## Classification of Costs
Definition: Grouping of costs according to their common characteristics.
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### (I) By Nature / Element
| Cost | Definition | Examples |
|---|---|---|
| Direct Material | Present in finished product; economically identifiable | Cloth in dress-making |
| Direct Labour | Can be wholly attributed to a cost object | Production floor workers |
| Direct Expenses | Other than DM & DL; specifically incurred for cost object | Hire of special machinery |
| Indirect Material | Not part of finished product | Machine/building maintenance stores |
| Indirect Labour | Cannot be directly allocated; apportioned | Foremen, supervisors |
| Indirect Expenses | Cannot be wholly allocated to cost centres | Factory rent, insurance, power |
| Overheads | Aggregate of indirect M + L + E | Production, admin, selling, distribution |
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### (II) By Functions
Direct Material → Direct Labour → Direct Expenses → Production Overheads → Admin Overheads → Selling Overheads → Distribution Overheads → R&D
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### (III) By Variability / Behaviour
| Type | Behaviour | Examples |
|---|---|---|
| Fixed | Constant regardless of output level | Rent, insurance |
| Variable | Changes proportionally with output | Direct material, direct labour |
| Semi-variable | Has both fixed and variable components | Telephone bills, electricity |
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### (IV) By Controllability
- Controllable: Can be influenced by the manager of that responsibility centre (e.g., direct labour, material).
- Uncontrollable: Cannot be influenced by a specific manager (e.g., allocated head-office costs).
> Note: The distinction is not always clear-cut; it depends on context and level of management.
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### (V) By Normality
- Normal Cost: Cost normally incurred at a given output level under normal conditions.
- Abnormal Cost: Not normally incurred; charged to Costing Profit & Loss Account.
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### (VI) By Managerial Decision Making
| Cost Term | Meaning |
|---|---|
| Pre-determined Cost | Computed in advance before production starts |
| Standard Cost | Pre-determined based on efficient operation standards |
| Marginal Cost | Change in total cost from producing one more/less unit |
| Estimated Cost | Expected cost based on available information |
| Differential Cost | Change in total cost due to change in activity/technology |
| Imputed Cost | Notional cost (e.g., opportunity cost); no cash outlay |
| Capitalized Cost | Recorded as asset first, expensed later |
| Product Cost | Costs associated with purchase/manufacture of goods |
| Opportunity Cost | Value of benefit foregone by choosing an alternative |
| Out-of-pocket Cost | Involves actual cash outflow; relevant for short-term decisions |
| Shut-down Cost | Incurred even when plant is shut; cannot be eliminated |
| Sunk Cost | Historical cost; irrelevant to current decision-making |
| Absolute Cost | Total cost of a product, process, or unit |
| Discretionary Cost | Not tied to cause-effect; arises from periodic management decisions |
| Period Cost | Not assigned to products; expensed in the period incurred |
| Engineered Cost | Clear cause-effect relationship between inputs and outputs |
| Explicit Cost | Out-of-pocket; involves immediate cash payment |
| Implicit Cost | No immediate cash payment; not recorded; also called economic cost |