Session 3 Types of cost and cost behavior

　　Main contents:

　　1. Classifying costs

　　2. Cost objects, cost and cost centers

　　3. Analysis of costs into fixed and variable elements

　　3.1 Classifying costs

　　Costs can be classified in a number of different ways:

　　· Element – costs are classified as materials, labor or expenses (overheads)

　　· Nature – costs are classified as being direct or indirect.

　　a. Direct cost is expenditure that can be directly identified with a specific cost unit or cost center.

　　(1). Direct material is all material becoming part of the product unless used in negligible amount and/or having negligible cost. (component parts, part finished work and primary packing material)

　　(2). Direct wages – are wages paid for labor either as basic hours or as overtime expensed on the product line.

　　(3). Direct expense are any expense which are incurred on a specified product other than direct material and direct labor.

　　b. Indirect costs/ overheads; are expenditure that can not be directly identified with a specific unit or cost center and must be ‘shared out’ on an equitable basis.

　　· Behavior –costs are classified as being fixed, variable, semi-variable or stepped fixed.

　　a. Fixed costs: are costs that are not affected in total by the level of activity, but remain the same.

　　b. Variable costs: are the costs that change in total in direct proportion to the level of activity.

　　c. Semi-variable/semi-fixed/mixed costs: are costs which contain both fixed and variable components and so it partly affected by changes in the level of activity.

　　d. Step costs: are fixed in nature but only within certain level of activity.

　　· Function: costs are classified as being production or non-production costs.

　　e. Production costs: are costs included in a stock valuation. The product cost is the cost of making or buying.

　　f. Period costs (general cost): are costs that are not attributed to product costs, but instead are treated as a cost of the time period when they arise.

　　· Other cost classification:

　　Avoidable cost: cost which can be eliminated by changing operations

　　Unavoidable cost: cost which will not be changed by decision making.

　　Controllable cost: those cost controllable by a particular manager in a given period.

　　Uncontrollable cost: any cost that can not be affected by management within a given period.

　　COST MODEL: $

　　Direct material: 2

　　Direct labor 3

　　Direct expense 1