Understanding Basic Types Of Cost Classification In Accounting

Accounting is a very diverse and complex subject which has many subfields. Cost classification is one of the most important concepts of accounting which discusses the broad and clear idea of segregation of different types of expenses into different sectors like indirect cost, product cost, variable cost, manufacturing cost, direct cost, and sunk cost. Cost classification is very imperative for any business. Businesses can’t operate without understanding the cost classifications properly and thoroughly. Cost classification is a broad concept. It can be divided into several categories, which are; classification of cost on the basis of element, classification of cost on the basis of function, classification of cost on the basis of behavior, classification of cost on the basis of relevancy, and classification of cost on the basis of management.

Classification On The Basis Of Element:
Classification on the basis of element is also known as classification of cost on the basis of nature. Experts of a dissertation help firm told that the element cost is further divided into two groups; direct cost and indirect cost.

Direct Cost:
The cost which is directly related to elements like raw materials and laborers is known as direct cost. These costs are impasse in a unit. The direct cost is further divided into sub costs; direct element, direct labor and direct expense.

• Direct Element: Direct element is the material which is related to the finished product. It includes all kinds of material used to complete a product.
• Direct Labor: Direct labor includes the salary of employees directly involved in manufacturing and processing of a product.
• Direct Expense: The cost which is directly associated with any specific expenses (purchase of tools) is called direct expense.

Indirect Cost:
Indirect Cost includes all the costs associated with a unit or department and is not directly linked to a specific product. The indirect cost is also divided into subcategories; indirect element, indirect labor and indirect expense.

• Indirect Element: The material which is indirectly related to the manufacturing of a product is called indirect elements, such as cleaning chemicals.
• Indirect Labor: Labor which is indirectly linked to the manufacturing of a product is called indirect labor.
• Indirect Expenses: Expenses which are not directly related to product manufacturing makes indirect expenses. Factory overhead, selling and distribution overhead and administration and office overhead are also included in indirect expenses.

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Classification Of Cost On The Basis Of Function:
On the basis of function, cost is classified into three categories; prime cost, product cost and factory cost. Direct labor, direct material and direct expenses make up the prime cost. The factory, office and administrative overheads are included in product cost and work cost and expenses are included in factory overhead.

Classification On The Basis Of Behavior:
On the basis of behavior cost is divided into three types; fixed cost, variable cost and mixed cost. Fixed cost is the cost which remains constant and does not change with the change in the amount of production. It may change after a long time period. Variable cost varies with the variation in the amount of goods produced. Mixed cost is the cost which changes but not with the changes in the amount of production.

Classification On The Basis Of Relevance:
In accordance with the relevance, we can classify the cost into five types; relevant cost, opportunity cost, standard cost, controllable cost and sunk cost. The cost which occurs due to a new and specific decision is called relevant cost. Relevant cost is not a fixed cost. Opportunity cost means receiving some extra gains from the present things of a factory. Standard cost is the fixed cost according to a specific budget. Controllable cost is the cost which management can control. Sunk cost also is known as historical cost, is a cost which by this time has been lost and can’t be recovered.

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Classification On The Basis Of Management:
On the basis of management, cost can be classified as manufacturing and non-manufacturing cost. The total cost occurred in the manufacturing of a product is called manufacturing cost. It includes labor cost, direct material cost and manufacturing overhead. Non-manufacturing cost is not related to the manufacturing process.

Final Thoughts:

When someone has proper knowledge about costs and its classification he can make the good use of accounting methods. Proper classification of cost helps in making working of management, accountants, and researchers. It also smooths the method of controlling, reducing and managing cost.