Classification of cost on the basis of elements

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Classification of cost refers to a complete and transparent idea of the separation of expenses in the different sectors such as manufacturing cost, product cost, sunk cost, variable cost, direct cost, indirect cost, etc. Classification of cost is a vital part of a company. It is almost impossible to operate a business without understanding it properly. We can divide the cost classification into several categories. Here are including the main categories.

(a) Classification of cost according to the element
According to the element, the cost can be divided into two main categories. It is also known as the classification of cost by nature.

(i) Direct cost:

It is such a cost that is able to mark directly any particular cost such as raw materials, labor included operating expenses and some other costs are belongs to the direct cost. These costs are bound in a unit. For example, we can say a total cost of an advertisement for several products. The direct cost has some subcategories.

Direct element: Direct element refers to that material that is related to all of the finished products. This material is a part to complete any product. It can have imposed conveniently on a particular product. The purchased and upcoming requisite products are included in the direct element. As like, all kinds of initial packing material.

Direct labor: Direct labor means the paid salary to the employee who is directly engaged in manufacturing, handling, and processing a product. Actually, they are responsible for the observation and maintenance of the product also.
Direct expense: This cost is directly related to any particular expense is called direct expense. If a company needs to buy some specific product, equipment or tools is an example of direct expense.

(ii) Indirect cost:

Indirect cost means the opposite side of direct cost. Which cost is related to a unit or department and can't trace for any specific product is called indirect cost. The indirect cost has also some subcategories.

Indirect element: Some example of indirect materials is cleaning chemicals, small tools, glue, maintenance work fuel, etc. These element costs are incurred as a unit.

Indirect labor: Indirect labor is covering the supervisor's and the inspector's salaries. The worker of cleaners' and storekeepers' wages are also included in the indirect labor.

Indirect expenses: Indirect expenses are house rent, hospital service, lighting, insurance, and welfare trust.

Factory overheads: It is related to all kinds of indirect costs like manufacturing products and the timekeeper's salary. Indirect costs and overhead costs are often the same. It follows the indirect labor cost formula.

Selling and distribution overhead: This overhead is included with advertising expenses and packing materials costs such as free advertising and marketing on the field. 

Administration and office overhead: Administrative expenses are an expense of office works related expenses such as office lighting, rent welfare trust are included here.

(b) Cost classification according to function

Cost is classified into the following categories. The main four categories of functional costs are given below-

(i) Prime cost: Prime cost is the adjustment of the direct material, direct labor, and direct costs. It is actually the result of these three elements.

(ii) Product cost: It means the factory cost with administrative and office overheads

(iii) Factory cost: Factory cost is also known as work cost. It is combined with work costs and work expenses

(c) Depending on the behavior

By behavior or variability, the cost is classified as Variable cost, Fixed cost, and Mixed cost which is explained below.

(i) Variable cost: Variable cost is such a cost whose proportion is changing with the amount of production. Such as direct material and changeable costs

(ii) Fixed cost: This cost won't change with the proportion of production. It is the maximum time fixed. But it is notable that this cost may be changed after a long time. For example, office rent, insurance, and hospital cost.

(iii) Mixed cost: Mixed cost can change overall but not with the proportion of production. More changeable cost is counted under a Mixed cost. An example of a mixed cost is electricity expenses.

(d) According to relevancy

Relevance base cost is mainly divided into five categories which are given below;

(i) Relevant cost: This cost can be by making a new decision is called relevant cost. Occasionally there may have many relevant costs. This cost is not fixed from before.

(ii) Opportunity cost: Opportunity cost is the system of getting some extra advantages from the existing things of a factory like land, money and time, etc. Someone can rent his office for another purpose of advantages. Moreover, they can rent their other things also. It is actually an extra benefit for a company.

(iii) Standard cost: Standard cost is fixed from the previous experience. It was fixed according to the specific budget, and the volume of the industry. The actual cost is also included with this cost.

(iv) Controllable cost: Which cost can be controlled by management is called controllable cost. The manager can control some costs.

(v) Sunk cost: It is known as a historical cost. Sunk cost effect is the most important for a company. It is such a cost that is already lost and can't be undone anymore. If a company is paid its monthly rent then we can say this rent cost is sunk cost.

(e) According to management
These costs are mainly divided into two categories; manufacturing cost and Non- manufacturing cost given is given below;

(i) Manufacturing cost: Manufacturing cost refers to the total cost of a product from the raw materials to finish the product. It is mainly the combination of direct material cost, labor cost, and manufacturing overheads.

(ii) Non-manufacturing cost: In order, the rules of GAAP Non-manufacturing cost
are not actual product cost. It is a part of the company's income statement.

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