basic concepts

MANAGEMENT
ACCOUNTING & CONTROL
SYSTEMS

MODULE 1
MANAGEMENT CONTROL SYSTEMS

MANAGEMENT CONTROL SYSTEMS
The Management Control System refers to a framework or set-
up by which the manager can ensure control over the
actions of his subordinates as well as control over the whole
operations in an organisation.
The main purpose of the control system is to assist in target
fixing, collecting information on actual performance,
comparing actuals with targets, reporting the variations and
initiating suitable action to ensure that the targets are
achieved efficiently and effectively.

Definition. Anthony
“It is a total system that embraces all aspects of
the firm’s operations because an important
management function is to assure that all parts
of the operation are in balance with one another
and in order to examine balance, management
needs information about each of the parts”.

Characteristics of Management control system:
1. It focuses on programmes and responsibility centers. A
programme is a product, product line, research and
development project, etc.
2. The infn in a MCS is of two types: i)planned data i e
programmes, budgets and standards and ii) actual data
i e infn on what is actually happening, both inside the
orgn and in the external envt
3. MCS is a total system. It embraces all aspects of a
company’s operation.
4. It is built around a financial structure; i e resources and
revenues are expressed in monetary units.

5. It follows a definite pattern and timetable, month after
month and year after year.
6. It is a coordinated, integrated system; data on the actual
performance be structured in the same way i e, have the
same definitions and the same account content as data on
planned performance.

Phases of Management Control Systems
The Mgmt Control process involves the following phases:
1. Programming
2. Budgeting
3. Operating and Accounting
4. Reporting and Analysis

Phase I – Programming
It is the process of deciding on the programmes that the company will
undertake and the approximate amount of resources that are to be
allocated to each programme.
Programs are the principal activities that the orgn has decided to
undertake in order to implement the strategies that it has decided
upon.
Eg. Product, a product line, setting up a plant, modification, etc
Phase II - Budgeting
It is a plan expressed in quantitative, usually, monetary terms that covers
a specified period of time, usually one year.
In the process of Budgeting each programme is translated into terms that
correspond to the sphere of responsibility of each manager who is
charged with executing the programme.

Phase III - Operating and Accounting:
During the period of actual operations, records are kept of
resources actually consumed and of revenues actually
earned. These records are structured so that cost and
revenue data are classified both by programs and by
responsibility centers. For this purpose, data on actual
results are reported in such a way that they can be readily
compared with the plan as set forth in the budget.

Phase IV – Reporting and Analysis:
MCS serves as a communication device. The information
that is communicated consists of both accounting and
non-accounting data. This information keeps the
managers informed about what is going on in the
organisation and helps coordination of different
responsibility centers.
Reports are also used as a basis for control. Such reports
are derived from an analysis that compares actual
performance with planned performance and attempts to
explain the difference. Based on these formal reports,
and also on information received through informal
communication channels, managers decide what action
should be taken.

Levels of Management
An orgn consists of 3 distinct levels of management;
Corporate Management: It consists of executives who are
responsible for the performance of the orgn as a whole.
The Chairman or MD and executives in charge of specific
functions such as finance, manufacturing, marketing or
personnel constitute the corporate mgmt. They are
responsible for the overall performance of the orgn
Divisional Management: It consists of executives
responsible for total performance of particular regions or
product divisions.
Operating Management: It consists of executives charged
with the management of unit operations / or responsible
for the accomplishment of specific operations tasks. Eg.
Branch Manager, production Manager of a specific
production unit.

Levels of Decision Making:
1. The institutional level for strategic thinking and planning
2. The managerial level which focuses on gathering,
coordinating and allocating resources for the orgn; eg.,
planning budgets, deciding on capital expenditures,
formulating personnel practices;
3. The technical level, involving the acquisition and
utilisation of technical knowledge for operational controls,
eg., inventory controls and production scheduling.

The total planning and control system of an orgn is
subdivided into 3 categories;
i. Strategic planning
ii. Management control
iii. Operational control

Strategic Planning:
It is the process of deciding on the goals of the orgn, on
changes in these goals, on the resources used to attain
these goals and on the policies that are to govern the
acquisition, use and disposition of these resources. It is a
long range plan carried on at the top level of the
management after analysing its own strengths and
weaknesses and on the basis of the threats it faces and
the opportunities available to it.
Eg. Decisions to expand, diversify, etc

Management Control:
It is the process of evaluating, monitoring and controlling the
various sub-units of the orgn so that there is effective and
efficient allocation & utilisation of resources in achieving
the predetermined goals. It focuses on the managers of
organisational sub-units and hence its focus is on line
managers responsible for the performance of their
departments. Management control is exercised by
evaluating the performance of each ‘responsibility center’
against planned performance.
Eg. Legal department of a company.

Operational control or Technical control:
It is the process of assuring that specific tasks are carried out
effectively and efficiently. The focus of operational control
is on individual tasks or transactions: scheduling and
controlling individual jobs through a shop, procuring
specific items for inventory, specific personnel actions, etc.
Eg. Inventory control system.

Management By Objectives
It is also known as Management By Results.
MBO is defined as a process whereby superiors and
subordinate managers of an enterprise jointly
i. identify its common objectives,
ii. Define each individual’s major areas of responsibility in
terms of results expected of him, and
iii. Use these measures as guides for operating the unit or
enterprise and assessing the contribution of each of its
members.
It’s an approach to management planning and appraisal in
which specific targets of performance are established
for each individual and the actual results are measured
against the original targets.

Steps in MBO Process
Appraising
Annual
performance
Setting
Objectives
Conducting
Periodic
Reviews
Developing
Action Plans

1. Setting the Objectives: verifiable & measurable objectives for
the overall orgn for all the positions.
1st
– Top management sets the goals for the total
enterprise in certain key areas considering
environmental opportunities, resources and
constraints of the orgn and forecasts
2nd
– Objectives for each dept are laid down in
consultation with the deptl heads.
This process of goal-setting is repeated at lower
levels of management until goals for each and every
individual are established.
Steps in MBO Process

2. Developing Action Plans: Responsibility for the
achievement of each goal is specified. Job descriptions
for various positions must define the goals to be attained.
Resources required for goal attainment are identified and
allocated. The means for the implementation of plans are
decided. Goals and resources must be matched together.
3. Conducting periodic Reviews: At frequent intervals actual
performance is reviewed jointly by the superior and the
subordinate in order to know the progress.
If necessary, the goals are modified. Ways and means
are identified to overcome problems and to improve
performance in future.

4. Appraising Annual Performance: A thorough
evaluation of individual performance is done at the
end of the year. At annual review, achievements are
carefully analysed against the given objectives.
Rewards are decided on the basis of annual
appraisal.

Advantages of MBO
1. Result – oriented planning
2. Co-operation and coordination
3. Motivation
4. Effective Communication
5. Training and Development
6. Performance Appraisal

Limitations of MBO
1. It’s difficult to set verifiable goals in several cases
2. It involves lot of paper work
3. Time consuming and too pressure-oriented
4. It may prevent co-operation and teamwork
5. May lead to inflexibility
6. May be resented by subordinates

COST ACCOUNTANCY
Cost:
It refers to the resources that are sacrificed to attain a particular
objective.
It is defined as a total of all expenses incurred in the manufacture and
sale of a product.
Costing:
It refers to cost finding using any method like arithmetic process
memorandum statements, etc
Cost Accounting:
Cost Accounting is the technique and process of ascertaining cost.
It is the process of “classifying, recording and appropriate allocation of
expenditure for the determination of costs of products or
services.”
It consists of principles and rules which govern the procedure of
ascertaining costs of a product or service.

Cost Accountancy:
It is the application of costing and cost accounting principles,
methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability. It
includes the presentation of information derived there from
for the purposes of managerial decision making.

Objectives of Cost Accounting:
 Ascertainment of cost
 Fixation of selling price
 Cost control
 Matching cost with Revenue
 Special cost studies and investigations
 Preparation of Financial Statement.

Differences between Financial Accounting
& Cost Accounting
• Transactions are recorded for a
definite period
• It covers transactions of the whole
firm pertaining to business
• It’s prepared to show the final results
during a particular period to owners,
outsiders, etc
• It analyses the expenditure under
different types of expenses eg.
Wages, salaries, depn., etc
• The overall business result is
revealed by P&L A/c, but results of
each dept. can’t be known.
• It can work independently.
• Reconciliation of results is not
required
• It deals with external transactions
• Stock is valued at cost price or
market price which ever is less
• To be maintained as the
requirements of Companies Act,
Income Tax Act.
• Transactions are identified with cost
units.
• It covers only a part of the transactions
viz., manufacturing, sales, services,
etc. partial
• Guides the management for proper
planning, control and decision making
• It analyses the expenditure under
different heads of performance eg.,
direct labour, indirect labour, Materials,
etc
• It analyses the profitability and
unprofitability of each
department/product.
• It depends upon Financial Accounting
• Reconciliation is required
• It deals with internal transactions
• Stock is valued at cost
• To be maintained to meet the
requirements of the management

Differences between Cost Accounting and Management
Accounting
• It deals with ascertainment,
allocation, apportionment and
accounting aspect of costs
• It provides a base for management
accounting
• It helps in collecting costing data for
the management
• The status of cost accountant comes
after the management accountant
• He refers to economic and statistical
data for analysing cost effects
• It has standard costing, variable
costing, BEA, etc., as the basic tools
and techniques
• It does not include financial
accounting, tax planning and tax
accounting
• It can be installed without
management accounting
• It deals with the effect and impact of
costs on the business
• It is derived from both cost
accounting and financial accounting
• It has greater degree of relevance
and objectivity
• Management accountant is senior in
position to cost accountant
• He reports the effect of cost on the
business along with cost analysis
• Along with these, Management
Accountant has funds and cash flow
statements, Ratio Analysis, etc as his
accounting tools and techniques
• It includes all these
• It needs financial and cost accounting
as its base for its installation.

COST UNIT
It is a device for the purpose of breaking up
or separating cost into smaller sub-divisions
attributable to products and services. It is the
unit of product, service or time in relation to
which costs may be ascertained. E.g.. Tonne
in case of coal. In case of brick kiln the unit
should be 1000 bricks. In case of industries
rendering service, usually the unit is a
compound of two measures, since the single
measure may be meaningless eg/ tonne-km
in transport

Methods of Costing- Basically there are two methods of costing (i)
specific order costing (or job/terminal costing and (ii)
Operation Costing ( or process or period costing)
1. Job costing
a. Batch Costing
b. Contract Costing
c. Multiple Costing
2. Process costing
a. Unit or Single output costing
b. Operating (Service) Costing
c. Operation costing

Job Costing
Under this method, costs are collected
and accumulated for each job, work
order or project separately. Each job
can be separately identified; so it
becomes essential to analyse the cost
according to each job. A job card is
prepared for each job for cost
accumulation. Eg. Printers, machine
tool manufacturers etc

Batch costing
This is an extension of job costing. A batch
may represent a number of small orders
passed through the factory in batch. Each
batch is treated as a unit of cost and
separately costed. The cost per unit is
determined by dividing the cost of the batch
by a number of units produced in a batch.
Applied in buscuits mfg, garments mfg and
spare parts/components manufacturing plants

Contract costing
When the job is big and spread over
long periods of time. The method of
contract costing is used. A separate
account is kept for each individual
contract. This method is used by
builders, civil engineering contractors,
construction and mechanical
engineering firms.

Multiple(0peration)costing
This method of manufacture consists of
a number of distinct operations. It refers
to conversion cost .i.e. cost of
converting the raw materials into
finished goods. The different operations
in machine screw are- stamps, knurl,
thread and trim. The cost per unit is
determined wrt final output

Multiple costing
It represents the application of more than one
method of costing in respect of the same
product. This is suitable for industries where a
number of component parts are separately
produced and subsequently assembled into a
final product. This method is used in factories
mfg cycles, automobiles, engines, radios ,
typewriters, aero planes and other complex .
This method has been dropped from the
CIMA terminology.

Process costing
This is suitable for industries where
production is continuous, manufacturing is
carried on by distinct and well defined
process, the finished product of one process
becomes the raw material of the subsequent
process, different products with or without by
products are produced simultaneously at the
same process and products produced during
a particular process are exactly identical.
Textile industries. Chemical industries,
tanneries, paper industries etc.

(One) Operation (Unit or Output)
Costing
This is suitable for industries where
manufacture is continuous and units are
identical. This method is applied in industries
like mines, quarries, oil drilling, breweries,
cement works, brick works etc. The cost per
unit is determined by dividing the total
expenditure incurred during a given period by
the number of units produced during that
period.

Service (or Operating) Costing
This is suitable for industries which render
services as distinct from those which
manufacture goods. This is applied to
transport undertakings, power supply
companies, hospitals, hotels et. This method
is used to ascertain the cost of services
rendered. There is usually a compound unit in
such undertakings, e.g. tonne-kilometre,
kilowatt-hour, patient day etc.

TYPES OF COSTING
1. Historical Costing
2. Standard costing
3. Absorption or Full costing
4. Variable or Marginal costing
5. Uniform costing
6. Direct costing

Historical costing
It is ascertainment of costs after they
have been incurred. It aims at
ascertaining costs actually incurred on
work done in the past. It has a limited
utility, though comparison of costs over
different periods may yield good results.

Standard costing
A comparison is made of the actual cost
with a pre-arranged standard and the
cost of any deviation ( called variances)
is analysed by causes. This permits the
management to investigate the reasons
for these variances and to take suitable
corrective action.

Absorption Costing
It is the practice of charging all costs,
both variable and fixed to operations,
process or products. This differs from
marginal costing where fixed costs are
excluded.

Variable or Marginal costing
It is ascertainment of marginal cost by
differentiating between fixed and
variable cost. It is used to ascertain the
effect of changes in volume or type of
output on profit.

Uniform Costing
It is the use of same costing principles
and/or practices by several
undertakings for common control or
comparison of costs.

Direct Costing
It is the practice of charging all direct
costs, variable costs and some fixed
costs relating to operations .processes
or products leaving all other costs to be
written off against profits in which they
arise.

Cost Centre: As per the definition given by
The Institute of Cost and Management
Accountants, London:
It is defined as a “location, person, or an item of
equipment (or a group of these) for which
costs may be ascertained and used for the
purposes of cost control”.
It is an organisational segment or area of activity
considered to accumulate costs. Its managers
are held responsible for the costs incurred in
that segment.
Performance evaluation of a cost centre is guided
by a cost variance equal to the difference
between the actual and budgeted costs for a
given period.

Cost Centre
A cost centre is the smallest segment of
activity or area or responsibility for
which costs are accumulated. Typically
cost centres are departments but in
some instances, a department may
contain several cost centres. These
cost centres are the sub departments of
an organisation wrt which cost is
collected for cost ascertainment and
cost control

Cost centre
The determination of a suitable cost
centre is very important for
ascertainment and control of cost. The
manager in charge of a cost centre is
held responsible for control of cost of
his cost centre. It enables the
accumulation of all such costs at one
place for which a common base of
recovery may be used.

Types of Cost Centres:
1. Impersonal Cost centre: It consists of a location or item of
equipment (or a group of these).
2. Personal cost centre: It consists of a person or group of
persons.
3. Operation cost centre: It consists of the machines and / or
persons carrying out similar operations
4. Process cost centre: It consists of a specific process or a
continuous sequence or operations.

Revenue Centre:
It is a segment of the orgn which is primarily responsible for
generating sales revenue. A revenue centre manager has
control over some of the expenses of the marketing
department. The performance of a revenue centre is
evaluated by comparing the actual revenue with budgeted
revenue.
Eg. Marketing Manager of a product line, sales representative.
Profit Centre:
A profit centre is a segment of the orgn for which both revenue
and costs are accumulated. The main purpose of profit centre
is to earn profit. Profit centre managers aim at both the
production and marketing of a product.
Its performance is evaluated in terms of whether the centre has
achieved its budgeted profit.
Eg. A division of the company which produces and markets the
products may be called a profit centre.

Responsibility Centres
It is defined as an area of responsibility
which is controlled by an individual.
The following types of responsibility
centers are found;

Differences between Profit
Centre and cost centre
(i) Cost centre is the smallest unit of activity
or area of responsibility for which costs are
collected whereas a profit centre is that
segment of activity of a business which is
responsible for both revenue and expenses.
(ii) Cost Centres are created for accounting
conveniences of costs and their control
whereas a profit centre is that segment of
activity of a business which is responsible for
both revenue and expenses.

Differences between Profit
Centre and cost centre
(iii) Cost Centres are not autonomous whereas profit
centres are autonomous.
(iv) A cost centre does not have target costs but
efforts are made to minimise costs, but each profit
centre has a profit target and enjoys authority to
adopt such policies as are necessary to achieve its
targets.
(v) There may be a number of cost centres in a profit
centre as production or service cost centres or
personal or impersonal but a profit centre may be a
subsidiary company within a group or division in a
company.

Investment Centre:
It is responsible for both profits and investments. The
investment centre manager has control over revenues,
expenses and the amounts invested in the center's
assets. He also formulates the credit policy which has a
direct influence on debt collection, and the inventory
policy which determines the investment in inventory.

Cost Units:
The Institute of Cost and Management Accountants, London:
A cost unit is defined as “a unit of quantity of product, service or time (or
a combination of these), in relation to which cost may be ascertained
or expressed”.
In the job costing method, cost unit is a single specific order; in batch
costing it consists of a group of similar articles and in contract costing,
it consists of a single contract.
Eg: Building – Sq. foot of area / House
Cement, Steel – Tonne
Automobile – Number
Power – Kilowatt hour
paper – Ream etc

Cost Concepts:
Cost:
It is the amount of expenditure, actual (incurred) or notional
(attributable), 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. The resources given up are generally in
terms of money.
Expenses:
They are expired costs, incurred and totally used up in
generation of revenue. It results from a productive usage of
an asset. It is that portion of the revenue producing potential
of an asset which has been consumed in the generation of
revenue. Eg. Selling & administrative expenses, salary, rent,
commission paid, taxes paid, interest paid, etc

Loss:
It refers to “reduction in firm’s equity, other than from
withdrawals of capital for which no compensating
value has been received”.
It is an expired cost resulting from the decline in the
service potential of an asset that generated no
benefit to the firm.
Eg; obsolescence or destruction of stock

COST CLASSIFICATION
(1) By nature or Elements
(2) By Functions
(3) By degree of traceability to the
product
(4) By changes in activity or volume
(5) By Controllability
(6) By Normality

COST CLASSIFICATION
(7) By relationship with accounting
period ( Capital and Revenue)
(8) By Time
(9) According to Planning and Control
(10) By Association with the product
(11) For Managerial Decisions.

CLASSIFICATION OF COST
I Natural classification of costs:
1. Direct Material: refers to the cost of materials which are traceable to
specific units of output. Eg. Raw cotton in textiles, crude oil for petrol,
steel to make automobile bodies, etc
2. Direct labour: It is the labour of those workers who are engaged in the
production process. It is the labour expended directly upon the
materials comprising the finished product. Eg. Labour of machine
operators and assemblers.
3. Direct expenses (chargeable expenses): It includes other expenses
other than direct material and direct labour directly incurred on a
specific product or job. Eg. Cost of hiring special machinery or plant,
cost of patents, royalties, licence fees, etc.
Total of the above 3 elements of costs is referred to as Prime Cost.

4. Factory overhead: It is also called manufacturing overhead. It is the
cost of indirect materials, indirect labour and indirect expenses.
Indirect material refers to materials that are needed for the
completion of the product but whose consumption with regard to the
product is small. Eg. Lubricants, cotton waste, hand tools, works
stationery, etc
Indirect labour refers to the labour cost of production-related activities
that cannot be associated the final product. Eg. Labour of foremen,
shop clerks, general helpers, cleaners, etc
Indirect expenses covers all indirect expenditure incurred by the
manufacturing enterprise from the time production has started to its
completion and its transfer to the finished goods store. According to
Institute of Cost and Management Accountants Indirect expenses are
the expenses which cannot be allocated but which can be apportioned
to or absorbed by cost centres or cost units. They are incurred for the
benefit of more than one product, job or activity.
Eg: Heat, Light, Maintenance, factory manager’s salary, etc

5. Selling, distribution and administrative overheads: S & D overheads
are the expenses incurred for the selling the products. It covers the
cost of making sales and delivering / dispatching products. Eg.
Advertising, salesmen salaries, and commissions, packing, storage,
transportation, etc
Administrative overheads includes costs of planning and controlling
the general policies and operations of a business enterprise. Such
costs which cannot be charged either to the production or sales
division.

II on the basis of Cost Behaviour (By changes in
Activity or Volume)
Fixed cost: It is the cost which does not change in total for a given time
period despite wide fluctuations in output or volume of activity. They are
also called standby costs, capacity costs or period costs. Eg. Rent,
property taxes, salaries, depn, etc
Fixed Cost
Volume
Total
cost

Classification of Fixed costs:
a. Committed costs: They are primarily incurred to maintain the
company’s facilities and physical existence, and over which
management has little or no discretion. Eg. Depn, taxes, insurance
premium rate, rent charges, etc
b. Managed costs: They are related to current operations which must
continue to be paid to ensure the continued operating existence of
the company. Eg. Management and staff salaries.
c. Discretionary costs: They are also known as programmed costs.
They result from special policy decisions, management
programmes, new researches, etc. Eg. R&D costs, marketing
programmes, new system dvpt.
d. Step Costs: it is constant for a given amount of output and then
increases in a fixed amount at a higher output level.
Eg. Supervisor’s salary

2. Variable Cost: They are the costs that vary directly and proportionately
with the output. There is a constant ratio between the change in the
cost and change in the level of output. Eg. Direct material cost, direct
labour cost, factory supplies, sales commission, office supplies, etc.
V.C

3. Mixed cost (Semi-variable and semi-fixed cost)
They are a combination of semi-variable costs and semi-fixed costs.
Because of the variable component, they fluctuate with volume;
because of the fixed component, they do not change in direct
proportion to output. Semi-fixed costs are those costs which remain
constant up to a certain level of output after which they become
variable. Eg. Electricity charges, water, supervisors salary, etc

III. On the basis of degree of traceability to the product:
1. Direct Cost
2. Indirect cost
IV. On the basis of association with the product
1. Product cost: They are the costs which are identified with the product
and included in inventory values, i e they are included in the cost of
manufacturing a product. In a manufacturing concern, it is composed of
4 elements: i) direct materials, ii) direct labour iii) direct expenses iv)
manufacturing overhead
2. Period Cost: They are the costs which are not identified with product or
job and are deducted as expenses during the period in which they are
incurred. Eg. All Selling & administrative expenses.

V.Functional Classification
According to this classification costs
are divided in the light of the different
aspects of basic managerial activities
involved in the operation of a business
undertaking. Eg production,
administration, selling and distribution.

VI. By relationship with Accounting period (Capital and Revenue)
Capital cost and Revenue costs:
Costs can also be divided into
a) Capital Expenditure & b) Revenue Expenditure
Capital expenditure provides benefit to future periods and is
classified as an asset; a revenue expenditure is assumed to
benefit the current period and is classified as an expense. A
capital expenditure will flow into the cost stream as an expense
when the asset is used up or written off.

VII.Costs for Decision Making and Planning
1. Opportunity Cost: It is the cost of opportunity lost. It 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. It is the benefit lost by rejecting the best competing
alternative to the one chosen.
2. Sunk Cost: It is the cost that has already been incurred. Also
known as unavoidable cost, it refers to all past costs since these
amounts cannot be changed once the cost is incurred.
Eg. Book values of existing assets – Plant and equipment,
inventory, investment in securities, etc

3. Relevant Costs: They are the future costs which differ
between alternative. They are the costs which are
affected and changed by a decision.
Irrelevant costs are the costs which remain the same and
not affected by the decision whatever alternative is
chose.
Features of Relevant Costs:
i. They are only future costs, they are expected to be
incurred in future.
ii. They are only incremental (additional) or avoidable
costs.
Incremental costs refer to an increase in cost between 2
alternatives.
Avoidable costs are those which are not incurred from one
alternative to another.

4. Differential Cost: It is the difference in total costs
between any 2 alternatives. They are equal to the
additional variable expenses incurred in respect of
the additional output, plus the increase in fixed costs.
They are also known as incremental costs.
They are calculated by taking the total cost of
production and comparing it with the total costs
incurred if the extra output is undertaken.

5. Imputed Cost: They are not actually incurred but
are relevant to the decision as pertain to a particular
situation.
Eg. Interests on internally generated funds, rental
value of company owned property and salaries of
owners of a single proprietorship or partnership, etc
6. Out-of-Pocket Cost: It refers to the cash cost
incurred on an activity. It 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.

7. Shut Down Cost:
These are the costs which have to be incurred under all
situations in the case of stopping manufacture of a product
or closing down a department or a division.They are always
fixed costs. If the manufacture of a product is stopped,
variable costs like direct materials, direct labour, direct
expenses, variable factory overhead will not be incurred.
However, a part of fixed costs associated with the product
will be incurred.

VIII. By Normality
Under this , costs are classified according to whether
these are costs which are normally incurred at a
given level of output in the conditions in which that
level of activity is normally obtained. On this basis, it
is classified into two categories: ( a) normal cost – It
is the cost which is normally incurred at a given level
of output in the conditions in which that level of output
is normally attained. It is a part of cost of production.
(b) Abnormal cost. It is not a part of cost of
production and charged to P & L Account.

IX.BY TIME: Costs can be classifed as (i)
Historical costs and (ii)
Predetermined costs.
(I) Historical costs: The costs which are
ascertained after their incurrence are
called historical costs.
(II) Predetermined costs : Such costs are
estimated costs. i.e, computed in advance or
production taking consideration the previous
period’s costs and the factors affecting such
costs.

X. COSTS FOR CONTROL
1. Controllable and Uncontrollable cost
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.
Controllable costs can be controlled (reduced) by a
manager at a given organisation level.
Eg. Indirect labour, lubricants, cutting tools, etc

XI. ACCORDING TO PLANNING AND CONTROL : Planning and
control are two important functions of management. According
to this, costs can be classified as budged costs and standard
costs.
Budgeted costs: represent an estimate of expenditure for
different phases of business operations such as manufacturing,
administration etc coordinated in a well conceived framework for
a period of time in future which subsequently becomes the
written expression of managerial targets to be achieved.
Standard costs:
They are the costs which are planned or predetermined cost
estimates for a unit of output in order to provide a basis for
comparison with actual costs. They are used to prepare
budgets. Standard cost is a unit concept and indicates standard
cost per unit of output, per labour hour, etc.

Other costs:
1. Joint cost: They arise where the processing of a 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. They are apportioned to
different products using suitable bases of
apportionment.
Eg. Kerosene, fuel oil, gasoline & other oil products are
derived from crude oil.

2. Common Costs:
They are those which are incurred for more than one product,
job, territory or any other specific costing object. They
cannot be easily identifiable with individual products and
therefore, are generally apportioned.
Eg. Salary of a manager of a production dept which is
manufacturing 3 products

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