Cost Accounting Assignment Help >>Classification of Costs Assignment Help, Cost Accounting Help

Classification of Costs

Cost classifications are needed for the development of cost date that is useful to management. Hence costs are being classified:

1) By nature.

2) By product.

3) By period.

4) By behavior.

5) By departments.

6) Common or joint costs.

7) For planning and control.

8) For analytical processes.

Natural Classification of Costs:

The process of classifying costs and expenses begin with total cost, which may be thought of as all costs or deduction from sales before income tax calculation. In a manufacturing concern, total operating cost is divided into (a) manufacturing cost and (b) commercial cost. Manufacturing cost, also named as production cost or factory cost, is the sum of three elements; direct material, direct labor and factory overhead (FOH). Commercial expenses are further classified into two categories; marketing expenses and administrative expenses.

Classification by Product:

The elements of manufacturing costs are direct material, direct labor and factory overhead.

Direct material and direct labor are combined into another classification called prime cost. Direct labor and factory overhead can be combined into a classification named as conversion cost, representing the cost of converting direct materials into finished products. Direct materials are all those materials that form an integral part of the finished product and can be directly included in calculating the cost of the product. Direct labor is the labor applied directly to the materials comprising the finished products. Factory overhead may be defined as the cost of indirect materials, indirect labor and all of the other manufacturing costs that cannot be charged to specified units, products or jobs.

Classification with respect to Accounting Period:

In this format, expenditures can be divided into two broad classes; (a) Capital expenditures and (b) Revenue expenditures.

A capital expenditure is intended to benefit future periods and is classified as an asset. On the other hand, revenue expenditure benefits the current period and is known as expense. An expenditure classified originally as an asset will ultimately flow into the expense when the asset is either consumed or charged off.

Classification by Behavior:

Some costs vary directly in relation to changes in volume of output while others, as they incurred in relation to time, remain more or less fixed in amount. Unless a cost system pays due regard to this distinction, costs accumulated and reported for planning the company’s strategy or for costing individual products or services will not be of material value to management.

Classification by Departments:

A factory is generally organized along departmental lines for production purposes. This factory departmentalization is the basis for the important classification and subsequent accumulation of costs by department to achieve (a) cost budgeting with responsibility accounting and (b) a great degree of reliable costing. The departments of a factory generally falls in two categories (1) Producing departments and (2) Service departments.

Common or Joint Costs:

Considerable confusion exists with regard to the correct usage of these two costs classifications. Common costs are costs of facilities or services employed in two or more accounting periods, operations, commodities or services, For example, a capital expenditure, intended to benefit future periods is classified as an assert. Subsequently, the cost of the asset flows into the expense stream as the asset is consumed or charged off. Since the asset benefits several accounting periods, the cost must arbitrarily be allocated or shared among the periods. Depreciation of a building is a good example.

Costs for Planning & Control:

A company cost information system provides the data required for the preparation and operation of the budget and for establishing standard costs. In many companies, predetermining or estimating factory overhead constitutes the initial step towards a budget program. Standard costs constitute the basic accounting tool which aids in the solution of managerial problems. The measurement of variances provides management with necessary information and to complete standard costs services to management should include systematic, day by day reports relaying deviation information which requires the attention of the management.

Costs for Analytical Purposes:

Costs as the basis for the analysis are the estimated costs which may be incurred if any one of several alternative courses of actions is adopted. Different type of costs involves varying kinds of considerations in managerial analysis for decision making. When management is faced with the problem of abandoning one product and substituting another, the decision will demand the consideration of opportunity costs.

Tags: Cost Accounting Assignment Help, Cost Accounting Homework Help, Cost Accounting Projects Help, Cost Accounting Solutions