Page 41 - DCOM202_COST_ACCOUNTING_I

Unit 2: Cost Elements and Classification

Notes
Example: Salary paid to the supervisor.
By Variability: The costs are grouped according to the changes taken place in the level of
production or activity.

It may be classified into three categories:
1. Fixed cost: It is cost which do not vary irrespective level of an activity or production.

Example: Rent of the factory, salary to the manager and so on.

2. Variable cost: It is a cost which varies in along with the level of an activity or production
like material consumption and so on.

Example: The fuel for an airline. The cost for it changes with the number of flights and
how long the trips are.
3. Semi-variable cost: It is a cost which is fixed up to certain level of an activity. Later it
fluctuates or varies in line with the level of production. It is known in other words as step
cost.

Example: Electricity charges
Labour costs in a factory are semi-variable. The fixed portion is the wage paid to workers
for their regular hours. The variable portion is the overtime pay they receive when they
exceed their regular hours.
By Controllability: These costs are classified into two categories in accordance with controllability,
as follows:
1. Controllable costs: Cost which can be controlled through some measures known as
controllable costs. All variable cost are considered to be controllable in segment to some
extent.
2. Uncontrollable costs: Costs which cannot be controlled are known as uncontrollable costs.
All fixed costs are very difficult to control or bring down; they rigid or fixed irrespective to
the level of production.
By Normality: Under this methodology, the costs which are normally incurred at a given level of
output in the conditions in which that level of activity normally attained.
1. Normal cost: It is the cost which is normally incurred at a given level of output in the
conditions in which that level of output is normally achieved.
2. Abnormal cost: It is the cost which is not normally incurred at a given level of output in the
conditions in which that level of output is normally attained.
Normal cost for a defined-benefit pension plan generally represents the portion of the economic
cost of the participant’s anticipated pension benefits allocated to the current plan year.

Abnormal cost maybe unexpected costs incurred, as a result of natural calamities or fire or
accident or such other losses.
By Time: According to this classification, the costs are classified into historical costs and
predetermined costs:
1. Historical costs: The costs are accumulated or ascertained only after the incurrence known
as past cost or historical costs.

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