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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) Labor- Obtaining finished products from raw material solely depends on labor. Cost of labor is calculated in the form of wages and salaries. ) Expenses- Expenses other than material and labor 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)lenience/untraceable cost- It refers to those costs that are not easily traceable of identifiable. For example- lubricants, cotton wastes, insurance, 3.
By function- On the basis of function, cost may be divided into four disgorges- 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 straightening policies, leading the organization, and carrying out the operations. C)Selling cost- The cost incurred on marketing for promotion of sales is called selling cost. D) Distribution cost- The cost incurred on distribution of finished products is called distribution cost. 4.