Unit 2 : Cost Concept and Classification( Theory concept ) ( BBS second year )

( Bachelor Second Year Account)                                 Chapter 2: Cost Concept and Classification  [2 marks= theory& 2 marks= numeric]                   Definition of Cost Segregation: The separation of fixed cost and variable cost is know as cost segregation .                                                                                                                                     Segregation of cost:                                                i) Fixed cost : The cost that don't change in relation to production volume is known as fixed cost. Fixed costs are time- related as they remain constant for a period of time. Increasing or decreasing production unit doesn't effect in fixed cost. The total fixed cost stays the same . For example: Rent, Advertising, Depreciation, Insurance etc                                                                                                    ii) Variable cost: The cost that change in relation to production volume. Variable costs are volume- related as they change with the change in production volume. As production volume increases, variable cost also increases and as production volume decreases, variable cost also decreases. For example: Direct materials( Sugar, egg, wood, cement) , Direct Labour( wages of part time staff)                                                                                                                  iii) Semi- Variable cost: The cost composed of a mixture of both fixed cost and variable cost is known as semi- variable cost. The costs are fixed for a set level of production and become variable after this production level is exceeded. For eg : ( Repairs, Telephone charges, Electricity charges )                                                                                                                                         * Methods of Cost Segregation                                i) High - Lowpoint method/ Two point method: - Variable cost per unit( b) = High cost - Low cost / Highunit - Low unit                                           - Fixed cost ( a )  = y- bx ( Total cost- Variable cost)                                                                                - Total cost ( y) = a+bx ( Fixed cost+ Variable cost)                                                                                     Where,   y= Total cost                                                                 a=  Fixed cost                                                               b= Variable cost per unit                               x= Production unit/ Machine hours