3. Cost Classification
Type Behaviour
Fixed VariableDirect Indirect
Element Function
Material
Labour
Expense
Product Period
Administration
Selling &
Distribution
Finance
4. Cost ClassificationCost Classification
Classification by Type:
• Direct Costs:
Direct costs are the ones which can be specifically related to
the production of a particular good.
• Indirect Costs:
Indirect costs are the ones that are not so specifically related. Indirect
costs are also frequently called overheads.
5. Cost ClassificationCost Classification
Classification by Behavior:
• Fixed Costs:
Fixed costs do not change as the quantity of output changes. Increasing
output does not increase these costs.
• Variable Costs:
Variable costs do change. Variable costs increase as output increases.
6. Cost ClassificationCost Classification
Directs costsDirects costs IndirectIndirect
costscosts
FixedFixed Depreciation onDepreciation on
dedicateddedicated
machinerymachinery
RentRent
VariablVariabl
ee
Raw materialRaw material EnergyEnergy
Examples:
7. Cost ClassificationCost Classification
Classification by Element:
• Material Costs:
• Direct Material Costs – Eg. Plywood, nails, screws, glue
• Indirect Material Costs – Eg. Lubricants, cleaning materials
• Labor Costs:
• Direct Labor Costs – Eg. Drillers, painters, polishers
• Indirect Labor Costs – Eg. Managers, supervisors, cleaners
• Expenses:
• Direct Expenses – Eg. Hiring machinery for special design
• Indirect Expenses – Eg. Depreciation of equipment, building,
water, rent, insurance
8. Cost ClassificationCost Classification
Classification by Function:
• Product Costs:
Product costs are costs of manufacturing products.
• Period Costs:
Period costs are costs other than product costs that are charged to
debited to, or written off to the income statement each period.
9. Cost ClassificationCost Classification
Classification of Period Costs:
• Administration Costs:
Costs of running the administrative aspects of an organisation
•Selling & Distribution Costs:
Costs involved in selling and distribution of products.
• Finance Costs:
Costs associated with providing the permanent, long term and short
term finance.
10. DO YOU KNOW HOW
MUCH IT COSTS
TO MAKE A CALL ?
17. Interconnect ChargesInterconnect Charges
• Payments made towards other operators forPayments made towards other operators for
terminating calls on their networkterminating calls on their network
• Example – Airtel Customer calling up a BPLExample – Airtel Customer calling up a BPL
Mobile Number.Mobile Number.
• Here the Originating network is Airtel andHere the Originating network is Airtel and
Terminating Network is BPLTerminating Network is BPL
• In this example Airtel would need to pay BPL forIn this example Airtel would need to pay BPL for
landing calls on BPL Networklanding calls on BPL Network
18. Interconnect ChargesInterconnect Charges
Nature of CallNature of Call Rs.Rs.
Local Call to VodafoneLocal Call to Vodafone 0.000.00
Local Call to Other OperatorLocal Call to Other Operator 0.300.30
STD CallSTD Call 0.660.66
ISD CallISD Call 4.504.50
• Interconnect charges form the biggest variableInterconnect charges form the biggest variable
componentcomponent
• Table shows Interconnect Charges Payable for aTable shows Interconnect Charges Payable for a
Call Originating from Home NetworkCall Originating from Home Network
19. Network CostNetwork Cost
• Network consists of Base-Stations, Towers,Network consists of Base-Stations, Towers,
Cell Sites, Servers & other applicationCell Sites, Servers & other application
which support Voice Call Routing.which support Voice Call Routing.
• The only Fixed component in Air-timeThe only Fixed component in Air-time
CostingCosting
• Network Cost works out toNetwork Cost works out to 12 Paise /12 Paise /
MinuteMinute
20. Access Deficit ChargesAccess Deficit Charges
(ADC)(ADC)
• ADC refers to charges paid to theADC refers to charges paid to the
Government towards a fund created toGovernment towards a fund created to
promote rural telephonypromote rural telephony
• The money in the fund is utilized by BSNLThe money in the fund is utilized by BSNL
& invested in creating landline infrastructure& invested in creating landline infrastructure
in rural areas.in rural areas.
• The cost works out toThe cost works out to 0.75 %0.75 % of Revenuesof Revenues
21. License FeesLicense Fees
• The current spectrum policy involves a fixedThe current spectrum policy involves a fixed
payment at the time of spectrum procurementpayment at the time of spectrum procurement
• Besides a fixed payment, there is a revenueBesides a fixed payment, there is a revenue
sharing model towards usage of Spectrumsharing model towards usage of Spectrum
• Operators need to payOperators need to pay 15.45 %15.45 % of theirof their
revenues as “License Fees” to therevenues as “License Fees” to the
GovernmentGovernment
22. Other OperationalOther Operational
ExpensesExpenses
• This includes Admin Cost, Sales &This includes Admin Cost, Sales &
Marketing Cost, Customer Service Cost,Marketing Cost, Customer Service Cost,
etc.etc.
• This works out to Rs. 20 Crores / Month.This works out to Rs. 20 Crores / Month.
• The per minute cost works out toThe per minute cost works out to 8 Paise /8 Paise /
MinuteMinute
24. Key InsightsKey Insights
• Business Dynamics of Rate-PlansBusiness Dynamics of Rate-Plans
• Better Understanding of Telecom IndustryBetter Understanding of Telecom Industry
• Industry Initiatives to cut cost throughIndustry Initiatives to cut cost through
“Competitive Collaboration”“Competitive Collaboration”
