Cost Classification

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Cost classification is the process of grouping costs according to their common characteristics. A suitable classification

of costs is of vital importance in order to identify the cost with cost centres or cost units. Cost may be classified

accounting to their nature, i.e., material, labor and expenses and a number of other characteristics. The same cost figures

are classified according to different ways of costing depending upon the purpose to be achieved and requirements of

particular concern. The important ways of classification are:

On the basis of Identity: According to this classification, the costs are divided into there categories i.e., Materials,

Labor and Expenses. There can be further sub-classification of each element; for example, material into raw material

components, and spare parts, consumable stores, packing material etc. This classification is important as it helps to find

total cost, how such total cost is constituted and valuation of work-in-progress. On the basis of Function: Production, Administration, Selling & Distribution are three important functions of a business

concern. Taking these functions into consideration, costs have been classified by:

(a) Production or Manufacturing Cost: Manufacturing costs are those costs which are incurred in the course of manufacture.

It includes cost of raw material, cost of labour, other direct cost and factory indirect cost. Example of production or

manufacturing costs may be power, lighting, heating, rent, depreciation etc.

(b) Office and Administration Cost: These costs are incurred for the general administration of the enterprise. It includes

office costs as well as administration cost. For example, salary of office staff, rent of office building, electricity

charges, audit fee, printing and stationeries etc.

(c) Selling and Distribution Cost: It includes both selling cost as well as distribution cost. Selling costs are those

costs which...
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