Cost Classification

By Ajay Vatsavai 10BSUHH010096 Seat No: 13

Cost classification
Cost Classification refers to the process of

grouping costs according to their common characteristics such as nature or element of expenses, functions, traceability and variability. It can be used on the basis of time, their relation with the product and accounting period. It can used in planning and control and decision making. Thus classification is essential for identifying costs with cost centers or cost units for the purpose of determination and control of cost

The important ways of cost classification are:

By nature or element: materials, labor,

expenses By functions: production, selling and distribution, administration, Research & development By traceability: direct and indirect By variability: fixed, variable, semi-variable

By nature or element: materials, labor, expenses

Material cost:- is cost is used for the manufacture of

a product, a particular work order, or provision of a service.

Labor cost:- is defined as the total expenditure borne

by employers in order to employ workers. include the direct costs linked to remuneration for work carried out such as direct remuneration, bonuses and ex gratia payments not paid at each pay period, payments for days not worked, severance pay, benefits

By nature or element: materials, labor, expenses

Expenses:- are defined as money expended or

cost incurred in a firm's efforts to generate revenue, representing cost of doing business. They may be in the form of actual cash payments (such as wages and salaries), a computed 'expired' portion (depreciation) of an asset, or an amount taken out of the firm's earnings (such as bad debts

By functions: production, selling and distribution, administration, Research & development

Production Cost: Manufacturing costs are those costs

which are incurred in the course of manufacture. It includes cost of raw material, cost of labor, other direct cost and factory indirect cost. Example of production or manufacturing costs may be power, lighting, heating, rent, depreciation etc.
Selling and Distribution Cost: It includes both selling cost

as well as distribution cost. Selling costs are those costs which are incurred in connection with the selling of goods and services Distribution costs are those costs which are incurred on dispatch of finished goods to the consumers. Example of selling and distribution costs are: sales men salary, packing charges, carriage, out ward, advertisement, ware house charges etc

By functions: production, selling and distribution, administration, Research & development

Administration Cost: These costs are incurred for

the general administration of the enterprise. It includes office costs as well as administration cost. For example, salary of office staff, rent of office building, electricity charges, audit fee, printing and stationeries etc Research & development cost relates to the costs of researching for new or improved products, new application of materials or new or improved methods, processes, and cost of implementation of the decision including the commencement of commercial production of that product or by that process or method.

By traceability: direct and indirect

Direct cost:- The expenses on material and labor

economically and easily traceable to a product, service or job are considered as direct costs. In the process of manufacture or production of articles, materials are purchased, laborers are employed and the wages are paid to them
Direct costs are those, which are incurred for a

particular cost unit and can be conveniently linked with that cost unit. Direct costs are termed as product cost.

By traceability: direct and indirect

Indirect cost:- The expenses incurred on those

items which are not directly chargeable to production are known as indirect costs.
Indirect costs are incurred for a number of cost

units and also includes cost which through incurred for a particular cost unit are not linked with the cost unit. Since such costs are incurred over period and the benefit is mostly derived within the same period, they are called period costs.

By variability: fixed, variable, semivariable

Fixed Cost:- Fixed costs are those costs which

remain fixed irrespective of the change in volume of out put. As production increases cost per unit of the fixed cost decreases and as production decreases fixed costs are, rent of the factory building depreciation, salary of the office manager etc. Variable Cost:- Variable costs are those costs which very in direct proportion to the volume of out put. As production increases total cost increases but also per unit remains constant. As production decreases total cost decreases and cost per unit also decreases. Example of variable costs are, cost of raw materials labor etc.

By variability: fixed, variable, semivariable

Semi-Variable Cost / Semi-Fixed cost: These

costs are partly fixed and partly variable. Examples of variable costs are telephone rent. It includes partly fixed charge up to a certain level and then varies according to the calls

References
Taxman's Cost Accounting (2007)

http://banadurga.blogspot.in/2012/02/classificatio

n-of-cost.html