Cost Accounting – Classification of Costs
Cost Accounting – Classification of costs
Cost accounting refers to a process of accumulating, recording, classifying and analyzing all costs incurred at various levels of production. The purpose of cost accounting is manifold. It provides a final selling price, suggests the best possible course of action where maximum savings are possible and a strategy for future. Cost accounting is also constructive in comparing the input and output results that ultimately aids the management to arrive at a financial statement. It includes tangible as well as the intangible expenses.
Let us look at the various methods of cost classification.
1. By element- On the basis of element, cost is divided into three categories-
a) Material- It is one of the most important aspects of production. It is also referred to as raw material or tangible items. Almost 50% of the cost comes under material. For example- cotton, wood, rubber, etc.
b) Labour- Obtaining finished products from raw material solely depends on labour. Cost of labour is calculated in the form of wages and salaries.
c) Expenses- Expenses other than material and labour come under the category of ‘expenses’. For example- rent, insurance, etc.
2. By nature/traceability- On the basis of traceability, cost is divided into two categories-
a) Direct/traceable cost- It refers to those costs that are easily traceable or identifiable. For example- wages, salary, cost of timber, cotton, etc.
b) Indirect/untraceable cost- It refers to those costs that are not easily traceable of identifiable. For example- lubricants, cotton wastes, insurance, etc.
3. By function- On the basis of function, cost may be divided into four categories-
a) Production cost- Cost incurred in obtaining finished goods from raw material is referred to as the production cost.
b) Administration cost- It includes the cost of strategizing policies, leading the organization, and carrying out the operations.
c) Selling cost- The cost incurred on
Cost accounting refers to a process of accumulating, recording, classifying and analyzing all costs incurred at various levels of production. The purpose of cost accounting is manifold. It provides a final selling price, suggests the best possible course of action where maximum savings are possible and a strategy for future. Cost accounting is also constructive in comparing the input and output results that ultimately aids the management to arrive at a financial statement. It includes tangible as well as the intangible expenses.
Let us look at the various methods of cost classification.
1. By element- On the basis of element, cost is divided into three categories-
a) Material- It is one of the most important aspects of production. It is also referred to as raw material or tangible items. Almost 50% of the cost comes under material. For example- cotton, wood, rubber, etc.
b) Labour- Obtaining finished products from raw material solely depends on labour. Cost of labour is calculated in the form of wages and salaries.
c) Expenses- Expenses other than material and labour come under the category of ‘expenses’. For example- rent, insurance, etc.
2. By nature/traceability- On the basis of traceability, cost is divided into two categories-
a) Direct/traceable cost- It refers to those costs that are easily traceable or identifiable. For example- wages, salary, cost of timber, cotton, etc.
b) Indirect/untraceable cost- It refers to those costs that are not easily traceable of identifiable. For example- lubricants, cotton wastes, insurance, etc.
3. By function- On the basis of function, cost may be divided into four categories-
a) Production cost- Cost incurred in obtaining finished goods from raw material is referred to as the production cost.
b) Administration cost- It includes the cost of strategizing policies, leading the organization, and carrying out the operations.
c) Selling cost- The cost incurred on