COST CLASSIFICATION – TYPE OF COSTS

Cost classification is arranged in groups on suitable basis. Costs can be classified on different basis:

• Element
• Function
• Nature

Classification on basis of Element

• Material –materials purchase for production or non- production purpose, direct or in direct material
• Labor  – all salaries and wages paid to workforce whether work specifically for materials as direct labor costs or indirect labor like supervisor salary
• Overhead –  expenses other than  material and labor

Classification on basis of Nature

• Direct Costs – Cost that can be attributed to a specific cost unit. In other words cost that form essential part of final product e.g material for specific product, labor specifically working on certain product will become part of that product
• Indirect costs – Cost  that cannot be attributed to a specific cost unit or costs that are not part of any specific product like salary cost of supervisor, rent and depreciation expenses

Classification on basis of Element

• Production costs –  costs incurred up to stage of  goods manufacturing  like direct labor, direct material

• Non production costs –  costs incurred at stage when production of good is completed like selling , distribution costs etc