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TMI BlogCLASSIFICATION OF COST - (REVISED 2015)X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 depends on the purpose for which cost is incurred. For example, material cost is the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... • 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, the costs of which can be attributed to a cost object in an economically feasible way. 4.15 Distribution Overheads: Distribution overheads, also known as distribution costs, are the costs incurred in handling a product or service from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 a product or in rendering service. The terms Production Overheads, Factory Overheads, Works Overheads and Manufacturing Overheads denote the same meaning. Production overheads include administration costs relating to production, factory, works or manufacturing. 4.28 Research Cost: Research cost is the cost of original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nature. Costs shall be gathered together in their natural groupings such as material, employee and expenses. The elements of cost can be classified in the following three categories : i) Material ii) Employee iii) Expenses 6.1.2 Material Costs are cost of materials used for the purpose of production of a product or rendering of a service, net of trade discounts, rebates, taxes and duties refundable that can be quantified with reasonable accuracy. 6.1.3 Employee Costs are consideration, including benefits paid or payable to employees, permanent or temporary, for the purpose of production of a product or rendering of a service. It is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be directly assigned to a particular cost object in an economically feasible way. Examples: • Insurance • Rates and Taxes 6.3 By function 6.3.1 Costs shall be classified according to major functions viz: • Production/ Project; • Administration; • Selling; • Distribution; • Research; • Development; 6.4 By nature of behaviour 6.4.1 Costs shall be classified based on behaviour in response to the changes in the activity levels such as, fixed cost, variable cost and semi-variable cost. 6.5 By nature of production or operation process 6.5.1 Costs shall also be classified on the basis of nature of production or operation process. 6.5.2 Batch Cost shall be the aggregate cost related to a cost unit which consist of a group of similar articles or services which maintain its identity throughout one or more stages of product ..... X X X X Extracts X X X X X X X X Extracts X X X X
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