Page 19 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes By Functions

Under this methodology, the costs are classified into various divisions or functions of the

enterprise viz. Production cost, Administration cost, Selling & Distribution cost and so on.

The detailed classification is that total of production cost sub-classified into cost of manufacture,
fabrication or construction.
Example: 1. Costs of manufacture: The cost of materials for packaging, the cost of
electricity and water, the cost of promotion and advertising, etc.
2. Costs of construction: The cost of materials, the cost of equipment, the cost of labour, etc.
(a) Cost of transportation

(b) Cost of management and co-ordination
(c) Depreciation of fi xed assets.

And another classification of cost is commercial cost of operations; which is other than the cost of
manufacturing and production.
The major components of commercial costs are known as administrative cost of operations and
selling and distribution cost of operations.

Example: 1. Administrative cost of operations: Expense incurred in controlling and
directing an organization.
2. Selling and distribution cost of operations: Any cost incurred by a producer or wholesaler
or retailer or distributor (as for shipping, etc.)

Direct and Indirect Cost

1. Direct cost: This classification of costs are incurred for the manufacture of a product or
service. They can be conveniently and easily identifi ed.
(a) Material cost for the product manufacture: It includes the direct material for
manufacturing.

Example: For garments factory-cloth is the direct material for ready made garments.
(b) Labour cost for production: Labour cost is the cost of the entire labour who is directly
involved in the production of a product as well as attributable to single product
expenses and so on.
2. Indirect cost: The costs which are incurred for and cannot be easily identified for any single

cost centre or cost unit known as indirect cost.
Indirect material cost, Indirect labour cost and Indirect expenses are the three different
components of the indirect expenses.
(a) Indirect material:

Example: Cost of the thread cannot be conveniently measured for single unit of the
product.
(b) Indirect labour:

Example: Salary paid to the supervisor.

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