IGNOU : M.COM : MCO 5 : UNIT 2 : Q - 3. Distinguish between the following : i) Product cost and period cost ii) Controllable and uncontrollable cost iii) Variable and fixed costs iv) Direct and indirect costs

Ans. 

i. Product cost and period cost

Product costs are those costs which are easily attributable to products. These costs are necessary for the production and will not be incurred if there is no production. Product costs consist of direct material, direct labour and a reasonable share of factory overhead. These costs are also called inventoriable costs because these are included the cost of product as work-in-progress, finished goods or cost of sales. Generally all manufacturing costs are treated as product costs.

Costs which are easily attributable to time interval are known as period costs. These costs do not attach to products. These costs incurred for a time period and generally non-manufacturing costs are treated as period costs. These costs are charged to profit and loss account. The examples of period costs are rent of office building, salary of company executives, etc.

Period costs affect profit as they are charged to profit and loss account after they are incurred whereas product costs will affect profit only when they goods are realized. Thus, classification of costs on the basis of product and period is significant from profit determination point of view.

ii. Controllable and uncontrollable

Controllable costs are those costs which can be controlled by a specified person or a level of management. Variable costs are generally controllable by the lower level of management like departmental heads. For example cost of raw materials can be controlled by purchasing them in bulk quantities. Uncontrollable costs are those costs which cannot be controlled or influenced by a specified person of an enterprise. For example costs like factory rent, managerial salaries etc. It should be noted that the costs which are not controllable in the short run likely to become controllable in the long run at some level in the organisation. Similarly, when one moves to the higher levels of management in the organisation more and more costs become controllable. Sometimes classification of costs as controllable or non controllable will be a discretionary matter of the management. The classification of costs on the basis of controllability is important for the evaluation of performance of the executives and assigning the responsibility in the organisation.

iii.Variable and fixed costs

Variable Costs: Variable costs are those costs which vary directly or almost proportionately with the level of output. When volume of output increases, total variable cost also increases and when volume of output decreases the variable cost also decreases. But the variable cost per unit will remain unaffected. The examples of variable costs are : direct material, direct wages, power, commission of salesmen etc.

Fixed Costs: These costs remain fixed irrespective of a change in the volume of output. But fixed cost varies when it is expressed on per unit basis. In other words fixed cost per unit decreases when the volume of production increases and vice versa. Rent and lease, salary of production manager, salaries of staff, etc., are the examples of fixed cost. It should also be noted that fixed costs do not remain fixed always. They remain fixed only upto a certain level of production activity. If there is a change in the production capacity which require additional building and equipment, staff, etc., such cost will also change. Therefore, fixed costs are fixed within a relevant range of production.

iv. Direct and indirect costs 

Direct Costs : Direct costs are those costs which are the major components of the finished products and can be clearly identified with the product being produced. The examples of direct costs are : raw materials, labour and other direct expenses which are exclusively incurred for a particular job, product or process.

Indirect Costs : indirect costs are those costs which cannot be assigned to any particular product, job or process. These costs are usually incurred for the business as a whole and therefore, are to be allocated to various products manufactured in the factory on some reasonable basis. Examples of indirect costs are : factory lighting, rent of factory building, salaries of foreman, etc, Indirect costs are also called as ‘overheads’ or ‘on costs’. These overheads can be further subdivided into factory overheads, administrative overheads, selling and distribution overheads.