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Cost Classification Exercise

This document provides a list of 50 cost items and asks the reader to classify each item based on functional classification, traceability, and behavior. The classifications are manufacturing (M), selling (S), administration (A), other (O); direct (D) vs indirect (I); and variable (V) vs fixed (F). The first 8 items are already classified as examples. The reader is asked to classify the remaining 42 items and be prepared to explain their classifications.

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271 views

Cost Classification Exercise

This document provides a list of 50 cost items and asks the reader to classify each item based on functional classification, traceability, and behavior. The classifications are manufacturing (M), selling (S), administration (A), other (O); direct (D) vs indirect (I); and variable (V) vs fixed (F). The first 8 items are already classified as examples. The reader is asked to classify the remaining 42 items and be prepared to explain their classifications.

Uploaded by

Vikas Mv
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Cost Classification Exercise

Attached is a list of cost items which do not necessarily relate to a single company.
Classify each cost item as indicated below:

A. On a functional basis, that is manufacturing (M); selling (S), and administration (A).
Items not falling in any of these three categories, should be, classified as other (O).
Specify your answer in column 2 by inserting the appropriate letter (M), (S), (A), or
(O) against each item. If it is (0), specify what it is, to the extent you can.

B. On a traceability basis, that is direct or indirect cost. The terms "direct" and
"indirect" relate to the traceability of the cost -item- to the final product.' Direct cost
can be directly and easily traced to a particular job product. Whereas indirect cost
may have to be allocated using some apparently rational basis to trace its effect on
individual products. Indicate your answer in column 3 by inserting the letter (D) for
direct costs, and (I) for indirect costs.
Note: This classification is required only for those items which you have classified
as manufacturing costs in column 2. For this exercise, all non- manufacturing costs
are deemed to be indirect costs, though not true in some situations.

C. On a behavioural basis, that is, variable or fixed cost. The terms "variable" and
"fixed" refer to the variability of the cost item in relation to the volume of activity.
It is easier to identify a true variable cost which directly, proportionately and almost
automatically varies with fluctuations in volume, whereas fixed costs remain the
same irrespective of changes in the level of activity, within a relevant range. Specify
your answer in column 4 by inserting the letter (V) for variable costs and (F) for
fixed costs against each cost item.

The first eight items in Part I have already been classified; you should classify-the
remaining items and be prepared to explain and defend your logic for the chosen
classification.

Source: Prof. K Balakrishnan, IIM –Ahmedabad


Cost Classification Exercise
Sr. Example Functional Traceability Behavior
(M/S/A/O) (D/I) (V/F)
Part: 1 Illustrative Answers

1. Wheat flour in bread M D V

2. Tailoring Charges in garment making M D V

3. Factory rent M I F

4. General Manager’s salary A - F


5. Salesmen’s commission S - V

6. Interest paid on deposits (Finance charges) O (Finance - F


charges)
7. Loss due to theft Loss, not a cost. Should not be there

8. Cost of installing machinery Capital (Asset); not a cost till it is depreciated

Part: II Homework for practice

9. Pulp in Paper making M D V


10. Daily wages paid in road construction A D V

11. Salesmen's salary S D F


12. Salesmen's samples S D V

13. Depreciation of machinery (common for all M I V


products)
14. Monthly rental for leased computer D F
A
15. Fire loss O I V

16. Commission paid to sales agency D V


S
17. Commission paid to raw material buying agency M D V
18. Rent for head office building A F
D
19. Depreciation of delivery truck with a fixed O I V
schedule of trips every month
20. Auditors' fee A D F
21. Batteries for a car manufacturer M D F

22. Insurance premium on company car O D V

23. Dividend paid to share-holders D V


O
24 Cloth in garment making
25 Thread in garment making
26 Lubricating oil for the sewing machine
27 Depreciation of a chemical processing plant and
machinery
28 Power to run the machinery
29 Electricity for lighting the shop floor
30 Freight-in
31 Customs duty for raw materials
32 Royalty to author in book publishing
33 Royalty (one-shot payment) for using a foreign
brand name
34 Helpers’ wages in a furniture firm
35 Nails used in a furniture firm
36 Advertising expenses
37 Trade discount (margin to outlets)
38 Cash discount (for prompt payment)
39 Expense account for government liaison
40 Bribes paid
41 Donations
42 Overtime (factory workers)
43 Idle time (account clerks)
44 Waste of raw material in manufacturing
45 Bottled perfume: the perfume
46 Bottled perfume: the bottle
47 Bottled perfume: the fancy carton for each bottle
48 Cardboard boxes to pack and deliver large orders
of perfumes and other toiletries to the retail shops
49 Civil engineer’s salary in a construction firm
50 Advanced basic research

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