Page 20 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 1: Introduction to Cost Accounting

By Variability Notes

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 fl ights 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

The 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 defi ned-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 fi re or
accident or such other losses.

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