In this article we will discuss “The classification of cost”, and this article will be very helpful for those who are studying in MA1.
What Is Cost
- Specific price for a specific object.
- Anything which has a price.
- Except for the individual everything has a cost.
Classification of Cost
Cost can be classified as:
- The Element of cost,
- The function of cost,
- The Cost behavior
Classification of Cost By The Element
The element of cost is divided into three elements but they are related to each other.
1. Material: raw material which is used to manufacture a product two types of materials are,
- Direct material: basic ingredient for a product that forms a product.
- Indirect material: useful material in a product but not the basic ingredients.
2. Labor: one who makes the product two types of labor are,
- Direct labor: one who is directly involved in making the product.
- Indirect labor: one who play role in production but is not involved in making the product like a supervisor or maintenance worker.
3. Expense: the money which is spent during the operation two types of expenses are,
- Direct expense: this occurs when an organization hires some special tools or equipment.
- Indirect expense: this expense usually occurs on heating, lighting, rent for place, depreciation, insurance, etc.
prime cost= material+ labor+ expense
production overhead cost= indirect material+ indirect labor+ indirect expense.
Prime cost and production overhead cost look different but their work is to make the product. All three indirect elements (material, labor, and expense) are known as production overhead.
Classification of Cost By Function
The way of grouping the cost together according to what aspects of an organization’s operations(what function) cause them to meet with. The function of cost includes,
- Research and development
- production cost
- selling expense
- finance cost/cost of capital/interest cost
- distribution
- administrative expense
Classification of Cost By behavior
The level of activity changes the level of cost. The level of activity refers to the amount of work or the volume of the production.
variable cost: a cost that increases or decreases with the level of production. Variable costs are,
- The cost of raw material, because the volume of raw material relates to the volume of production.
- Direct labor is because of an increase or decrease in the number of workers.
Fixed cost: the cost which does not affect in total by increasing or decreasing the volume of output. Fixed costs are,
- The salary of the managing director (monthly and annually)
- The rent of a single building (monthly and annually)
Stepped-fixed cost: fixed cost at a certain level of activity. Stepped fixed costs are,
- Rent, where accommodation requirements increase as output levels get higher.
- Supervisor salaries, one supervisor may be able to supervise a maximum of ten employees. When the number of employees increases above a multiple of ten an extra supervisor will increase.
Mixed/semi-variable/semi-fixed cost: the cost which affects partly by changes in the activity level. Example:
- Utility bills
- Telephone bills
- Food expense
- Water bills
this is happen because of changes in activity level, the more you use these sources the more cost you have to pay.
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FAQS
What are the 3 classifications of cost by behavior?
If we talk about the classification of cost by behavior, we have these costs variable, fixed, and step/mixed cost.
What do you mean by classification of cost on the basis of element
It means how the cost is classified in the form of elements, cost can be classified as material, labor, and expense.
What do you mean by the classification of cost on the basis of variability
It means how the cost changes with the level of activity we have the following cost that is classified as variability those are fixed, variable, and semi-variable cost.