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What are the types of cost and its classification in Cost Accounting?

 Cost Accounting helps to determine the total cost of production by ascertaining the different cost like fixed cost variable cost etc.

Cost is divided into three parts that is:

  • Material cost
  • Labour Cost 
  • Expense cost
Material cost: It is a cost used to purchase raw material to manufacture goods. It is divided into two parts that is direct cost and indirect cost.
  • Direct cost: It is a cost directly related to the production of goods. for example cement is use for construction work, timber is used for furniture etc.
  • Indirect cost: It is a cost indirectly related to the production of goods. for example repairing cost of factory machine etc.
 Labour cost: It is cost paid as a wages to the workers of factory. It is also divided into two part that is direct cost and indirect cost.
  • Direct cost: It is a cost which is paid to workers who directly related to the production activity. for example workers who are working on timber to make a furniture.
  • Indirect cost: It is a cost which is paid to employees who work on factory but not engaged to manufacture a goods for example store keeper, cleaning staff etc.
Expense cost: It is a cost associated with office and administrative work and selling and distribution of goods and services.It is also divided into two parts that is direct cost and indirect cost.
  • Direct cost: It is an expense which are directly related to production of goods and services. For example exercise duty, rent on machine, royalty etc
  • Indirect cost: It is an expense which are indirectly related to production of goods and services. In other words those expenses which are not incurred for particular job even it incurred for whole production process. For example electricity bill, stationery for work etc.
Classify according to variability:
  • Fixed cost
  • Variable cost
  • Semi - variable cost
Fixed cost: It is a cost which is fixed and  the total fixed cost does not change with change in output level. Fixed cost per unit is inversely related to  volume of output.For example lease,rent on machine, insurance, depreciation etc. 

Variable cost: It is a cost which changes with change in out put level. Variable cost is directly related to output level. It means if production level increases 3 times than the variable cost will also increases 3 times and if the output level half decreases then the variable cost will also decreases in half. The total cost of variable varies with output level but the per unit cost of variables does not change. For example cost of raw material, commission etc 

Semi variable cost:It is a cost which is partially fixed and partially variable. It includes both fixed and variable cost. For example electricity bill etc.

Other cost:

Sunk cost: Those cost which is incurred and never going to recover. For example you never get your money from bankrupt company, spending money for marketing but the result is not het as expected that money known as sunk cost.

Accounting cost: It is a cost of an activity. To know the cost of producing a goods accounting cost is used which includes fixed cost and variable cost.

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