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Cost Accounting – I Gopika Juneja, Lovely Professional University

Notes Unit 2: Cost Elements and Classification

CONTENTS

Objectives
Introduction
2.1 Cost Unit
2.2 Elements of Cost
2.3 Classification of Costs
2.3.1 General Classification

2.3.2 Technical Classification
2.4 Summary
2.5 Keywords
2.6 Review Questions

2.7 Further Readings
Objectives

After studying this unit, you will be able to:
z z Understand the meaning of cost unit;

z z Learn the elements of cost;
z z Describe the classification of cost.

Introduction

Cost can be defined as the value attributed to a resource. There are three resources of a cost, i.e.,
material, labour and services for a manufacturing organisation. Cost is the amount of expenditure
incurred on a given thing. The committee on cost concepts and standards of American Accounting
Association has defined “cost is foregoing measured in monetary terms incurred or potentially to
be incurred to achieve a specific objective”. In this way, cost indicates a foregoing of something
of value in consideration of obtaining some sort of benefit. The term ‘cost’ connotes different
meanings to different people. But in cost accounting it is used in a special sense.
According to Crowning shield cost represents, “an expenditure made to secure an economic
benefit, generally resources that promise to produce revenue. The resources may have tangible
substance (material) or they may take the form of labour and services”.
Cost has been defined in terminology given by the Institute of Cost and Management Accountants
as “the amount of expenditure incurred or attributed on a given thing”. More simply, it can be
defined as that cost which is given or scarified to obtain something. Thus, the cost of an article is
its purchase or manufacturing price, i.e., it would consist of its direct material cost, direct labour
cost, direct and indirect expenses allocated or apportioned to it.
The term cost is denoted by “expenses” when the cost is incurred after deriving the benefit. The
AICPA Committee on terminology defined expenses as “all expired cost which is deductible
from revenue”. In a narrow sense, expense refers to such items as production, administrative
and selling expenses.

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