MA-1(CH-3) CLASSIFICATION OF COSTS AND COST BEHAVIOUR
LECTURE-NOTES:
CLASSIFICATION OF COSTS AND COST BEHAVIOUR
CONTENTS:
1. Classification of costs
2. Cost behaviour patterns
3. Direct costs and indirect costs
1 CLASSIFICATION OF COSTS
1) Classification by Function:
• Production Cost (the cost of making, or buying, an item of inventory)
• Non-production (those costs charged in the income statement for the period that are not directly
related to the production of the goods.)
2) By Element:
• Material
• Labor
• Factory Overhead (FOH)
3) By Nature:
• Direct Cost
• Indirect Cost
4) By Behavior:
• Fixed Cost
• Variable Cost
• Semi-variable Cost (Total Cost)
• Steped Fixed cost
Total Cost of Organisation:
Product Cost Non-Product Cost or Period Cost
Direct Cost
Material Cost Admin Cost
Indirect Cost
Labor Cost Direct Cost Selling & Distribution
Indirect Cost
FOH Finance Cost
Indirect Cost
Indirect Cost
1 | HM Hasnan [CFM (UK), CFMA, AFA, MA (Economics)] Crescent College of Accountancy
, MA-1(CH-3) CLASSIFICATION OF COSTS AND COST BEHAVIOUR
Note:
• Direct Material + Direct Labor + Direct Expense = Prime Cost/Work in Process
• Indirect Material + Indirect Labor + Indirect exp = FOH
• All Material + All Labour + All FOH = Product Cost.
• Direct Labor + Direct Expense + FOH = Conversion Cost
Direct Cost Indirect Cost
• Specific to product All other cost (other than Direct cost)
• Separately identifiable/Traceable
to one unit of a product
Examples: Examples:
• Direct Material • Indirect Material
• Direct Labor • Indirect Labor
• All other factory Exp
COST CLASSIFICATION
(BY: FUNCTION “Product & Non-Product Cost”)
Practice Question-02:
Within the costing system of a manufacturing company the following types of expense are incurred
1. Cost of oils used to lubricate production machinery
2. Motor vehicle licence fee for delivery vehicles
3. Depreciation of factory plant and equipment
4. Cost of chemicals used in the laboratory
5. Commission paid to sales representatives
6. Salary of the secretary to the finance director
7. Trade discount given to customers
8. Holiday pay of machine operatives
9. Salary of security guard in raw material warehouse
10. Fees to advertising agency
11. Rent of finished goods warehouse in a factory
12. Salary of scientist in laboratory
13. Insurance of the company's premises
14. Salary of supervisor working in the factory
15. Repairs & maintenance cost of printer in the general office
16. Protective clothing for machine operatives
17. Interest on bank overdraft
18. Developing a new product in the laboratory
19. Floppy disks for general office computer
2 | HM Hasnan [CFM (UK), CFMA, AFA, MA (Economics)] Crescent College of Accountancy
LECTURE-NOTES:
CLASSIFICATION OF COSTS AND COST BEHAVIOUR
CONTENTS:
1. Classification of costs
2. Cost behaviour patterns
3. Direct costs and indirect costs
1 CLASSIFICATION OF COSTS
1) Classification by Function:
• Production Cost (the cost of making, or buying, an item of inventory)
• Non-production (those costs charged in the income statement for the period that are not directly
related to the production of the goods.)
2) By Element:
• Material
• Labor
• Factory Overhead (FOH)
3) By Nature:
• Direct Cost
• Indirect Cost
4) By Behavior:
• Fixed Cost
• Variable Cost
• Semi-variable Cost (Total Cost)
• Steped Fixed cost
Total Cost of Organisation:
Product Cost Non-Product Cost or Period Cost
Direct Cost
Material Cost Admin Cost
Indirect Cost
Labor Cost Direct Cost Selling & Distribution
Indirect Cost
FOH Finance Cost
Indirect Cost
Indirect Cost
1 | HM Hasnan [CFM (UK), CFMA, AFA, MA (Economics)] Crescent College of Accountancy
, MA-1(CH-3) CLASSIFICATION OF COSTS AND COST BEHAVIOUR
Note:
• Direct Material + Direct Labor + Direct Expense = Prime Cost/Work in Process
• Indirect Material + Indirect Labor + Indirect exp = FOH
• All Material + All Labour + All FOH = Product Cost.
• Direct Labor + Direct Expense + FOH = Conversion Cost
Direct Cost Indirect Cost
• Specific to product All other cost (other than Direct cost)
• Separately identifiable/Traceable
to one unit of a product
Examples: Examples:
• Direct Material • Indirect Material
• Direct Labor • Indirect Labor
• All other factory Exp
COST CLASSIFICATION
(BY: FUNCTION “Product & Non-Product Cost”)
Practice Question-02:
Within the costing system of a manufacturing company the following types of expense are incurred
1. Cost of oils used to lubricate production machinery
2. Motor vehicle licence fee for delivery vehicles
3. Depreciation of factory plant and equipment
4. Cost of chemicals used in the laboratory
5. Commission paid to sales representatives
6. Salary of the secretary to the finance director
7. Trade discount given to customers
8. Holiday pay of machine operatives
9. Salary of security guard in raw material warehouse
10. Fees to advertising agency
11. Rent of finished goods warehouse in a factory
12. Salary of scientist in laboratory
13. Insurance of the company's premises
14. Salary of supervisor working in the factory
15. Repairs & maintenance cost of printer in the general office
16. Protective clothing for machine operatives
17. Interest on bank overdraft
18. Developing a new product in the laboratory
19. Floppy disks for general office computer
2 | HM Hasnan [CFM (UK), CFMA, AFA, MA (Economics)] Crescent College of Accountancy
