This type of cost accounting uses different types of ratios to compare how efficiently labour and materials are being used (or can be used) to produce goods and services in standard conditions.

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