COST CLASSIFICATION IN RELATION TO PRODUCT

a) Manufacturing and non- manufacturing

- Manufacturing costs are the costs incurred during the production of a product. costs include the
cost of direct materials, direct labor and manufacturing overheads. Non-manufacturing costs are
expenditures not associated with product costs .Costs include administrative costs, marketing and
selling costs, finance costs etc.
- Manufacturing costs initially form part of product inventory and are expensed out as cost of
goods sold only when the inventory is sold out. Non-manufacturing costs, on the other hand,
never get included in inventory rather are expensed out immediately as incurred.
b) Cost classified as to variability
- Variability of cost is estimated in relation to the volume of production. Some costs vary in
accordance with production while some remain constant. Under this classification, costs are
classified into three groups: Fixed cost. Variable costs, semi-variable costs
- FIXED COST - is that cost that is not affected by any variation in the volume of
output. The amount of fixed cost tends to remain constant for all volumes or
production within the fixed capacity of the plant.
- VARIABLE COST - this is a cost that varies directly with variations in the volume of
output. Such cost increases when the production goes up and correspondingly the cost
decreases when the production declines. However, variations may not always be in the
same proportion.
- SEMI - VARIABLE COST - This cost is partly variable and partly fixed. It possesses
the characteristics of both the fixed and variable.
c) Cost classified as to relation to manufacturing departments
- Production costs refer to the costs a company incurs from manufacturing a product or providing a
service that generates revenue for the company. Production costs can include a variety of expenses,
such as labor, raw materials, consumable manufacturing supplies, and general overhead.
- DIRECT MATERIAL COST- Direct materials are the raw materials that become a
part of the finished product. Manufacturing adds value to raw materials by applying a
chain of operations to maintain a deliverable product. There are many operations that
can be applied to raw materials such as welding, cutting and painting. It is important to
differentiate between direct materials and indirect materials.
- DIRECT LABOR COST - The direct labor cost is the cost of workers who can be
easily identified with the unit of production. Types of labor who are considered to be
part of the direct labor cost are the assembly workers on an assembly line.
 - MANUFACTURING OVERHEAD - Manufacturing overhead is any manufacturing
cost that is neither direct materials cost nor direct labor cost. Manufacturing overhead
includes all charges that provide support to manufacturing.
d) Cost classified to their nature as to joint and common
- Joint costs arise when the same resource results in two or more different products at the same time.
Common costs are harder to identify, but include all costs that keep the business running but
which cannot be attributed to one product, department, project, territory or other specific cost
center.
- Some costs benefit more than one product or process in the manufacturing process. These costs are
called Joint costs. Almost all manufacturers incur joint costs at some level the manufacturing
process. It can also be defined as the cost to operate joint-product processes including the disposal
of waste.
- Common costs are business expenses that multiple departments share. Usually, common costs
aren't attributable to a single individual, product or team. Instead, they might benefit multiple
departments, processes or business offerings
e) Cost classified as to relation to an accounting period
- The capital expenditure and revenue expenditure are classified under it. Revenue expenses relate to
the current accounting period. Capital expenditures are the benefits beyond the accounting period.
- In managerial accounting, costs are classified into fixed costs, variable costs or mixed costs (based on
behavior); product costs or period costs (for external reporting); direct costs or indirect costs (based
on traceability); and sunk costs, opportunity costs or incremental costs (for decision-making)
f) Cost for planning, control and analytical process
- Cost planning and control is the estimation of costs, the setting of an agreed budget, and
management of actual and forecast costs against that budget.
- Cost control is the method of reducing business expenses by managing and analyzing financial data.
Collecting costs in a consolidated format allows organizations to make more accurate and informed
projections, know where they can minimize costs, and identify areas of overspending.
- Analytical costs are those costs that are taken into account for analyzing the production activities of
an organization. These costs are the deciding criteria for carrying out business activities.