Session 3 Types of cost and cost behavior Main contents: 1. Classifying costs 2. Cost objects, cost and co
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