What is Cost?
Cost is the amount of money that a company spends on the creation, production of goods or services, refers to the money value of expenditures. Cost denotes the amount of money that a company spends on the creation or production of goods or services. It does not include the markup for profit.
Cost is the expenditure required to create and sell products and services, or to acquire assets. When sold or consumed, a cost is charged to expense. In the case of an asset, the charge to expense could be significantly deferred. https://www.bluebellcottage.co.uk/.well-known/
The term cost refers to the monetary value of expenditures for services, supplies, raw materials, labour, products, equipment, etc.
Classification of cost
The classification of cost is-
(A) According to the function:
The total cost is divided into various segments according to the purpose of the company. Therefore, costs are grouped according to company requirements in order to properly evaluate the functioning of the company. In other words, the total cost includes all costs, from material costs to product packaging costs.
Direct material costs, direct labour costs, paid costs, and all overhead costs are born by the head of manufacturing / manufacturing costs.
(B) According to volatility:
These costs per volume can be subdivided as follows:
- Fixed costs;
- Variable costs;
- Semi-variable cost.
In other words, we maintain fixed costs (salary, rent, etc.) up to a certain limit regardless of production volume. It is interesting to note that if more units are products, the fixed cost per unit will be reduced, and if fewer units are produced, the fixed cost per unit will obviously increase.
On the other hand, variable costs fluctuate in proportion to production volume. s of production volume. In other words, changes in production (raw material prices, labor, etc.) do not have a direct impact on cost per unit. On the contrary, semi-variable costs are partially fixed and partially variable (e.g. building repairs).
(C) According to controllability:
Costs can be broadly divided into two categories, depending on the performance of the members of the company.
They are:
(I) Manageable costs. And
(II) Uncontrollable costs.
Manageable costs are costs that may be affected by decisions made by certain members of the management of the company, or costs that are at least partially management-dependent and manageable by management.
Uncontrollable costs are costs that are unaffected by the actions taken by a particular member of management. For example, fixed costs, that is, building rent, salary payments, and so on.
(D) According to normality:
Under this condition, costs are categorized according to the normal needs of a particular level of output for the normal level of activity generated for such output.
They are divided as follows.
(I) Normal cost; and
(II) Unusual cost
Normal cost is the cost that is normally required for normal production at a particular output level and is part of production.
Anomalous costs, on the other hand, are costs that are not normally required to successfully produce a particular level of output, or are not part of the production cost.
(E) According to time:
Costs can also be categorized according to the time factor within them. Therefore, costs are categorized as follows:
(I) Acquisition cost; and
(II) Prescribed costs.
Acquisition costs are costs that are considered after they occur. This is possible, especially if production for a particular unit of output has already taken place. They have only historical value and cannot help manage costs.
On the other hand, the given cost is the estimated cost. Such costs are pre-calculated based on past experience and records.
(F) According to traceability:
Costs can be identified by a particular product, process, department, and so on. Costs are categorized as follows:
(I) Direct (traceable) costs; and
(II) Indirect (untraceable) costs.
Direct / traceable costs are the costs that can be directly tracked or assigned to a product.
Indirect / non-traceable costs are costs that cannot be directly tracked or assigned to a product.
(G) According to planning and management:
Costs can also be categorized as follows:
(I) Budget costs; and
(II) Standard cost
Budget cost refers to the estimated manufacturing cost calculated based on the information available prior to the actual production or purchase. In reality, budget costs include standard costs.
Standard costs are pre-determined for each element: materials, labor, and overhead costs. The standard costs are:
(I) the cost per unit is determined to produce the estimated total output for the next period.
(A) Material;
(B) Labour; and
(C) Overhead.
(II) Costs should depend on past experience and experimentation, and technical staff specifications.
(III) Expenses must be expressed in rupees.
(H) According to management’s decision: Under this, costs may be categorized as follows:
(A) Marginal cost:
Marginal cost is the cost of producing additional units by separating fixed costs (that is, capacity costs) from variable costs (that is, production costs) that help us know profitability.
(B) Difference cost:
The differential cost is due to the additional features and is part of the cost of the features that can be identified by the additional features. That is, a cost change as a result of a change in activity level or production method. Above are the classification of cost.https://theinvestorsbook.com/cost-classification.html