Page 111 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
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

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 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.

2. Predetermined costs: These costs are determined or estimated in advance to any activity
by considering the past events which are normally affecting the costs.

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