BBM 201 Unit 1, Lesson 3
LESSON 3 ELEMENTS OF COST AND
CLASSIFICATION OF COST
TABLE OF CONTENTS:
3.0 OBJECTIVES
3.1 ELEMENTS OF COST
3.1.1 MATERIAL
3.1.2 LABOR
3.1.3 EXPENSES
3.1.4 OVERHEAD
3.1.5 COMPONENTS OF TOTAL COST
3.2 CLASSIFICATION OF COST
3.2.1 VARIABLE, FIXED AND SEMI-VARIABLE COSTS
3.2.2 PRODUCT COSTS AND PERIOD COSTS
3. 2.3 DIRECT AND INDIRECT COSTS
3.2.4 DECISION-MAKING COSTS AND ACCOUNTING COSTS
3.2.5 RELEVANT AND IRRELEVANT COSTS
3.2.6 SHUTDOWN AND SUNK COSTS
3.2.7 CONTROLLABLE AND UNCONTROLLABLE COSTS
3.2.8 AVOIDABLE OR ESCAPABLE COSTS AND UNAVOIDABLE OR
INESCAPABLE COSTS
3.2.9 IMPUTED OR HYPOTHETICAL COSTS
3.2.10 DIFFERENTIALS, INCREMENTAL OR DECREMENT COST
3.2.11 OUT-OF-POCKET COSTS
3.2.12 OPPORTUNITY COST
3.2.13 TRACEABLE, UNTRACEABLE OR COMMON COSTS
3.2.14 PRODUCTION, ADMINISTRATION AND SELLING AND DISTRIBUTION
COSTS
3.2.15 CONVERSION COST
1
, BBM 201 Unit 1, Lesson 3
3. ELEMENTS OF COST AND CLASSIFICATION OF
COST
This lesson deals with the understanding of various elements of cost which
form the part of the cost of the product/article or service. It also deals with various
classification of cost which are helpful in taking short term and long term decision
making.
3.0 Objectives
To understand the elements / components of cost
To familiarize with different types of cost.
3.1 Elements of Cost
The Elements of cost can be classified into three broad categories:
3.1.1 Material
The substance from which a product is made is known as material. It may be
in a raw or a manufactured state. It can be direct as well as indirect.
Direct Material
The material which becomes an integral or major part of a finished product
and which can be conveniently traced or identified or assigned to specific
physical unit is termed as direct material. Following are some of the examples
of direct material:
o All material or components specifically purchased, produced or
requisitioned from stores
o Primary packing material (e.g., carton, wrapping, cardboard, boxes etc.)
o Purchased or partly produced components
Indirect Material
The material which is used for purposes ancillary to the business and which
cannot be conveniently traced or identified or assigned to specific physical
units is termed as indirect material. Consumable stores, oil and waste, printing
and stationery material etc. are some of the examples of indirect material.
Indirect material may be used in the factory, office or the selling and
distribution divisions.
2
LESSON 3 ELEMENTS OF COST AND
CLASSIFICATION OF COST
TABLE OF CONTENTS:
3.0 OBJECTIVES
3.1 ELEMENTS OF COST
3.1.1 MATERIAL
3.1.2 LABOR
3.1.3 EXPENSES
3.1.4 OVERHEAD
3.1.5 COMPONENTS OF TOTAL COST
3.2 CLASSIFICATION OF COST
3.2.1 VARIABLE, FIXED AND SEMI-VARIABLE COSTS
3.2.2 PRODUCT COSTS AND PERIOD COSTS
3. 2.3 DIRECT AND INDIRECT COSTS
3.2.4 DECISION-MAKING COSTS AND ACCOUNTING COSTS
3.2.5 RELEVANT AND IRRELEVANT COSTS
3.2.6 SHUTDOWN AND SUNK COSTS
3.2.7 CONTROLLABLE AND UNCONTROLLABLE COSTS
3.2.8 AVOIDABLE OR ESCAPABLE COSTS AND UNAVOIDABLE OR
INESCAPABLE COSTS
3.2.9 IMPUTED OR HYPOTHETICAL COSTS
3.2.10 DIFFERENTIALS, INCREMENTAL OR DECREMENT COST
3.2.11 OUT-OF-POCKET COSTS
3.2.12 OPPORTUNITY COST
3.2.13 TRACEABLE, UNTRACEABLE OR COMMON COSTS
3.2.14 PRODUCTION, ADMINISTRATION AND SELLING AND DISTRIBUTION
COSTS
3.2.15 CONVERSION COST
1
, BBM 201 Unit 1, Lesson 3
3. ELEMENTS OF COST AND CLASSIFICATION OF
COST
This lesson deals with the understanding of various elements of cost which
form the part of the cost of the product/article or service. It also deals with various
classification of cost which are helpful in taking short term and long term decision
making.
3.0 Objectives
To understand the elements / components of cost
To familiarize with different types of cost.
3.1 Elements of Cost
The Elements of cost can be classified into three broad categories:
3.1.1 Material
The substance from which a product is made is known as material. It may be
in a raw or a manufactured state. It can be direct as well as indirect.
Direct Material
The material which becomes an integral or major part of a finished product
and which can be conveniently traced or identified or assigned to specific
physical unit is termed as direct material. Following are some of the examples
of direct material:
o All material or components specifically purchased, produced or
requisitioned from stores
o Primary packing material (e.g., carton, wrapping, cardboard, boxes etc.)
o Purchased or partly produced components
Indirect Material
The material which is used for purposes ancillary to the business and which
cannot be conveniently traced or identified or assigned to specific physical
units is termed as indirect material. Consumable stores, oil and waste, printing
and stationery material etc. are some of the examples of indirect material.
Indirect material may be used in the factory, office or the selling and
distribution divisions.
2
