CLASSIFICATION OF COST - (REVISED 2015)

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....the meaning specified. 4.1 Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and / or due to some abnormal situation of the production or operation. 4.2 Administrative Overheads: Cost of all activities relating to general management and administration of an entity. Administrative overheads shall exclude production overheads, marketing overheads and interest and finance charges. Administrative overheads do not include administration cost relating to production, factory, works or manufacturing. 4.3 Classification of cost: Classification of cost is the arrangement of items of costs in logical groups having regard to their nature (subjective classification) and purpose (objective classification). 4.4 Conversion cost: Conversion cost is the production cost excluding the cost of direct materials. 4.5 Cost: Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. Manufacturing of goods or rendering services involves consumption of resources. The type of cost often referred to in the costing system depend....

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....on of a product or a service. Cost Unit is generally adopted on the basis of convenience and practice in the industry concerned. Examples: • Power - MW • Cement - MT • Automobile - Number • Transportation- Tonne- Kilometre 4.11 Development Cost: Development cost is the cost for application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. 4.12 Direct Employee Cost: Employee costs, which can be attributed to a cost object in an economically feasible way. 4.13 Direct Expenses: Expenses relating to manufacture of a product or rendering a service, which can be identified or linked with the cost object other than direct material cost and direct employee cost. Examples: • Royalties charged on production • Job charges • Hire charges for use of specific equipment for a specific job • Software services specifically required for a job 4.14 Direct Materials: Materials....

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....ial used for the purpose of production of a product or rendering a service. 4.23 Normal capacity: Normal Capacity is the production achieved or achievable on an average over a number of periods or seasons under normal circumstances taking into account the loss of capacity resulting from planned maintenance. The above definition is also applicable for normal capacity in relation to a service being rendered. 4.24 Overheads: Overheads comprise costs of indirect materials, indirect employees and indirect expenses. 4.25 Packing Material Cost: The cost of material of any nature used for the purpose of packing of a product. Packing material can be classified into primary packing material and secondary packing material. Primary packing material is essential to hold and preserve the product for its use by the customer and secondary packing material enables to store, transport, inform the customer, promote and otherwise make the product marketable. 4.26 Prime cost: Prime cost is the aggregate of direct material cost, direct Employee cost and direct expenses. 4.27 Production Overheads: Indirect costs involved in the production of ....

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....grouped together under common heads shall be further classified according to their fundamental differences. It is the process of identification of each item and the systematic placement of like items together according to their common features. The same costs may appear in several different classifications depending on the purpose of classification. Cost is classified normally in terms of managerial objective. Its presentation normally requires sub-classification. Such sub-classification may be according to nature of the cost elements, functional lines, areas of responsibility, or some other useful break-up. The appropriate sub-classification depends upon the uses to be made of the cost report. Cost may be classified with reference to the nature of expense, its traceability to a cost object (direct/ indirect), its relation to functions /activities, its behaviour (fixed, semi-variable or variable)and its relationship to production process. 5.2 Scheme of classification shall be such that every item of cost is classified. 6. Classification of Costs 6.1 By Nature of expenses 6.1.1 Items of costs differ on the basis of their natur....

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....d or linked with a cost centre or cost object, including the fringe benefits like provident fund contribution, gratuity, ESI, overtime, incentives, bonus, ex-gratia, leave encashment and wages for holidays and idle time. 6.2.4 Direct Expenses are expenses, which can be assigned to a cost object. Examples: • Expenses for special moulds required in a particular cost centre • Hiring charges for tools and equipments for a cost centre • Royalties in connection to a product • Job processing charges 6.2.5 Indirect Material Costs are cost of materials, which cannot be directly assigned to a particular cost object in an economically feasible way. Examples: • Consumable spares and parts • Lubricants • Cost of computer stationary for administrative function 6.2.6 Indirect Employee costs are employee costs, which cannot be directly assigned to a particular cost object in an economically feasible way. Examples: • Salaries of security staff • Operating manager's salary 6.2.7 Indirect Expenses are expenses, which cannot....