In this article we will discuss about “The classification of cost”, and this article will be very helpful for those who are studying in MA1.

Cost

  • Specific price for a specific object.
  • Anything which have a price.
  • Except the individual everything has a cost.

Classification of Cost

Cost can be classified as:

  • Element of cost,
  • Function of cost,
  • Cost behavior

Element of Cost

Element of cost is divided into three element but they are related to each other.

1. Material: raw material which is used to manufactured a product.

Two types of materials are,

Direct material: basic ingredient for a product which form a product.

Indirect material: useful material in a product but no the basic ingredients.

2. Labor: one who make the product.

Two types of labor are,

Direct labor: one who directly involved in making the product.

Indirect labor: one who play role in production but is not involved in making product like supervisor or maintenance worker.

3. Expense: the money which is spent during the operation .

Two types of expense are,

Direct expense: this is occur when an organization hire some special tools or equipment.

Indirect expense: these expense usually occurs on heating, lighting, rent for place, depreciation and insurance etc.

prime cost= material+ labor+ expense

production overhead cost= indirect material+ indirect labor+ indirect expense.

Prime cost and production overhead cost is look different but there work is to make the product.

All three indirect elements (material, labor and expense) is known as production overhead.

Function of cost

The way of grouping the cost together according to what aspects of an organization operations(what function) cause them to meet with.

Function of cost include,

  • Research and development
  • production cost
  • selling expense
  • finance cost/cost of capital/interest cost
  • distribution
  • administrative expense

Cost behavior

The level of activity which change the level of cost.

The level of activity refers the amount of the work or the volume of the production.

variable cost: cost that increase or decrease with the level of production.

Variable cost are,

1 The cost of raw material, because the volume of raw material relates to the volume of production.

2 Direct labor this is because of increase or decrease the number of worker.

Fixed cost: the cost which not affect in total by increasing or decreasing the volume of output.

Fixed cost are,

1 The salary of the managing director (monthly and annually)

2 The rent of a single building (monthly and annually)

Stepped-fixed cost: fixed cost at certain level of activity.

Stepped fixed cost are,

1 Rent, where accommodation requirements increase as output levels get higher.

2 Supervisor salaries, one supervisor maybe able to supervise a maximum of ten employees. When the number of employees increase above a multiple of ten an extra supervisor will increase.

Mixed/semi variable/semi fixed cost: the cost which affect partly by changes in the activity level.

Example, utility bills, telephone bill, food expense, water bill, this is because of changes in activity the more you use theses sources the more cost you have to pay.

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