Cost Types

ACCA F2 - Management Accounting

Cost

Classification by element:

Ø  Material  -  material used for production, non-production material e.g. stationary, cleaning

Ø  Labor - labor used for production, non-production labor e.g. sales and support staff

Ø  Expenses - expenses used for production, other than material and labor e.g. rent, depreciation, telephone

Classification by function

Ø   production costs

o   Direct

§  Material - material used for production e.g. raw material for production

§  Labour -  labor used for production e.g. production staff cost

§  Expenses - expenses used for production e.g. depreciation of machine

o   Variable production overhead - electricity/fuel used by machine

o   Fixed production overhead - space charge for production facility

Ø   (period cost) non-production costs

o   Administration - account and head office cost

o   Selling - sales department cost

o   Distribution - warehousing and distribution cost

o   Finance - loan and interest

Classification by behaviour (traceability)

Ø  Direct costs - material , labor and expenses (Check above under direct production cost)

Ø   Indirect cost  (overhead) - material (lubricants used for production machine), labor (supervisor, managers) and expenses (factory rent)

Classification by nature

Ø  Fixed - cost is static for certain range of production in a period e.g. rent, minimum wage

Ø  Variable - cost varies with production level e.g. direct material

Ø  Semi variable - defined minimum fixed cost increasing with production level e.g. electricity

Ø  Step fixed cost - changes for different range of production e.g. warehouse $20 (100-200unit), $40 (200-300unit), ….

Relevancy cost - for investment appraisal

Ø  Irrelevant cost

o   Sunk cost - cost already incurred

o   Non cash flow costs

Ø  Relevant cost

o   Out of pocket cost - all direct and indirect cost

o   Opportunity cost - earning opportunity forgone when selecting one alternative project

Controllability - for performance appraisal

Ø  Controllable - costs which can be influenced by authorized personnel. Cost control is done by reducing material wastage, idle time and unnecessary expenses.

Ø  Uncontrollable - costs which cannot be influenced by authorised personnel. Eg. cost of raw material, labor and machinery.

The different types of costs and they behaviour