Different Types of Cost

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1.1. Origin of the Assignment
Our course teacher Rehana Fowzia authorized us to prepare this assignment. She authorized us not only orally in our class but also with written documents.

1.2 Purpose
This assignment has been made for an academic requirement of the course “Cost Accounting”. It has made to gain practical knowledge about “Classification Of Costs”.

1. 3. Scope of the study
We, the group members have conducted a survey at “Prime Textile Ltd.”, which was our chosen company and have collected information which is related to Classification Of Costs in the organization from the Admin and HR manager. We are benefited to visit the “Prime Textile Ltd.”. It helps us to increase the knowledge of our subject “Cost Accounting”.

1.4. Limitations
Lack of financial support we cannot make this report more informative, we do prepare the assignment with our own financial ability. For the lack of enough time we cannot go through in details. Some information was confidential from the firm‟s point of view. So, the Assistant vice President did not provide us that information. Moreover it was not possible for us to go to conduct the survey with all the group members when we got the appointment of the Admin and HR manager .They cannot provide enough information to us. So we cannot provide M/A of the company. We spent more time on this issue otherwise we could make it more informative.

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2. Objectives
Bangladesh is developing country. There are many textile company exists in our country. Prime Textile is one of them. The main objective of the company is to give best service to the customer and try to contribute economic development in the country. In the below the objectives are explained:  Contribution in national income.  Contribution in national economy.  Create employment opportunity.  Formation of capital and  Enhances standard of living.

3. Historical Background of organization

Prime Group is one of the leading manufacturers and Exporters of Readymade Garments in Bangladesh. Since its inception in 1984, the group has been able to Create a distinctive image amongst American & European garment buyers as makers of high quality garments. Right from its inception the policy of the company has been to provide total buyer's satisfaction by offering quality garments in time to meet the commitments of quality and prompt delivery. In each stage of production we maintain close monitoring and ensure quality. Main strength manner of this Company is planned infrastructure, which is reinforced by 1000 employees, who from the background of the Company. Employees are trained with teamwork culture, Department are headed by qualified and experience managers assisted by executives who undergo continuous new developments training. We specialize in heavier weights & bottom line garments such as Pants, Shorts, Bermudas, Skirts & Skorts. We also make Overalls, Shortalls, Jackets and Shirts.

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2.1.Sources & method of collecting data
For this report we have collected data from two sources1. Primary Source: We have collected primary data by conducting a questionnaire survey at “Prime Textile Ltd.” We have got the answers of the questionnaire by asking questions to and gossiping with the Assistant Vice President, whom we surveyed. The questionnaire was built by following the instructions that you gave us to make this assignment. We, the group members have gathered the information and put our remark at the questionnaire papers. Our opinions are almost alike, that indicates more reliability.

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Secondary Source: We gathered some additional information from the website1 of the company and from some printed documents of the company and our text book.

4. Classification Of Costs
Cost:
Cost is the amount of expenditure, actual (incurred) or notional (attribute), relating to a specific thing or activity. The specific thing or activity may be a product, job, service, process or any other activity. Cost is the amount of resources given up in exchange for some goods or services.

4.1 Natural Classification Of Costs

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Direct material: Direct material refers to the cost of materials are conveniently and
economically traceable to specific units of output. The term “direct materials” is denoted by certain other names also, such as process material, prime cost material, stores material, construction materials. The following group of materials fall within the definition of direct materials. a)all materials specially purchased for a particular job, order ,process or product. b)Materials passing from one process to another process. c)Primary packing materials, e.g.; Wrappings, cardboard boxes, etc.

Direct Labor: Direct labor is defined as the labor of those workers who are engaged in
the production process. It is the labor expended directly upon the materials comprising the finished product. Other terms for the direct labor are: process labor, productive labor, operating labor: examples are the labor of machine operators and assemblers.

Direct expenses: These include any expenditure other than direct material and direct
labor directly incurred on a specific product or job. Such special necessary expenses can be indentified with product or job and are charged directly to the product as part of the prime cost. Examples of direct expenses are: a) Cost of hiring special machinery or plant. b) Cost of special moulds, designs and patterns. c) Experimental costs and expenditure on model and pilot schemes.

Factory overhead: Factory overhead also called manufacturing overhead or factory
burden, is the total cost involved in operating all production facilities of a manufacturing business. It generally applies to indirect labor and indirect cost, it also includes all costs involved in manufacturing with the exception of the cost of raw materials and direct labor. Factory overhead also includes certain costs such as quality assurance costs, cleanup costs, and property insurance premiums. Factory Overhead is generally defined as indirect labor, Indirect material and all other factory expenses that cannot conveniently be identified with nor charged directly to specific job or products or final cost objectives, such as government contracts. Other terms used for factory overhead are factory burden, manufacturing expense, manufacturing overhead, factory expense, and indirect manufacturing cost.

Selling and distribution and administrative overheads: Selling and
distribution overheads begin when the factory cost end. Such expenses are generally incurred when the product is in saleable condition. It cover the cost of making sales and
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delivering/dispatching products. These costs included advertising, salesmen salaries and commission, packing, storage, transpiration and sales administrative costs. Administrative overhead includes costs of planning and controlling the general policies and operation of a business enterprise. usually, all costs which can‟t be charged either to the production or sales division are considered as administrative costs.

4.2 Costs Behaviors
Fixed cost: Fixed cost is a cost which does not change in total for a give time period
despite wide fluctuations in output or volume of activity. fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related (and are paid per quantity produced).In management accounting, fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period. For example, a retailer must pay rent and utility bills irrespective of sales.

Variable cost: Variable costs are those costs that vary directly and proportionately
with the output. There are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct Costs, however, are costs that can easily be associated with a particular cost object. However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

Mixed costs: Mixed cost are costs made up of fixed and variable elements. The term
mixed costs often refers to the behavior of costs and expenses. The annual expense of operating an automobile is a mixed cost. Some of the expenses are fixed, because they do not change in total as the number of annual miles change. Think insurance, parking fees, and some depreciation. Other expenses are variable, because they will increase for the year when the miles driven increase (and will decrease when the miles driven decrease). Think gas, oil, tires, and some depreciation.

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4.3 Degree Of Traceability of the products
Direct cost: Direct costs can be traced directly to a cost object such as a product or a
department. In other words, direct costs do not have to be allocated to a product, department, or other cost object. Direct materials, direct labor and direct expenses are examples of costs.

Indirect costs: Indirect costs are those for activities or services that benefit more than
one project. Their precise benefits to a specific project are often difficult or impossible to trace. An indirect cost is a cost that is not directly traceable to a cost object. Rather, the cost is common to several objects and requires an allocation. For example, the depreciation of the factory building is an indirect cost of manufacturing products. The reason is that the annual cost of the factory building is not directly traceable to a specific unit of product manufactured during the year. The depreciation will be included in manufacturing overhead which is allocated to the units of product manufactured during the year.

4.4 Degree Of Associate With the products
Product cost: A „manufacturer‟s product costs are the direct materials, direct labor,
and manufacturing overhead used in making its products. (Manufacturing overhead is also referred to as factory overhead, indirect manufacturing costs, and burden.) The product costs of direct materials, direct labor, and manufacturing overhead are also “inventorial” costs, since these are the necessary costs of manufacturing the products.

Period cost: Period costs are not a necessary part of the manufacturing process. Period
costs, also known as non-manufacturing costs or period expense, include all nonmanufacturing overhead costs such as marketing and selling costs and general administrative costs incurred by passage of time rather than by production. Such costs do not directly relate to production and do not trace back to the products or inventory in the same way that product costs such as materials, labor and manufacturing related overheads do.

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4.5 Functional Classification Of Costs
Manufacturing cost: Manufacturing cost is the cumulative total of resources that are
directly used in the process of making various goods and products. In some formulas, the cost of manufacturing includes the expenses associated with the purchase of raw materials. At other times, the cost for raw materials is excluded. In general, factors such as labor, equipment operation, and the general overhead for maintaining the production facility are common components that are included in determining the overall manufacturing costs.

Selling and distribution cost: Both in manufacturing and non-manufacturing
concerns selling function is involved besides manufacturing or purchase of goods. In order to perform this function efficiently selling and distribution expenses are incurred in all the concerns. Most of these expenses are not identified with products and that is why these are included indirect costs. selling and distribution expenses with winery owners, they often start their list with the increased cost of labor, over-generous discounts, or high commissions.

Administrative cost: Expense incurred in controlling and directing an organization,
but not directly identifiable with financing, marketing, or production operations. Salaries of senior executives and costs of general services (such as accounting, contracting, and industrial relations) fall under this heading. Administrative costs are related to the organization as a whole as opposed to expenses related to individual departments. Also called administrative expenses.

4.6 Relationship with the accounting period
Capital Cost and Revenue Cost:
Costs can also be divided into two broad classes on the basis of the accounting period to which they relate: i. Capital Expenditure: A capital expenditures provides benefit to future periods and is classified as an asset. A capital expenditure will flow into the cost stream as an expense when the asset is used up or written off.

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ii. Revenue Expenditure: A revenue expenditure is assumed to benefit the current period and classified as an expense. The distinction between capital and revenue expenditures is vital to the proper matching of costs and revenue and to be the accurate measurement of periodic net income.

4.7 Costs For Decision Making And Planning
Opportunity Cost: Opportunity cost is the cost of opportunity lost. Opportunity cost
is the cost of selecting one course of action in terms of the opportunities which are given up to carry out that course of action. Opportunity cost is the benefit lost by rejecting the competing alternative to the one chosen. The benefit lost is usually the net earnings or profits that might have been earned from the rejected alternative. Other examples of opportunity cost are when the owner of a business foregoes the opportunity to employ himself elsewhere, or a machine used to make Product A is said to have an opportunity cost if the machine can be sold or if it can also make product B. Opportunity costs are important in decision-making and evaluating alternatives. Decision making is selecting the best alternative which is facilitated by the help of opportunity costs. But opportunity costs are not recorded in an accounting system as they relate to opportunities lost.

Sunk Cost: A sunk cost is the cost that has already been incurred. Generally known as
unavoidable cost, it refers to all past costs since these amounts can not be changed once the cost is incurred. They are the costs which have been created by a decision in the past and cannot be changed or avoided by any decision that is made in the future. Examples of sunk costs are the book values of existing assets, such as plant and equipment, inventory, investment in securities, etc. Except the possible gains or losses on sales of any of such assets, the book value is not relevant for decisions regarding whether to use them or dispose them off.

Relevant Cost:

Relevant costs are those future costs which differ between alternatives. Relevant costs may also be defined as the cost which are affected and changed by a decision. On the contrary, irrelevant costs are those costs which remain the same and not affected by decision whatever alternative is chosen.

Differential Cost: Differential Cost is the difference in total costs between any two
alternatives. Differential costs are equal to the additional variable expenses incurred in respect of the additional output, plus the increase in fixed costs, if any. This cost may be calculated by taking the total cost of production without the additional contemplated output and comparing it with the total costs incurred if the extra output is undertaken. Differential costs are also known as incremental costs, although technically an incremental cost should refer only to an increase in cost from one alternative to another; decrease in cost should be referred to as decremental cost. Differential cost is a broader term, encompassing both cost increases (incremental costs) and cost decreases
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(Decremenal costs) between alternatives. The differential cost analysis can assist management in knowing the additional profit that would be earned if idle or unused capacity is used for extra production or if some additional investments are made by the firm.

Imputed Cost: Imputed costs are costs not actually incurred in some transaction but
which are relevant to the decision as they pertain to a particular situation. These costs do not enter into traditional accounting system. Interest on internally generated funds, rental value of company owned property and salaries of owners of single proprietorship or partnership are some examples of imputed costs. Costs paid or incurred are not imputed costs.

Out-of-Pocket Cost: While imputed costs do not involve cash outlays, out of pocket
costs signify the cash cost incurred on an activity. Non-cash costs such as depreciation are not included in out-of-pocket costs. This cost concept is significant for management in deciding whether or not a particular project will at least return the cash expenditures associated with the project selected by management. Similarly acceptance of a special order for production may necessitate the consideration of out-of-pocket costs that need not be incurred if the special order proposal is not accepted. Depreciation on plant and equipment is not relevant in decision-making because no cash goes outside the business.

Fixed, Variable and Mixed Cost: Fixed costs remain fixed over a relevant range
of output. Relevant range means a maximum range of output where the fixed costs remains fixed. Total fixed cost is fixed when output changes within the relevant range. But per unit fixed cost increases or decreases when output decreases or increases within the relevant range. It means total fixed cost is fixed but per unit fixed cost is variable. For example, rent expenses, insurance expenses, salary of supervisor etc. Variable costs vary directly and in proportion to the level of output. Total variable cost is variable, but per unit variable cost is fixed. For example: direct materials cost, direct labor cost etc. Mixed costs are costs made up of fixed and variable costs. They are the semi-variable or semifixed costs. For example: Telephone bill: a telephone-user has to pay a fixed amount as monthly rent charge and also variable amount according to per minute call charge.

Shutdown Cost: Shutdown costs are these costs which have to be incurred under all
situations in the case of shopping manufacture of a product or closing down a department or a division. Shutdown costs are always fixed costs, If the manufacture of a product is stopped, variable costs like direct materials, direct labor, direct expenses, variable factory overhead will not be incurred. However, a part of fixed costs (if not total fixed costs) associated with the product will be incurred such as rent, watchman‟s salary, property taxes etc. Such fixed costs are unavoidable. Some fixed costs associated with the product become avoidable and need not be incurred in case production is stopped such as supervisor‟s salary, factory manager‟s salary, lighting, etc. Shutdown costs thus refer to
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minimum fixed costs which are incurred in the event of closure of a department or division.

4.8 Costs For Control
Controllable and Uncontrollable Cost: The cost of controllable cost is very
important in cost accounting and contributes to the achievement of the objectives of cost control and responsibility accounting. The ICMA (UK) defines controllable cost as “a cost which can be influenced by the action of a specified member of an undertaking” and a non-controllable cost as “a cost which cannot be influenced by the action of a specified member of an undertaking.” Basically, a controllable cost is the cost over which a manager has direct and complete decision authority. That is, controllable costs can be controlled (reduced) by a manager at a given organizational level. Some examples of controllable costs are indirect labor, lubricants, cutting tools, and power costs incurred in the machining department. Controllable do not imply that they are 100% controllable. Some costs are partly controllable by a responsibility centre manager. The term “Controllable cost” should not be confused with the terms “variable cost” “direct cost”. These terms are not synonymous. Variable costs vary with the output but are not necessarily controllable. For example, factory supplies used for servicing plant and equipment may vary with the output in the production department, but the production manager can not control them. It is contended that two factors: (a) the time period factor, and (b) the decision-making authority, can be make a cost controllable or uncontrollable. The managing director of a company is responsible for all costs. But practically, the responsibility and authority of controlling costs is delegated to different levels in the organization.

Standard Cost : Standard costs those costs which are planned or predetermined cost
estimates for a unit of output in order to provide a basis for comparison with actual costs. Standard costs are used to prepare budgets. Standard cost is unit concept and indicates standard cost per unit of output, per labor hour etc. On the contrary, the term „Budgeted Cost‟ is total concept and indicates total budgeted cost of an item at some activity level or output level such as budgeted cost of material is Rs 8,00,000 if 8000 units are manufactured.

Fixed, Variable and Mixed Cost: Fixed costs remain fixed over a relevant range
of output. Relevant range means a maximum range of output where the fixed costs remains fixed. Total fixed cost is fixed when output changes within the relevant range.
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But per unit fixed cost increases or decreases when output decreases or increases within the relevant range. It means total fixed cost is fixed but per unit fixed cost is variable. For example, rent expenses, insurance expenses, salary of supervisor etc. Variable costs vary directly and in proportion to the level of output. Total variable cost is variable, but per unit variable cost is fixed. For example: direct materials cost, direct labor cost etc. Mixed costs are costs made up of fixed and variable costs. They are the semi-variable or semifixed costs. For example: Telephone bill: a telephone-user has to pay a fixed amount as monthly rent charge and also variable amount according to per minute call charge.

4.9 Other Costs
Joint Cost: Joint costs arise where the processing of single raw material or production
resources results in two or more different products simultaneously. Joint costs relate to two or more products produced from a common production process or element-material, labor, or overhead or any combination thereof, or so locked together that one can not produced without producing the other(s). Thus, joint cost is the cost of two or more products that are not identifiable as individual types of products until a certain stage of production known as split-off point (point of separation)is reached. For example, kerosene, fuel oil, gasoline and other oil products are derived from crude oil. Joint costs are total costs incurred up to the point of separation.

Common Cost: Common costs are those which are incurred for more than one
product, job, territory or any other specific cost object. Common costs are not easily identifiable with individual products and therefore, are generally apportioned. Common costs are not only common to products, but they may be common to processes, functions, responsibilities, customers, sales territories, periods of the time and similar costing units. For example, the salary of a manager of a production department which is manufacturing three products is an example of common cist with respect to the products. But his salary is direct cost to the departments located in the factory. The basic point is that a particular (common) cost may be direct to one object and common as far as other objects are concerned.

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Findings
Strongly Effective Direct materials Direct Labor Direct expenses O/H Sell. And distribution And administrative costs Natural Classification Of costs Fixed cost Variable cost Mixed cost Costs under cost behavior(cc) Dir. cost Indirect cost Costs under Degree of Moderately Effective Slightly Effective Neutral Slightly Ineffective Moderately Ineffective Strongly Ineffective

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traceability to the product(cc) Product cost Period cost Costs under Degree of association with the product(cc) Manufacturing cost Selling and distribution cost Administrative cost Functional Classification of costs (cc) Capital cost Revenue cost Costs under relationship with accounting period (cc) Opportunity cost

Relevant cost Differential cost

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Imputed cost

Fixed, variable and mixed cost

Costs for planning (cc) Controllable cost

Standard cost Fixed, variable and mixed cost Cost for control (cc) Committed cost Managed cost Discretionary cost

Other cost (cc)

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Conclusion
Prime Group Ltd. have started business in Bangladesh from 1984 and have contributed in the economy of Bangladesh. It creates huge employment opportunity in doing its business. It has become part and parcel of our economy. We know doing business in today‟s world is so competitive. In order to do so it have to recruiter skilled people as they are main strength of any company .Government should patronize this sector for the development of our economy.

Bibliography
i. ii. iii. Cost Accounting Planning & Control – Matz usry, Eighth Edition. www.primejeansbd.com. www.google.com.

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