Different Types Of Cost For All Organizations Accounting Essay

Cost is used in different ways in different organisation and besides the ground for this is that there are many types of cost and these cost are classified in assorted ways harmonizing to the demand of the organisation. Classification of cost is a procedure which group the component of cost in order to the nature, property or relation. The cost is classified usually in term of the fringy aims. Cost categorization is made for planning, determination devising and controlling. When it comes to the types of cost, merely some of the categorization carries out the cost types in them and as for the types they are: Fixed, Variable, Semi-Variable, Direct, Indirect cost, Department, premier and Overhead. These cost plants along with the cost categorization ‘s and those are Behavior ( In Variability ) , In relation to the Product.

The cost is break down into elements in order to acquire the designation, control and accounting. The component is related to the procedure of fabrication, and the cost is broken down into three basic elements, “ Material Cost, Labour Cost and disbursal Cost ” .

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Material Cost- this include all the natural stuff consumed on the procedure of the fabrication.

Labour Cost- this includes the payments made to the workingmans ‘s and staffs for the service they have done to turn the natural stuff into finish good.

Expenses- this Consist of the cost of public-service corporations and services used for the transition procedure including fanciful cost for the usage of owned assets.

And so far I have explained about the cost and its elements, now let ‘s discourse about the types and the categorization cost of the type of cost. As I have antecedently have mentioned that merely some of the categorization carries out the types, I would wish to get down out the categorization of cost first and explicate the type of cost which contains in it.

Cost can be classified as follows:

Harmonizing to the Relation to the Cost Center

Harmonizing to the Behavior

These three are merely the footing of cost categorization other do n’t play an of import function as these three does and besides these three carries out the types of cost as good.

Harmonizing to the Relation to the Cost Center

The categorization should be on the footing method of allotment of cost for the cost unit. This categorization is considered to be a sub- division in the categorization of cost which is used to place the manner the cost has arisen. And this cost is classified as Direct Cost and Indirect Cost.


Direct Cost Indirect cost

Material Labour Expenses Material Labour Expenses

Direct Cost

This cost is straight related in the production procedure and this can be identified straight on the peculiar good or services which an organisation provided. And this cost has the three component of cost in it, which is the Material, Labour and Expense cost.

Direct Material: the cost of stuff which can be straight allocated to a cost Centre or a cost object in an economically executable manner.

Direct Labor: the cost of rewards of those workers who are readily identified or linked with a cost Centre or cost object

Direct Expense: the disbursals other than direct stuff or direct labour which can be identified or linked with the cost Centre or cost object.

Indirect Cost

This cost has an indirect consequence over the finished merchandises, which is that the Material, Labour and disbursals which are incurred in the procedure of production but this can non be identified with a good or service. For illustration care staff in a fabrication organisation.

Indirect Material: Materials which are of little value and can non be identified in or allocated to a product/service are classified as indirect stuffs. Example: Consumable spares and portion.

Indirect Labour: Payment paid to the workers who have indirectly associated in the production procedure. Example: Electricians and shopkeeper.

Indirect Expenses: disbursals other than of the nature of stuff or labor and can non be straight allocatable to a peculiar cost centre, which mean the cost that has non taken portion in the production of a good. Example: Insurance, Lighting and Heating.

Harmonizing to the Behavior

The cost which is classified in this is the Fixed, Variable, and semi-Variable cost Depending on the Response of the alterations in the Activity degree.


Fixed Cost Variable Cost Semi-Variable

Fixed Cost: This is the cost which does non vary by the alterations of the volume of end product. And besides they are non affected by impermanent fluctuation in any procedure of an organisation. And this cost is known as Prime Cost as good. Examples: Wages, rent, depreciation etc.

This Graph shows a Company ‘s Annual fixed cost $ 40. Let ‘s take rent as the fixed cost for this company, as we see the fixed cost ( rents ) remains same even or non the gross revenues increases or lessening. bec1.gif

Selma Blair

( Figure 1.1a )

Variable cost: this is a cost of component which is straight varied with the Volume of end product. And this costs that can be varied flexibly as conditions change. As for an illustration we can state that the natural stuff needed and labors used to bring forth a merchandise unit will change in depending on the merchandise.

This graph represents the Variable cost Line. The variable cost will change when there is a alteration in the procedure of an organisation and as any alterations are made it will take to the cost to alter. As for illustration, cost per unit green goods and sold will differ and besides the figure units sold will besides number. And there is chance that there can be an addition or lessening in the units sold. image004.gif

Semi-Variable Cost

This cost contains the both Fixed and Variable cost constituents ( Elementss ) . The fixed cost component shall be a portion of the cost that needs to be paid irrespective of the degree of activity achieved by the entity. On the other manus the variable constituent of the cost is collectible proportionate to the degree of activity. Example: telephone measure, electricity, committee for selling points


As for an illustration for this graph: A orbiter telecasting, which a monetary value for the box must be paid monthly and to acquire extra films, more money has to be given.

The Other Types Of Cost

There are other types as well which is used and of import for an organisation. And these are the sub-division to the categorization system, and this is used to happen out the manner the cost comes other than look intoing it through the behaviour. And those types of cost are:

Department Cost

Prime Cost

Operating expense Cost

Department Cost

As in a big graduated table Organization, several sections are organized in the duties of a individual Manager. And the chief intent for this Cost is that to command instead than foretelling that. On the other manus this Cost is divided in to two chief classs:

Direct Department: This section is involved in the fabrication procedure.

Service Department: Other Than The production Process, which Is the Services or executing map for the organisations purpose.

Prime Cost

Entire Direct cost is known as the Prime cost:

Direct Material + Direct Labour + Direct Expenses = Prime Cost

Operating expense Cost

Operating expenses are the indirect Cost but it besides contains other operating expenses such as Administrative Overhead and Selling Overheads. The Entire cost of production is calculated by the Prime Cost and the Overheads. And as for the fabrication cost the Prime cost and the Production Overhead is calculated.


Production O/H cost + Administration O/H Cost + Selling O/H Cost = Total O/H cost

Prime Cost + Production O/H cost = Manufacturing Cost

Prime Cost + Total Overhead Cost = Total cost of production

Undertaking 1.2

Explain with illustrations why different costing methods are used by Organization in the modern context.

Costing plays a important function in the accounting of the organisation through assisting the organisation to do determinations,

There are assorted methods of bing which are the demands for the organisations. But the basic rules of these methods are same. And the methods of bing are selected on the dependance on the nature of the concern on its concern.

Although the rule in every costing methods are related the allotment and soaking up and categorization of cost are common to all types of fabrication and it differs in which the merchandise is manufactured. And this is a ground why the costing method differs from each other to accommodate the peculiar production method of an organisation.

Even though there a chief intent for the organisation to follow the methods of cost and they are:

Decision Making

This is one of the chief concerns for an organisation, which can be said as the premier map is to do determinations. Even a determination is made it should be the best determination of all, which will be relied on the truth and the information gathered for the information. As for the determination devising I can merely province throughout doing determinations certain cost are affected and some are non and certain alterations are made depending on the determination made. Relevant Cost and irrelevant cost can be classified as an illustration for this:

Relevant Cost: this cost will take consequence on the determination made.

Irrelevant Cost: there will be no consequence for this cost from the determination made.


In order for the aim of the organisation to run swimmingly, the operation in the sections or the organisation must be controlled. And this undertaking plays an of import function for the directors of the organisation to make their ultimate end. Through the other types of cost, the director is able to make his/her work swimmingly and absolutely. And it is the chief function for the director to happen out the chief cost which should be controlled and merely some of the costs are able to command.

Stock rating

Stock valuationA is the method of ciphering theoretical values of companies and theirA stocks. And an organisation must make this in order to happen whether their organisation running in a net income or in a loss. And as many organisations produce many merchandises it is of import for the organisation to observe out the cost of production for each merchandise.

And besides at that place some other basic ground every bit good, and these undermentioned is a portion of the three mentioned above.

Decide whether to better the company if it on continues loss or make up one’s mind to close down.

Make determination to spread out the organisation to overseas.

Decide whether to bring forth a new merchandise to the market and to halt the low sale ‘s merchandise in the market.

Target a net income which is needed of thee twelvemonth or month and step the net incomes of the organisation.

Make sure the organisation is running good on the consecutive line through wards its end and run against failures and gain a good income ( net income )

Measure the merchandises quality and better it or seek to cut down the merchandise of a certain merchandise.

The Costing methods play an of import function for the fabrication organisation, the organisation is able to cipher or understand the value of the input and the end product in the organisation ‘s procedure. By tracking out this information and categorising them harmonizing to their strict accounting system, the direction will be able to find the cost the organisation production. And it besides helps the organisation to do determinations as good about the production degree, pricing, competitory scheme, the hereafter investings and every bit good as for other intent. And each method is adapted by the organisation on the nature of the merchandise every bit good as its end product.

And even though there are several methods available, there are two chief or basic methods of costing, which is

Specific Order or Job Costing

Continuous operation or Procedure Costing

All the other methods are either fluctuation of Job Costing or Process Costing and besides they can be classified as techniques used for a peculiar intent.

Job Costing

The Job bing chiefly concerns with tracking down merchandises cost separately. This method plays an of import function in the certain fabrication organisation, which merchandise less merchandises, and this is used where each unit of production is customized. And this method is used every bit good as for the big measure merchandises, and besides this method can be carried out by the client ‘s petition or either and this could be in big measure or little. This method is carried by the seamsters or printing companies for the measure wise and other illustration for the less merchandise is Building aeroplanes and ships. And under this method a JOB COST sheet is prepared it find out the net incomes or losingss for the each occupation or undertaking done. The most of import characteristic in the occupation costing is that the occupation can be identified at the each production degree and this makes easier to happen out the cost which is charged to the occupation. And there are two fluctuation in Job bing and they are:

Contract Costing

This is a specific order costing, which are orders undertaken from the clients by the organisation and besides to their demands as good and this is besides a long term continuance. Such methods like this are carried out by the building industries. Example: Ship Building, construction for span etc.

Batch Costing

This is a specific order bing where little articles are manufactured in batches for gross revenues. Cost is collected harmonizing to the batch order and the entire cost is divided by the entire batch to be arrived in each unit. And the batch costing is applied in many ways ; illustration: a printing industry prints 1000 documents per twenty-four hours. And these 1000 printed documents are tagged as the batch at a certain day of the month or clip. And so the cost is calculated for the whole batch ( which is taking all production ) .

Procedure Costing

This is suited for a repetition procedure of production or where goods and services from a sequence continue and the merchandise is indistinguishable but can non be segregated. The cost is charged on the procedure of unit and norm over the units produced during the period. Example: nutrient Procedure, Chemical, paints etc. the fluctuation of the Process cost is identified through the Operation Costing, Single or Output Costing and Department Costing.

Operation Costing:

This refers to the method where the cost is individually calculated in the operation of production in each phase, a so later the coating cost is determined. This method is suited for a organisation which trades in mass production of insistent nature. Example: Motor rhythm or auto fabrication organisation.

Single Or Output Costing

This is used when the production is indistinguishable and uniformed and a individual article is produced. The entire cost is divided by the figure of units produced to acquire units or end product cost. Example: Mining, brink doing etc.

Department Costing

Cost of runing a section or cost Centre. Entire cost of each section is ascertained and divided by entire units produced in that section to get at unit cost. If one merchandise passes through a figure of sections for completion, cost of each section will be picked up and the entire unit cost will be the sum of unit cost of the sections through which the merchandise passes.

Service runing Cost

Operating Cost

This an of import cost for a service organisation that does non bring forth or sell goods and render service. As an illustration we can take Hotels, Hospitals, and Schools etc. Cost of supplying and runing a service is ascertained and unit cost is found out by spliting entire cost of units of services rendered.

Multiple Cost

In some of the fabrication organisation, certain merchandise involves many complexnesss and so the Job and Process Costing can non be used to cipher the units of the present merchandise cost. In fabricating organisation which produces Cycles, car, aero planes etc. utilize the combination of the assorted bing methods and the methods used is known as the multiple costing.

As we can see that the organisation is able to bring forth merely 2000 as net income without including the Product X, where else with the Product X the organisation was able to Derive a Net income of 5500. If so we can understand that without the merchandise X the organisation faces a loss of 3500. And as for my suggestion I prefer that the merchandise X must stay. And on the other point, when we see to the part of merchandise X, it is in the positive figures so there ‘s no demand of ending the merchandise X, but it would be necessary to end merchandise Ten when it shows negative Digits. As for this instance there is no necessary ground to end the merchandise X.

Undertaking 2.1

Explain the footings Productivity, efficiency and effectivity and measure its impacts on any selected organisation

In the modern context it is really of import for an organisation to be successful and survive from their challengers. The three footings Productivity, efficiency and effectivity are important for the organisation to endurances in the modern context. As if the organisation refuses to follow these footings and affair would take up with certain jobs and it might even do the organisation to travel belly-up ( immense Loss ) .


This is the measuring of the end product per unit of input in the production unit. The productiveness of an organisation is measured in several ways and it is similar to the efficiency and both efficiency and productiveness are measured in the same methods. And it is besides the end product of efficiency and effectivity ( Productivity= efficiency + effectivity ) . When there is a alteration in the efficiency or either in the effectivity the productiveness alterations every bit good.

How the Organization ‘s Productivity is calculated.

Productivity= Value of Output/ Time

The Value of Output is the quality of the merchandise or end product of the organisation. The clip in the equation could be different types of factor, “ resources, energy etc ” .

Example: in a service sector organisation the productiveness is measured on the gross collected by the employees ( separately ) and so the sum is calculated with their wage.


This fundamentally means “ doing a maximal usage of the resorts and seeking to minimise the waste pay out of the stuff. This can be explained as “ inputting less resource and doing more end product ” . And the efficiency is based on the thought of wastage and as I said before that its chief intent is to input less or bring forth more merchandises compared on the indistinguishable merchandise in order to finish the procedure.

How the Organization ‘s Efficiency is calculated.

Efficiency = Total Output/ Total Input.

Example: Williams and Bros Ltd and Peters and boy ‘s Ltd are fabricating companies which produces Phones. Williams and Bros Produces 100 Telephones per hebdomad and Peters and Son ‘s green goods 300 in two hebdomads. Now let ‘s analyse the efficiencies of both companies.

Williams and Bros

Efficiency = 115/07

Efficiency = 16 Mobiles per twenty-four hours is Produced

Peters and Son ‘s

Efficiency = 250/14

Efficiency = 18 Mobiles produced per twenty-four hours

Harmonizing to the computation above we can see that Peters and boies is bring forthing more end product than Williams and Bros. which is Peters and boies is more efficient than William ‘s, bring forthing 18 Mobiles per twenty-four hours where Williams is merely able to bring forth 16 per twenty-four hours.


Effectiveness ‘s chief concern is to happen out the cheapest concern on the agencies of happening the aim of accomplishing the nonsubjective smoothly. And this is set to aim the organisation ‘s end on the measuring of the end product. And effectivity is besides making the right thing. And so effectiveness is the liability of the company to make its aim or end.

How the Organization ‘s Effectiveness is calculated

Effectiveness = Company ‘s objectives/Input

Example: an organisation which produces phones has targeted to gain a lower limit of $ 100000 net income per month and it has targeted to bring forth 10000 phones for the month to carry through their end. And at the terminal of the month it was able to bring forth 12000 phones.


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