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Cost Classification Methods Explained

This document classifies costs in several ways: 1. By nature or element - including material costs, labor costs, and expenses. Material costs refer to the cost of ingredients or parts, labor costs include wages and benefits, and expenses represent costs incurred to generate revenue. 2. By functions - such as production costs, selling costs, distribution costs, product costs, research costs, and development costs. Production costs include direct materials, labor, and overhead. Selling costs promote sales through advertising. Distribution costs cover moving products to customers. Research costs explore new products and applications while development costs implement research findings. 3. By other attributes like variability, controllability, normality, and identifiability.

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141 views14 pages

Cost Classification Methods Explained

This document classifies costs in several ways: 1. By nature or element - including material costs, labor costs, and expenses. Material costs refer to the cost of ingredients or parts, labor costs include wages and benefits, and expenses represent costs incurred to generate revenue. 2. By functions - such as production costs, selling costs, distribution costs, product costs, research costs, and development costs. Production costs include direct materials, labor, and overhead. Selling costs promote sales through advertising. Distribution costs cover moving products to customers. Research costs explore new products and applications while development costs implement research findings. 3. By other attributes like variability, controllability, normality, and identifiability.

Uploaded by

jeevan Monteiro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

CLASSIFICATION OF COSTS

Ways of classification of costs on the basis of


their common characteristics are:

1. By nature or element
2. By functions
3. By identifiably
4. By variability
5. By controllability
6. By normality
1. BY NATURE OF ELEMNTS

 Material Cost
 Labour Cost
 Expanses
MATERIAL COST

The amount of money invested in the production of a


product. The ingredients of a meal or the parts of a machine
would be things that incur material costs. This cost is apart
from the cost of labor to produce the product. The material
cost together with the cost of labor helps determine the
total cost of a product and its eventual sale price.
LABOUR COST

The cost of labor is the sum of all wages paid to employees,


as well as the cost of employee benefits and payroll taxes
paid by an employer. The cost of labor is broken into direct
and indirect (overhead) costs. Direct costs include wages for
the employees that produce a product, including workers on
an assembly line, while indirect costs are associated with
support labor, such as employees who maintain factory
equipment.
EXPENSES

Money spent or cost incurred in an organization's efforts to


generate revenue, representing the cost of doing business.
Expenses 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
earnings (such as bad debts). Expenses are summarized and
charged in the income statement as deductions from the
income before assessing income tax. Whereas all expenses
are costs, not all costs (such as those incurred in acquisition
of income generating assets) are expenses.
2. BY FUNCTIONS
1. Production 3. Distribution
2. Selling cost
cost cost

4. Product 5. Research 6. Developme


cost Cost nt Cost
PRODUCTION COST
Production costs are often classified as direct or indirect
product costs. For example, direct materials and direct labor
are direct product costs because they can be easily and
economically traced to the products being manufactured. On
the other hand, manufacturing overhead costs are indirect
product costs because they are not easily or economically
traceable directly to the products. Instead, the
manufacturing overhead costs must be allocated or assigned
to the products often through a predetermined overhead
rate.
Selling Cost
Selling costs play the key role in monopolistic competition
and oligopoly. Under these market forms, the firms have to
compete to promote their sale by spending on
advertisements and publicity.
Moreover, producer has not to decide about price and output
and he also keeps in view how to maximize the profit.
DISTRIBUTION COST
If the shipper is a distributor and it further sells to the
retailer and the retailer sells to the end user then all the
separate distribution costs at each stage would be included
in the total distribution cost. Moreover, in some cases the
manufacturer has a production unit at one place and the
“product pick up place” by the forwarder at another place.
The cost of moving the product from the place of production
to the pick up point is also included in distribution cost.
PRODUCT COST
Product cost refers to the costs incurred to create a product.
These costs include direct labor, direct materials,
consumable production supplies, and factory overhead.
Product cost can also be considered the cost of the labor
required to deliver a service to a customer. In the latter
case, product cost should include all costs related to a
service, such as compensation, payroll taxes, and employee
benefits.
RESEARCH COST
The cost of researching for new or improved products, new
applications of materials, or improved methods.
Research is usually basic or applied. Basic research helps
the company acquire new knowledge, but doesn’t have any
specific application or use in mind. Think of it as research
for the sake of research.
While applied research is also done to acquire knowledge,
it’s done with a specific goal, use, or product in mind – such
as how to build a better mousetrap.
DEVELOPMENT COST
The cost of the process which begins with the
implementation of a decision to produce a new or improved
product or to employ a new or improved method and ends
with commencement or formal production of that product or
bye the method.
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