Page 110 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 5: Basic Cost Concepts

The major components of commercial costs are known as administrative cost of operations and Notes
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 identified.
(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.

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.

LOVELY PROFESSIONAL UNIVERSITY 105