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 â€“
Types of costs
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.
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.
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.
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.
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.
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.
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.
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.
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.
The costs that change with differencein course of activities are the costs of relevance. These costs have the ability to affect any decision making.
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.
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.
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.