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7/26/2019 Chapter 3 Cost Classification
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Chapter 3
Cost ClassificationIbrahim Sameer (MBA - Specialized in Finance,
B.Com Specialized in Accounting & Marketing)
www.ibrahimsameer.wordpress.com
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Total Cost / Service Costs
A direct cost is a cost that can be traced in full to
the product, service, or department that is being
costed. An indirect cost (or overhead) is a cost that is
incurred in the course of making a product,
providing a service or running a department, but
which cannot be traced directly and in full to
the product, service or department.
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Direct Cost & Indirect Cost
Primary data are data collected especially for a
specific purpose. Raw data are primary data
which have not been processed at all, and whichare still just a list of numbers.
For Eg: Telephone survey conduct by Dhiraagu to
monitor the effectiveness of the customer service.
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Examples of Direct Cost &
Indirect Cost
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Direct Cost & Indirect Cost
Analysis of total cost
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Direct Cost & Indirect Cost
Direct Materials
Direct materials is all material becoming part of
the product.
For eg: component part, part finished product,
primary packing materials.
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Direct Cost & Indirect Cost
Direct Labour
Direct wages are all wages paid for labour
expended on work on the product itself.
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Direct Cost & Indirect Cost
Direct Expenses
Direct expenses are any expenses which are
incurred on a specific product other than directmaterial cost and direct wages. It is also referred
as chargeable expenses.
For eg: the hire of tool or equipment for particular
job, maintenance costs of tool.
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Direct Cost & Indirect Cost
Production overhead
Production OH include all indirect material costs,
indirect wages and indirect expenses incurredin the factory from receipt of the order until its
completion.
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Functional Costs
Classification by Function
Classification by function involves classifying
costs as production / manufacturing costs,administration costs or marketing / selling and
distribution cost.
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Functional Costs
Functional cost Includes:
Production cost
Administration cost
Selling cost
Distribution costs
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Fixed Costs & Variable Costs
A fixed cost is a cost which is incurred for a
particular period of time and which, within certain
activity levels, is unaffected by changes in the
level of activity.
Eg: Rent
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Fixed Costs & Variable Costs
A variable cost is a cost which tends to varywith
level of activity.
Eg: Direct materials, sales commission
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Fixed Costs & Variable Costs
Many items of expenditure are part fixed and part
variable and hence are termed as semi fixed or
semi variable costs.
Eg: telephone call charges
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Production & Non Production
Cost
For the preparation of financial statements, costs
are often classified as production costs and non
production costs.
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Production & Non Production
Cost
Production costs are all the costs involved in
the manufacture of goods. In the case of
manufactured goods, these costs consist of direct
material, direct labour and manufacturing
overheads.
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Production & Non Production
Cost
Non - Production costs are taken directly to the
income statement as expenses in the period in
which they are incurred; such cost consist of
selling and administrative expenses.
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Controllable cost & Period cot
Controllable cost
Controllable costs are items of expenditure which
can be directly influenced by a given managerwithin a given time span. OR
A cost which can be influenced by its budget
holder.
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Controllable cost & Period cot
Period cost
Period costs is charged against the sales for the
period. It is not carried forward in inventory to afuture period. OR
A cost that relates to a time period which is
deducted as expenses for the period and is not
included in the inventory valuation.
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Cost Codes
Once costs have been classified, a coding system
can be applied to make it easier to manage the
cost data, both in manual systems and in
computerized systems.
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Cost Codes
Feature of a good coding system
The code must be easy to use and
communicate.
Each item should have unique code.
The coding system must allow for expansion.
The coding system should be brief.
The likelihood of errorgoing undetected should be
minimized.
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Types of Codes
Sequential (or progressive) codes
Numbers are given to items in ordinary numeral
sequence, so there is no obvious connectionbetween an item and its code. For example
000042 42cm nail
000043 office stapler
000044 hand wash
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Types of Codes
Block (or group classification) codes
These are an improvement on simple sequence
codes, in that digit (often the first one) indicates theclassification of an item. For example
4NNNNN Nails
5NNNNN Screws
6NNNNN Bolts
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Types of Codes
Faceted codes
These are a refinement of block codes, in that
each digit of the code gives information about anitem. For example
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Types of Codes
The 1st digit: 1 Nails
2 Screws
3 Bolts
The 2nd digit: 1 Steel
2 Brass
3 Copper
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Types of Codes
The 3rd digit: 1 50mm
2 60mm
3 75mm
A 60mm steel screw would have a code of 212
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Types of Codes
Mnemonic codes
Under this type of coding the code means
something, it may be an abbreviation of the objectbeing coded. Most of the time airport use this type
of coding. For example
SIN Singapore
LAX Los Angeles
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Types of Codes
Hierarchical codes
This is a type of faceted code where each digit
represents a classification, and each digit further tothe right represents a smaller subset than those to
the left. For example
3 = Screws
31 = flat headed screws
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Advantages of Coding
A code usually brieferthan a description, thereby
saving clerical time in a manual system & storage
space in a computerized system.
A code is more precise than a description and
therefore reduce ambiguity.
Coding facilitates data processing.
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Cost unit, Cost object &
Responsibility centres
Cost centres
Cost centres are collecting places for costs
before they are further analysed. Cost are furtheranalysed into cost units once they have been
traced to cost centres.
Cost centres may include a department, a
machine, a project.
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Cost unit, Cost object &
Responsibility centres
Cost units
A cost unit is a unit of product or service to
which cost can be related. The cost unit is thebasic control unit for costing purpose.
Eg: room (in hotel), Barrel (in the brewing industry)
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Cost unit, Cost object &
Responsibility centres
Cost objects
If the user of management information wish to
know the cost of something, this something iscalled a cost object.
Eg: the cost of product, the cost of service, the
cost of operating a department.
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Cost unit, Cost object &
Responsibility centres
Some examples of profit centre:
A sales division selling products to customers.
A service division providing after sales service.
Individual shop in a retail chain.
Local branches in a regional or nationwide
distribution business.
A geographical region. Eg: a country
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Cost unit, Cost object &
Responsibility centres
Revenue centre
Revenue centres are similar to cost centres and
profit centres but are accountable for revenueonly.
Revenue centre managers should normally have
control over how revenues are raised.
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Cost unit, Cost object &
Responsibility centres
Investment centre
An investment centre is a profit centre whose
performance is measured by its return oncapital employed.
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Cost unit, Cost object &
Responsibility centres
Responsibility centre
A responsibility centre is a function or department
of an organization that is headed by a managerwho has direct responsibility for its
performance. (OR)
It is an organization unit for which a manager is
made responsible.
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Questions & Answers
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Thank You
Ibrahim SameerSeek knowledge from cradle to grave