Cost classification by function

COST CLASSIFICATION BY FUNCTION

This is the classification of cost into the major activities undertaken by a business, such as production administration, etc.

1.      Production cost; the cost incurred directly from the production of goods. That is, the cost incurred by a factory up to the point that the products are ready for warehousing. This is made up of cost of raw materials, factory wages and salaries and other production overhead. It is known as a manufacturing cost.

2.      Administration cost: The cost incurred in the formulation of policies, decision making and control of the activities of an organisation. Examples include salaries of office staff, cost of office stationery, cost of office machines, etc.

3.      Selling and marketing cost: The cost incurred in securing orders, creating demand, providing customer service and increasing sales. Examples include salaries of sales reps or sales dept, cost of marketing research, bad debts, showroom expenses, etc

4.      Distribution Cost: The cost incurred in making the finished product ready for despatch and delivering it to the customer. Examples are cost of packaging, salaries of despatch drivers, salaries of packers, cost of packing cases, warehouse costs, etc.

5.      Finance Cost: The cost incurred in securing and servicing finance .Examples are loan interest, share issue expenses, dividends, cash discount, etc.

6.      Research and Development Cost: the cost incurred for the acquisition of new or improved knowledge in the production of goods and services. Examples are salaries of research personnel, cost of research equipment, etc.

Other Management Accounting Terms

1.      Controllability of cost: This considers the extents to which cost can be influenced by a particular manager lf an organization .These are

(a)    Controllable Cost: Any cost that can be influenced by a particular manager of an organisation.

(b)   Uncontrollable Cost: Any cost that cannot be influenced by a particular manager of an organisation.

2.      Normality of Cost: this considers whether a particular cost is expected to be incurred under certain conditions. These are

(a)    Normal Cost: Any cost incurred under operating conditions that are considered to be normal.

(b)   Abnormal cost: Any cost incurred under operating conditions that are not considered normal. An example may be cost incurred to repair a faulty product that has been manufactured.

3.      Avoidability of Cost: This considers the extent to which a particular may cease to occur when an activity or department is closed .These are

(a)    Avoidable Cost: Any specific cost which can be prevented when an activity or department does not exist.

(b)   Unavoidable Cost: Any specific cost which cannot be prevented when an activity or department does not exist.

4.      Cost Centre: It is a production or service location, function, activity or an item of equipment in respect of which costs may be ascertained and allocated to cost units. Eg production dept. administration dept, selling and marketing dept, etc.

5.      Cost Unit: It is a quantitative unit of a product or service in respect of which costs may be ascertained for the purposes of control. E.g. meal served, bed occupied, bar of soap, gallon of paint, etc.

6.      Revenue Centre: A part of a business responsible for the raising of revenue with no responsibility for the cost of doing so.

7.      Profit Centre: A part of the business accountable for both costs and revenues.

8.      Investment centre: A profit centre that is also responsible for investment and whose performance is measured by its return on investment.

9.      Responsibility Centre: A department or function whose performance is a direct responsibility of a particular manager.

10.  Discretionary Cost: this is any cost which arises directly as a result of a particular decision.

11.  Cost Object: Any activity for which a separate measurement of cost is desired.

12.  Period Cost: any cost incurred within a particular accounting period and is charge as expenditure within that period.

13.  Product Cost: Any cost incurred directly in producing a particular product and is matched with revenue generated from the sale of the product.

14.  Relevant Cost: Any cost affected by a particular decision.

15.  Irrelevant Cost: Any cost not affected by a particular decision.

16.  Sunk Cost: Any cost already incurred and will not be affected by any decision taken e.g. cost of research already undertaken.

17.   Notional or imputed cost: Any cost which does not involve the outflow of cash. E.g. depreciation.

18.  Differential Cost: Any cost that varies between alternative courses of action.

19.  Opportunity Cost: The cost of the benefit forgone in choosing a particular alternative in preference to another.

20.  Conversion Cost: Any cost incurred in transforming raw materials into finished products. That is labour cost and production over heads

21.  Marginal Cost: The additional cost incurred for producing one additional output.

22.  Standard Cost: The pre-determined unit cost of product or service expected to be incurred under normal operating conditions.

23.  Budgeted Cost: The pre-determined total cost of an activity or operation.

24.  Costing methods: These are the costing systems that are used in the ascertainment of cost. They are job costing, batch costing, contract costing, process costing and service costing. 

25.  Costing techniques: These are the costing systems that are used in presenting information to management. Examples include marginal costing, absorption costing, standard costing, etc.

26.  Incremental Cost: the additional cost incurred as a result of a particular decision or activity

<<Back to Home Page 
Go to other topics in Principles of Cost Accounting 
Go to the list of other subjects>>