Dear students, so far in this course we have covered financial accounting. So, we have done some discussion on how to record the transactions, how to report them through PNL account balance sheet or cash flow statements. We have also discussed a little bit about how to analyze the financial statements. Today we are going to start with another very interesting branch of accounting that is known as cost accounting. Sometimes it is also known as management accounting. If you remember in our first session, we have discussed the distinction between financial cost and management accounting. I will try to introduce it in a bit. So, cost accounting as the name suggests is basically accounting for the cost. It is targeted to the internal users. Financial accounting we have seen is primarily targeted to the external users. So, financial accountant essentially prepares the reports which are submitted to the government, to the shareholders, to the bankers and so on. Whereas, in cost accounting the statements or the reports which are made are sent to the higher level of management. So, essentially they are not meant to be for outsiders and the data in cost accounting is considered to be a confidential data. Now, let us see today what is exactly cost accounting, what is its scope and what are the advantages of cost accounting followed by we will also discuss on various types of cost. So this is the brief agenda of today's session. We will talk about the various cost categories and then we will discuss about what is cost center and so on. To begin with first of all what is cost accounting? Cost accounting basically has three parts. It involves recording, controlling, estimating and reporting for cost. Now, we are yet to discuss what is cost, but I hope you know it. We will discuss the cost classification later, but in short can you tell what do you understand by cost? For a simple common man cost means some expenditure something which you pay for. So, it is very much important in business that you record it properly that I think there is no two issues about it. So, the first aspect of cost accounting is proper recording of cost which is absolutely essential. Next is controlling of the cost because business always aims to maximize the profit. If you want to maximize the profit naturally you need to minimize your cost. So, you need to control your cost. Even for non-business entities it is necessary that they are able to provide the service as low cost as possible. So, they are also interested in controlling the cost. The third aspect is estimation of the cost. This is something unique because if you remember in financial accounting we have dealt with recording. So, as the transactions emerge you record them, but there is no attempt to estimate because financial accounting is essentially historical in nature whatever has happened is recorded and reported that is what the job of accounted. But in cost accounting apart from recording, analyzing and controlling we are also required to estimate the cost because many times the cost calculations are required for future period. Say for example, you want to quote the price to the party. So, you want to know what will be the cost of a product or what will be the cost of a service which is intended to be provided. Sometimes you may want to take a decision to buy machine X or buy machine Y. So, you will need to estimate the cost that is why one of the aspects of cost accounting apart from recording is also estimation. The fourth part of cost accounting is reporting of cost. So, cost accountant is required to make appropriate statements which are given to various levels of management. So, that they can take decisions about either cost control or making various choices. So, these are the essential I would say sub areas of cost accounting. So, we were seeing that these four are the issues. Next is now let us go for the definition of cost accounting. This is a formal definition of cost accounting that it is a process which begins with the recording of expenditure or the basis on which such expenditure is calculated. For example, let us suppose that you are required to pay the labor cost. Now, for paying the labor cost you may want to record the number of hours for which a worker or a particular person has worked and then you want to pay them at a fixed rate per hour. So, you need to record the number of hours that is also involved in cost accounting. That is why it is a recording of expenditure or the basis on which they are calculated and naturally it ends with preparation of appropriate statements which are mainly intended for two purpose. One is the ascertainment of cost and second is controlling of the cost. Now, the ascertainment of cost may not be necessarily for products. Sometimes it may be for the process. Sometimes that ascertainment of cost may be for a particular project or it may be for a particular period. We will see it in detail later. Now, these are the major objectives of cost accounting more or less we have already discussed. First is ascertainment of cost for which you record, analyze the cost systematically. Second is cost control and cost reduction. Now, what is meant by cost control and cost reduction? Cost control as the name suggests you are trying to control the cost vis a vis some target. So, you try to set up some norm or you try to set up some standard and see to it that the actual cost meet with that standard or they are below a particular budget or a norm that is called as a cost control. Cost reduction is more innovative exercise. Here you try to look for various new technologies. You may look for alternative raw materials. You may look for alternative ways of production or providing service so that the cost can be permanently reduced. So, these two are the prime objects that is ascertainment, cost control, cost reduction. The next third object is assisting the management in decision making. Now, various examples of decision making are given. Very, very important decision in any business scenario is pricing. So, whenever a company thinks of launching a product, first thing they have to decide is what at what price the product can be sold. So, price has a market factor at as to how much price the market will accept. Equally important is at what price I can provide considering my cost. That is why cost accounting leads the management to decision on pricing. Many times management is required to quote a price. Their tenders might have been floated or there may be an inquiry from a customer for a particular product or a service and a company is required to quote a price. Naturally first thing company has to do is to estimate the cost, add the profit margin to be charged so that you can arrive at a price. The second decision as you can see is about profit planning. So, company wants to achieve certain profit or they may have to achieve a certain rate of return by using a certain factory or using certain resources for which they have to plan the profit. Sometimes they also have to plan at what level of activity the plant is to operate. So, you may have the choice to run the plant at say 70 percent or 80 percent or 90 percent. So, looking at the profitability at various levels such decisions can be taken that is also covered in profit planning. The third decision which I have mentioned there is budgeting. Budgeting most of you would have heard is an exercise where you estimate certain things. So, you may want to estimate the cost for the next month or for the next year and that budget will help you in cost control and it will also help you in taking a call as to how much more money is available or how much more resources are available. So, these are the important decisions apart from them also there are many decisions which are required to be taken by the management. Can you tell me some of the decisions or can you think of some of the decisions? So, one simple decision I think which you can think of is make or buy decision. So many times company has a choice either they can make a certain component or they can get it outsourced they can get it from outside wherein again the cost calculations are very important at what cost you can make and at what cost the outsider is able to provide and then of course, there are quality issues there are timing issues, but cost issues are the dominant starting point for taking any of the decisions. So, these are some of the examples of decision making. So going back your three important objectives one is ascertainment, second is cost control and cost reduction and third is decision making. Now, let us look at advantages now from the objectives you would have realized that what type of activities or what type of benefits the cost accounting gives in addition to this these are the advantages. One it is helps in identifying unprofitable activities losses or inefficiencies in any form. So, company might have say 10 plants some of them may be loss making. In a traditional P and L account or traditional financial statement the losses of a particular unit or particular plant is not captured. Cost accounting tries to go into detail so that you can identify which activity or which unit or which plant is not making profits. So, that appropriate action can be taken either to close it or to make suitable changes. There may be also inefficiencies at various levels for example, purchase department is purchasing the raw material at a particular price. Now management wants to know whether they are paying a reasonable price or they are paying a higher price. So, they may compare with industry averages or they may compare with their peers to know the efficiency then their cost might be involved in storage cost might be involved in processing at each level whether it is a production industry or a service industry at various levels always a business entity tries to improve the efficiency. So, identify inefficient areas is one of the advantages of cost accounting. The second advantage as you can see is application of cost reduction techniques operation research techniques and value analysis techniques. So, earlier I have told that cost control is a exercise where you set a norm and you try to see that the actual cost are below that norm. In cost reduction you are trying to challenge the norm itself. So, by doing value analysis or by doing operations research entity is trying to look for alternate raw material it may look for alternate processes to achieve the same result. So, that the cost can be reduced it could be technological changes it could be managerial changes, but the objective is achieving some permanent reduction in the cost. This is one of the advantages of cost accounting that it helps the management in taking such measures. So, these were the advantages I think broadly now you have understood what is a overall structure of cost accounting. Now, we will try to look at what is really a cost. So, by common sense I think everyone knows that whatever expenditure one incurs is a cost. Now, let us look at a formal definition the formal definition says that a cost can be defined as the amount of resources given up in exchange of any goods or services. So, it could be in the form of cash sometimes it could be in the form of exchange of some resources, but something is being given up something is being sacrifice is naturally considered as a cost. So, here I am giving some examples that usually in a typical production scenario you will have a factory wherein you will incur the production cost the raw materials will enter into production phase some more cost might be incurred in finishing processing and ultimately the goods reach the customer. So, the costs are incurred at various stages of course, though I have given example of a product making or a manufacturing even for a service industry it is similar. For example, suppose you are operating in a software industry then development cost will be incurred which are mainly in the nature of human resources there will be cost for marketing and ultimately a service gets delivered to the customer. So, expenditure incurred at all these stages will be included in the cost. These are the typical examples of the cost which include material labor electricity fuel I think you can name another 10 examples can you think of any other cost. So, what could be the other cost? It might be transportation it might coverage cover something like advertising for marketing all this will be covered in cost there is one type of cost which is special in nature that is known as capitalized cost certain costs are incurred for purchasing acquiring for fixed assets they are called as capitalized cost. So, example given here is for purchase of machinery. Now, as you know machinery is not intended only for this period a machine is bought for next say 3, 4, 5, 10 years. So, the entire cost of machinery cannot be charged or cannot be considered as the cost of this period. So, such expenses are taken to balance sheet we have already studied profit and loss account and balance sheet. So, capitalized costs are taken to balance sheet they are considered as assets of the entity and they are not considered as day to day cost. So, this cost since they cannot be considered at one go they are required to be written off in the form of depreciation when we have discussed financial accounting we have already discussed depreciation. So, the depreciation charge for a particular period is taken as the cost of this period the capitalized cost of fixed asset is not considered as cost which is accounted for in a particular period. Now, let us come to cost classification. Now, you can think of 100s of types of cost and cost classification also can be done in variety of ways here I have tried to mention some of the ways of classifying the cost one is by elements, by function, by direct indirect variability controllability normality and relevance we will discuss each of them in detail, but before that you can also start thinking as to what could be the various ways cost can be classified. As we have seen in the beginning, one of the objectives of cost accounting is to ascertain the cost in detail. In financial accounting just recording of expenditure was enough, but in cost accounting what happens is you want to know what is the cost of the particular product. If you have 10 plants you want to know what is the cost of one plant within labor cost you want to know what is a overheads, what is a over time and so on. So, here we need to classify and analyze the cost so that the cost can be properly controlled that is why so many ways of classification have been evolved. Now, first way is by nature or the element this is one of the most traditional cost classifications where all cost are classified into three categories that is material, labor and expenses. Now, what do you understand by material cost? I think it is pretty common sense so you can also imagine what is the material cost this is the basic classification try to think of examples in all the three categories. In fact, all cost can be categorized into any one of these three types. So, here is a definition of material cost the cost which is incurred on physical substance or a thing something tangible is a material cost. So, the most common example is for components or raw material purchased this is a material cost the next cost is labor cost. So, any amount incurred on human resources is a labor cost now deliberately I have put a question mark. When you think of some examples of labor cost just think over what could be the labor cost. So, these are the examples you have salaries wages bonus incentives retirement benefit perks as I said anything given to any class of human resources right from a temporary laborer to the managing director they may be offered a variety of pay in variety of forms that is all covered in the labor cost. The next is expenses the cost which is incurred for various types of services and it is also it also acts as a residue ahead. So, anything not covered in material and labor will be now classified as expenses. So, what could be the examples here again it is a pretty common sense it will cover electricity rent telephone royalties and so on. Capital costs are not covered as we discussed in the beginning capital costs are treated as assets of the entity and they will go into assets they in further discussion of cost now we will not cover capital cost that is why in the beginning I told that they are different costs and they will be transferred to balance sheet. So, these are the various expenses. So, all costs can essentially in a traditional way be classified into material labor and expenses. Now, another way of classifying is functions. So, in elements we were seeing the nature of cost here we are seeing what the cost has achieved. So, here costs are classified as per the function for which they are incurred. So, what will they include can you think of the business functions. So, any business entity for what does it enter the incur the cost yeah marketing is a right example anything else. So, typically it will start with production. So, here I try to give. So, this is the most traditional way of classifying that is production cost office or admin cost and selling or distribution cost of course apart from this also you can think of R and D cost. If within production you have some specialized thing that you can think of in a industry like software they may call it a development cost. So, as per the industry as per the organization they can classify, but essentially the purpose for which it is incurred is a base for functional classification. Now, this is the further examples. So, production cost will cover material direct labor stores over its. So, here you can see now material labor over its all can be but related to production. They are now taken as production cost, office and admin cost. So, this is all cost for formulating policy directing managing the organization. So, what could be the examples of office and admin cost? Just think over what could be what are the costs which are incurred in an office setup. So, it will cover mainly the salaries of people. So, salaries director fees auditor fees consultant fees which are related to management these are all examples of office cost and of course cost like office rent office electricity they are also covered in office and admin cost. The next are selling costs. So, selling and distribution is typically incurred as selling basically covers the cost for generating demand. So, you may have to spend on advertising you may have to give free samples you may have to approach customers for looking for business that is all for selling. And distribution is for ensuring that the service or the product reaches the customer. So, all the marketing costs are covered within selling and distribution ambit. So, this are the this is the classification by function. Next classification which is very interesting and also very important for cost accounting purposes is classification by direct and indirect be attentive. Because here many times there is a confusion. So, by common sense you can say that those costs which are easily attributable to a cost center or a product can be called as a direct cost. Now, naturally I think everyone will understand a product cost center we are yet to define we will come to it later, but generally we can say that something which can be directly attributable. So, one example I have given that cost of hard disk while assembling a PC. So, here hard disk as a component is entering a PC. So, you can know that this particular hard disk is exclusively used for this PC. So, definitely it can be considered as a direct cost. Any other examples of direct cost can you think of can something say in labor will go into direct cost. So, suppose operators are working on machines to make something. So, the wages paid to those operators can essentially be considered as a direct cost. Suppose you are paying director fees and commission to managing director will it be a director in direct cost? It has to be indirect cost because it is for the management of the whole company. It is not for any particular product or a division or a cost center etcetera. So, those cost which are common will essentially be considered as indirect cost. So, here is a definition of indirect cost. Those cost must be allocated in order to be assigned to a product. So, they cannot be assigned directly. So, you do not know that x cost is exclusively for a particular product. It is common in nature hence it is called indirect. So, one example I have already given that managing director's remuneration is a good example of a indirect cost. Can you have some any other example? Can you think of some more examples of indirect cost? Let us say in a factory you are making 10 type of products, but factory rent is common for the whole factory. So, factory rent is a good example of indirect cost. Company does some advertising for specific products. So, let us say they have products x, y, z advertisement which is released for product x you can say is a direct cost for x, but there are common advertisements wherein company is trying to build a corporate image. It is not for one product it is more for market the company or to project the company that is essentially an indirect cost. So, here are some examples. So, in any product or a service setup you will incur cost for computer maintenance and support group that is not for making anything it is to ensure that the operations run properly. So, it is a indirect cost wages paid to security it is a indirect cost storage cost for units produced the indirect cost. So, broadly I think it would be clear now to you what is a direct cost and indirect cost. Now, this is not a watertight compartment certain examples which are clear case we have dealt with, but let us see you are making a particular product wages for the operator is definitely direct, but what about wages to the supervisor is it a direct cost or an indirect cost wages to supervisor because supervisor is not actually doing some production is supervising is inspecting. So, will you cover it as direct or indirect now here slightly depends on the definition if you look from a cost center angle that a particular supervisor is looking after a particular department which is producing that product then the supervisors cost or the supervisor salary also becomes a direct cost. If you apply a very narrow definition that people actually producing only direct then it will become indirect cost. So, that is left to the company, but generally it is looked at from a cost center angle. So, from a cost center angle the cost of that is the wages paid to the operators salary paid to the supervisor both will be treated as direct, but salary paid to factory manager will be looked at as an indirect because it is not for one cost center it is for the whole factory. So, like this company will have some cost manual where they will define how they are categorizing direct and indirect, but this categorization is very important because as you can see the definition of indirect cost they require to be apportioned or allocated whereas direct cost is easy I know that this cost is for this product I will directly charge indirect costs are common in nature. So, they have to be divided or apportioned on some basis and then charge to the product that is why more accounting gets involved for indirect cost. We will see on that accounting part later in the beginning let us understand the various types of cost. Next categorization which is again very important is as per the variability. So, again all cost can be categorized as fixed variable or semi variable. So, every cost will there will be an attempt to make it fall into these categories. Just as direct and indirect categorization was important for accounting variability type of classification is important for decision making. So, for taking any decision like pricing make or buy it is very important that you are able to classify your cost properly into fixed variable and semi variable. Now, what is a variable cost? As you can see the definition these are those cost which vary in the direct proportion to the output. So, there is a always a relationship between number of units produced and this cost. In case of service industry there will be a direct relation with the service provided and this cost. So, these are called as variable cost. Can you think of some examples of variable cost? What costs are variable? In a production scenario raw material cost is usually variable because as you produce more in the same proportion you will consume more raw material. Any other example? Wages will it be a variable cost depends if the wages are being paid on number of units produced which is rarely the case. If they are on number of units then it becomes variable. If they are being paid for time that is for a month or a day it may or may not be variable because our definition is strict. If it is directly proportionate then only you call it variable. Any other example of a variable cost? Power consumed or electricity usually in a production setup will vary in the direct proportion. So, it is a variable cost. For a service industry what could be a variable cost? Let us say in transportation what is the variable cost? So, fuel consumed as you run for more kilometers the fuel will increase in the direct proportion. So, it is a variable cost. So, these are the examples we have already discussed. Direct wages, direct material, petrol and then you can also think of more examples. Next is fixed. So, fixed as the name suggests it does not change in total for a given time period despite wide fluctuation in output or volume. So, these costs are irrespective of how much you are producing. You produce 0 units you produce 1000 units this cost will not change they will be fixed. What could be the example of fixed cost? Rent is a good example usually rent is charged for space. So, you take rent say you take a shop on rent you have to pay rent whether you sell or no rent becomes fixed cost. Any other if you hire somebody on a fixed salary that is the salary has nothing to do with the output then it becomes a fixed cost. Any other again say in a transport industry you have owner motor car what will be the fixed cost to you. So, depreciation driver salary these become fixed cost. Annual RTO taxes car insurance vehicle insurance these are all examples of fixed cost. So, here I have mentioned a few examples like rent property taxes. So, here in summary this is the position variable cost these are the ones we change with the number of units. So, the per unit cost remains the same in case of fixed cost the total remains the same the per unit cost will reduce because you have a same numerator number of units increase the fixed cost per unit will fall. The third category is known as semi variable as the name suggests it is a mixture of the two. So, it has a fixed component it has a variable component it is somewhat changes with the level of activity, but does not change in the direct proportion. So, what could be the examples of semi variable cost? Let us say you have a fixed line telephone you pay some rent plus you pay for call charges. So, the total telephone bill will be a semi variable cost. In case of marketing cost you may have a component of marketing which has to be incurred the additional marketing is based on the unit sold that is you may be paying some commission per unit in addition to salary to your sales month. So, the sales month's remuneration becomes a semi variable cost. Anything else it is a semi variable cost say in a production scenario what is a semi variable cost? In a production scenario maintenance is a good example of semi variable cost. So, raw material will be completely variable something like rent will be fixed, but maintenance will vary as per the output, but it will have a fixed component if you have to keep the machine running you have to maintain it irrespective of production. But as you produce more the maintenance will increase same thing even for vehicles you have to do some maintenance, but if you use vehicle more there will be more wear and tear. So, there will be more maintenance. So, these are the examples we already seen telephone bill even I have kept electricity because electricity has a rent component and you have to pay per unit also. So, total electricity bill is generally semi variable. So, this was the overall classification here is a small example. So, 2 months budgets are given for July and August and in July you plan 1000 units in August you are planning for 2000 units these are the costs. Now, can you tell which costs are variable which are fixed which are semi variable? So, direct material as you can see is a variable cost because it has exactly doubled direct labor also has doubled. So, it is a variable cost rent is unchanged our definition that in even if the output changes now the output has doubled rent is not has not changed. So, it is a fixed cost power is a semi variable cost because you can see it is does not doubled, but at the same time it is not constant because it must have a fixed component plus you are paying on per unit basis that is why it is a semi variable cost maintenance again as we have discussed is a semi variable cost. Now, this classification becomes very important when you are taking decisions or pricing when you want to know whether I should produce or I should outsource for any decisions or even for making a budget the classification as per variability plays a very important role. Now, let us look at the next classification that is as per controllability. Now, what is a controllable cost? It is very common sense one can say what can be controlled is controllable, but actually identifying a cost as controllable is very difficult because nothing in life is controllable. So, that way all cost will be uncontrollable at the same time you may put effort to control. So, it is not in overall sense here the controllability is looked from the angle of a specific position. So, for a particular position what cost is within the influence within the dominance is called as a controllable cost. And what cost is not within the domain of a person it is taken by some higher authority such costs are called as non controllable. Now, can you think of an example of a controllable cost? What is a controllable cost? First of all you should know for whom you are looking at. Let us say you have a small department which has 5 employees and there is one supervisor who is the in charge of that department. Now, this supervisor for that supervisor which costs are controllable and which are non controllable of course, difficult to tell, but you can imagine what could be within the domain of that person and what could be outside. Suppose you assume that supervisor has full power to increase or decrease the number of people under him. We can say that wages paid to those 5 operators becomes controllable, because if there is more work supervisor can hire more people if there is less work he can remove. So, in such a scenario the wages to operators will become controllable. Salary of the supervisor is it controllable? Not for him because management would not allow him to decide about his own salary. So, for the supervisors level wages of the staff are controllable, but his own salary or wages are non controllable. Electricity bill is it controllable for that supervisor? Will it be controllable? Difficult to tell, but generally we can say yes, rate comes from outside, but how much power to consume I assume that supervisor has full autonomy. So, how much power to consume is within supervisors domain. Rent is it within supervisors domain? Is it controllable rent? Usually no, because rent will be for the whole factory then the whole factories rent they will divide for each department. So, the decision being taken by the higher levels it becomes uncontrollable. So, you have to look it from a particular manager's level. So, here I have tried to say that it is not very sharp no cost is uncontrollable, but we are looking from a particular individual's angle. Now, this classification is important for cost control because if you hold a supervisor responsible for all cost of the department say including the part of the rent he will say that I have known how control. So, it is a good practice to hold a supervisor responsible for the cost which he or she can control that is why in cost control this classification becomes quite useful. At little senior level say for a factory manager many more cost will become controllable and he or she will be held responsible for the entire cost of the factory. So, like that the controllability can be defined, but here again within an organization generally there is flexibility. It is not necessary that all decisions within a factory also a factory manager can take. So, we have to look at from a particular organization's point of view for a particular person's controllability. So, here I have tried to give an example that expenditure by a tool room is controllable by foreman, but what is a portion to a machine shop is not controlled by machine shop foreman because typically what happens is tool room foreman will be responsible for his expenditures, but those cost will be shared or will be charged to other machine shops. So, they do not have any control on that cost. Next type of categorization is as per normality. So, here by common sense you will know that the cost which is generally incurred which is normally incurred for a particular level of output in a normal condition will be considered as a normal cost. Any cost which is beyond this normal will be an abnormal cost. So, here is an example.  Let us say you are dealing with some chemicals or say petroleum products. It will be technically established that 2 percent of the raw material let us say evaporates. So, the loss up to the level of 2 percent will be considered as a normal loss. If 5 percent of the material gets wasted on a particular day, then 2 percent is for a normal evaporation, extra 3 percent will be treated as abnormal. It is because of the mishandling or because of some accident or because of some mistake by the workers or in the machine and then the examples of say goods lost by fire or by theft are always abnormal. So, this classification of normality is also useful because the normal expenses or the losses are assumed, but for abnormal you can hold a management responsible. That is why this classification is also useful. Next cost classification is as per the relevance. So, what is the relevance? This is more from a decision making angle. So, these are the cost which are affected or changed by a particular decision. Then it is called as a relevant cost. Now, can you give an example of a relevant cost? So, for any decision certain costs are relevant, certain costs are irrelevant. So, what could be the example? Just think of some decision, then maybe you can think as to what could be the relevant cost for the decision. Let us say I want to decide on whether to make a component or to sources from outside. So, for my product I need a component. One choice is I make it myself or it is readily available from the market I can buy it from outside. This is popularly known as make or buy decision. Now, this particular for this decision which cost is relevant? Is the direct production cost relevant? Is the rent of the factory relevant? Is the say salary to factory manager relevant? If you think the direct production cost like raw material costs are relevant, but rent or factory manager's wage salaries are not relevant. Because they are not going to change by your decision. You already have a setup, so you are already paying rent. So, you are not going to pay extra rent for only for this component. That is why rent or the manager's salary are generally not relevant or they are also known as sunk. Whereas the raw material for making that component is relevant. Because if you decide to buy it from outside, you will save on that raw material cost. Is the transportation cost relevant? I mean the transportation for that component is it relevant? Yes, because if you make you do not have to pay for transport. But if you buy from outside, you are paying for transport. So, you will have to essentially weigh between how much is your raw material and direct production cost versus how much is a purchasing plus transport cost. And then depending on this, you will take a decision. So, for any decision, you should only look for the relevant cost. As against relevant, their opposite of relevant are the sunk cost. So, these are made because of some decision, some other decision which has already been made. It has nothing to do for this particular decision. So, example is cost of research which is done on a product. So, you have done some research. Let us say you have spent 2 crores on the research of a particular product. You have developed a new product. Now, for launching of that product, is this R and D cost relevant? No, sometimes you may feel now that I have spent 5 crore, let us launch it. Actually, it is a wrong decision. For launching of product, which is a relevant cost? Let us say you want to decide now, whether to launch or not to launch. What are the relevant costs? Now you have to think what will be the direct production cost, what will be the marketing cost and what is going to be realized from that product.  The R and D cost though it may be very important is irrelevant for the decision making, whether to launch or not to launch a product. This is what I was trying to say. Are you getting? Can you think of some other example? Let us say, you already own a car. Now you want to decide, whether to use the car to go to the office or whether to go by the bus to the office, you have two choices. So, what is the relevant cost? So, if you go by car, what is the relevant cost, perhaps the cost of fuel. If you go by bus, the cost of ticket, these are the only relevant cost. The cost of car, depreciation, maintenance, all these things are irrelevant because you have already incurred them. So, for a decision making it becomes very important to be able to properly classify between relevant and irrelevant costs. Next type of classification, which is also similar is differential cost. So, for a particular decision, we see that because of that decision, what difference is happening? So, I am already using say 1 lakh rupees of raw material. For going for some extra production, I am going to buy some more raw material. Then that extra cost will be considered as a differential cost. Usually, variable costs are differential because they change with the output. But sometimes even fixed cost can increase. Then that becomes differential. Can you give an example of some differential cost? So, typically what happens is, let us say you are traveling by a car, you have a driver. So, differential cost is only the cost of petrol. But if you have to pay overtime to the driver, then the overtime to the driver also becomes differential cost. So like that for each decision, because of that decision, if extra cost is incurred, it will be considered as a differential cost. So, in today's session, we have seen some primary classifications. So, we have seen how you classify by elements. Then we have seen how you classify by variability. How you classify as to direct and indirect. How you classify by function and so on. In the next session, we will see some more classifications of cost. And after that, we will go into actual recording and cost control aspects. Thank you so much.