COST ACCOUNT ING I CLASSIFICATION OF COST Classification

COST ACCOUNT ING -I CLASSIFICATION OF COST

Classification of Cost The term cost itself is without any significant meaning and therefore, it is always advisable to use it with an adjective or phrase such as prime, direct, indirect, fixed, variable, controllable, opportunity cost and the like.

Classification of Cost In order to ascertain, control, manage, forecast and interpret cost, the elements of cost must be classified. The elements of cost are; ü Material ü Labor and ü Other Expenses

Classification of Costs According to Nature and Function Nature According to the Identifiable (Cost Center and Production) Function According to Behavior (Variability) Fixed Costs Direct Costs Material Production Costs Indirect Costs Labor Other Expenses (Wages, Salaries, Depreciation, Utility, etc. ) Selling Costs Administrative Costs Research and Development Costs Variable Costs

Classification of Cost According to Nature and Function This classification is the basis of Balance Sheet Accounts (1 -5) Income Statement Accounts (6) Uniform Accounting System (Uniform Chart of Accounts) Other Accounts the recording system (Uniform Accounting System). Cost Accounts (7/A-7/B) According to Uniform Accounting System the costs are to be recorded on the basis of function (7/A) and nature (7/B).

Classification of Cost According to Nature Material Cost Labor Cost Other Expenses (Wages, Salaries, Depreciation, Utility etc. )

Classification of Cost According to Nature Material Costs Cost of materials used for the manufacture of a product, a particular work order, or provision of a service. All raw materials are material costs. Example: Cloth for making a dress or wood in furniture or desk, cotton in textiles etc.

Classification of Cost According to Nature Material Costs Material costs involve not only raw material costs but also the material used for a service is called material costs. Example: Cooking material for catering or stationary and office supplies, cleaning materials, material for repairs and lubricant.

Classification of Cost According to Nature Labor Costs Labor cost is defined as the total expenditure incurred from employers in order to employ workers. Labor cost is all labor expended in altering the construction or composition of the product.

Classification of Cost According to Nature Labor Costs Direct wages means the wages of labor which can be identified wholly to a particular job, product or process in converting raw materials into finished goods. It may also be defined as prime labor cost, process labor cost, operating labor cost, manufacturing labor cost etc.

Classification of Cost According to Nature Labor Costs Labor costs include the direct costs linked to work carried out such as wages, salaries, vocation payments, or other benefits. Labor costs also include indirect costs such as social benefits, vocational and training costs.

Classification of Cost According to Nature Other Expenses Expense is 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) or a computed 'expired' portion (depreciation) of an asset.

Classification of Cost According to Nature Other Expenses Example: Rent, telephone expenses, insurance, lightening, oil and gas, fees paid to consultants, depreciation, Other Expenses involve overheads such as manufacturing overhead, administration overhead, selling overhead, etc.

Classification of Cost According to Function Selling and Distribution Costs Research and Production Development Costs Functional Classification Administrative Costs Functional classification of costs defines how the cost was applied (manufacturing, administration or selling). A functional classification expresses that the business performs various functions for which costs are incurred.

Classification of Cost According to Function Selling and Distribution Costs Research and Production Development Costs Functional Classification Administrative Costs Functional classification is also important in giving an opportunity to the management to calculate the efficiency of departments performing various functions in the firm.

Classification of Cost According to Function Production or Manufacturing costs are all production cost incurred to manufacture the products and to bring them to a saleable condition, including direct materials, direct labor and indirect manufacturing (or factory overhead) costs.

Classification of Cost Selling According to Function costs are the costs of marketing function. Distribution costs include expenditure incurred in packing, unpacking, and transporting activities.

Classification of Cost According to Function Administrative Cost is the cost of formulating the policy, directing and controlling the business activities which is not related directly to a production, selling & distribution, research or development activity or function.

Classification of Cost According to Identifiable (Relation Between Product and Cost Center) Direct Cost Indirect Cost

Classification of Cost According to Identifiable (Direct-Indirect Costs) Direct Costs The expenses that can be completely attributed to the production or cost center. In the process of production of articles, material cost, labor cost and other expenses incurred directly related with manufacturing activity.

Classification of Cost According to Identifiable (Direct-Indirect Costs) Direct Costs For example in producing furniture the cost of wood and the cost of labor (converting wood to future) is directly related with manufacturing activity and will be defied as direct costs.

Classification of Cost According to Identifiable (Direct-Indirect Costs) Cutting& Molding Department Assembly Department Polishing Department For example in manufacturing furniture, the cost of wood is directly traceable to Cutting & Molding Cost Center, and the cos of wood is directly attributable to cost of production activity.

Classification of Cost According to Identifiable (Direct-Indirect Costs) Indirect Costs Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product, and therefore are considered indirect costs.

Classification of Cost According to Identifiable (Direct-Indirect Costs) The expenses incurred on those items which are not directly chargeable to production or cost center are indirect costs. Example: In production, salaries of timekeepers, storekeepers, are indirect costs.

Classification of Cost According to Identifiable (Direct-Indirect Costs) The costs that cannot be conveniently allocated to production are called indirect costs.

Classification of Cost According to Behavior Fixed Cost Variable Cost

Classification of Cost According to Behavior In this classification, costs are classified by their behavior to changes in the level of activity. This is the analysis of how cost or profits change as volume changes.

Classification of Cost According to Behavior In this context volume might be an activity such as the number of machine hours, the number of units produced, the number of pounds processed, the number of units sold, or the TL of goods sold.

Classification of Cost According to Behavior- Fixed Costs The cost which does not vary but remains constant within a given period of time or range of activity is called fixed costs. Example: Rent, insurance of factory buildings, depreciation etc. remain the same for different levels of production.

Classification of Cost According to Behavior- Variable Costs The costs tend to vary with the volume of output called variable costs. Any increase in the volume of production results in an increase in the variable cost. Example: cost of material, cost of labor etc.

Classification of Cost Production Costs The cost of inventory will be reported in balance sheet. The categories of inventory are as follows: I. Raw Material II. Work-in-progress III. Finished Goods The cost of product will be reported as Work-in-Progress (Process). The cost of finished goods will be reported as finished goods in Balance Sheet.

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