Cost is a completely subjective term; it does not have any specific meaning until it is grouped under logical sub heads. If one says that there was a cost of $100, it is completely vague until it is specified that the cost was used up for something specific like raw materials, equipment, etc. Classification of cost can be done based on various parameters such that cost can be allotted to groups.
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Basis of cost classification
There are various ways of classifying cost. These are as follows –
- Cost can be classified based on the type of expense. Accordingly, cost can be labor cost, material cost or expenses. Manuals as cost homework answers are of real help.
- The link between the cost and its object can also be used to classify cost and accordingly, cost can be indirect or direct in nature.
- It can be classified by the behavior of the cost whether it grows with the growth of the organization or stays stagnant. This forms the basis of budgeting.
- Classification can be based on the function for which the cost is being used, for example, for marketing, research or manufacturing,
- Where the cost is being used up that is the location where it is being incurred whether factory or office etc.
- The responsible person for controlling the cost as there should be specific people in whose hands the cost circulates.
Types of costs
- On the basis of function of management, cost can be of the following types –
- Cost of manufacturing
The cost that is used up in the factory for conversion of raw materials to their finished products is the cost of manufacturing. These costs could be of the raw materials, the factory overhead costs or the labor costs. You can get complete details with options as cost homework answers.
- Cost that does not involve manufacturing
The cost that is not involved in conversion of raw materials into their finished products is the non-manufacturing prices. These costs could be the ones needed for advertising, salaries, deliveries, commissions, etc.
- On the basis of the simplicity of tracing the cost.
- Direct
There are costs involved which can be easily tracked to its costing objects like products, branches or departments. Examples of such costs could be labor, advertising, raw materials, etc. These are actuallythose cost that can easily be accounted since it is traceable. The cost homework answers are of real help.
- Indirect
The costs that are used up but cannot be tracked in accordance with their costing object are called indirect costs. They are at times termed as joint costs. These basically cost like factory overheads which can be used for multiple products or departments. It is for this reason that such costs cannot be accounted easily in respect to its usage.
- On the basis of the charging time against the revenue.
- Cost of products
These costs are a part of the inventory that is taken against the revenues. This means that the cost is incurred only when the goods are sold. The costs that are thus involved in manufacturing of the various products of an organization are the product costs. Examples are all the direct material and labour costs in addition to the factory overheads.
- Periodic costs
The costs that cannot be inventoried involve the periodic costs. All non-manufacturing costs involved like expenses for selling or administration are termed as the periodic costs.
- On the basis of the behavior of the cost in accordance to its activity.
- Variable cost
The cost that directly related to its activity is the variable cost. These costs increase with the increase of activity and decrease with activity decrease, so in a way, these costs and activities are directly proportional to each other. Examples of variable costs could be raw materials, cost of energy that is being used for production, labour wages, sales commissions, etc. for further details you can surely check out cost homework answers.
- Fixed cost
The costs that stay constant irrespective of the activity level are the fixed costs. Whatever may be the change in the activity level, fixed costs do not change instead they remain same over a long period of time. Examples of fixed costs could be rent of the factory or office building, insurance premiums, etc.
- Mixed cost
The costs that keep changing but are not proportionate to activity changes are called the mixed costs. These costs involve a portion of fixed costs and in addition involve portions of variable costs as well. The electricity bill of a company could be an example of mixed cost because it involves a fixed part which is static and there is a variable part that keeps changing in accordance to usage.
- On the basis of usage in making decisions
- Cost of relevance
The costs that change with differencein course of activities are the costs of relevance. These costs have the ability to affect any decision making.
- Standardized costs
At times companies set certain costs that are based on the previous data that involves past experiences, standards of the industry or budgets. These costs are thus pre-determined and are used as a base to compare with the actual costs that are being incurred.
- Costs that have sunk
These are costs that are a part of the past and bear no significance to any decision making. They do not have any relevance to the present work at hand. These are completely opposite to the relevant costs.
- Cost of opportunity
During operation of a business, there are times when decisions are taken where certain alternatives are used for the business procedures. Suppose there was an initial plan of renting a factory unit to be used for the production process of the company but a situation arises that makes a building owned by the company available to them. The company chooses to use this building for its factory operations rather than renting a factory.
Here, this rent which would have been used in case the factory would b rented forms the cost of opportunity that is being saved when the company chose to use its own building for its factory purposes. Manuals as cost homework answers are of real help.
Thus, it is evident that classification of cost becomes necessary in order to manage the varied costs involved in the running of a business.