COST CLASIFICATION

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NOTES BY IDREES SAFI

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COST CLASIFICATION

Management
Definition: Management is about using resources like time, money, and
people in the best way possible to get the most out of them.
Key Functions:
Planning: Setting goals or targets that you want to achieve.
Control: Checking if what you planned is happening as expected.
Decision-Making: Choosing the best option from different possibilities.

Cost
Definition: Cost is the amount of money you spend on something.
Costing: This is the process of figuring out the costs by identifying, classify,
recording, and calculating how much a specific item or service costs.

Cost Unit
Definition: A cost unit is a single item or service to which costs are linked.
For example,
01. Restaurant: Per meal served.
02. Airline: Per passenger per flight.
03. Hotel: Per room per night.
04. University: Per student per semester.
05. Electricity Company: Per kilowatt-hour (kWh) of electricity.
06. Manufacturing Plant: Per unit of product produced.
07. Software Company: Per software license sold.
08. Telecom Company: Per minute of call time.
09. Clothing Retailer: Per garment sold.
10. Taxi Service: Per kilometer/mile driven.
11. Water Supply: Per liter/gallon of water supplied.
12. Construction Company: Per square meter/foot of construction.
13. Cinema: Per ticket sold.

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14. Gym: Per membership per month.

15. Furniture Store: Per piece of furniture.
16. Printing Press: Per page printed.
17. Courier Service: Per package delivered.
18. Online Streaming Service: Per subscription per month.
19. Coffee Shop: Per cup of coffee.
20. Pharmaceutical Company: Per pill/tablet produced.

Purpose of Costing

To know the cost per unit: Understand how much it costs to make or
provide one unit of your product or service.

To determine profit: Figure out how much money you make after covering
your costs.

To set the selling price: Decide the price at which you’ll sell your product by
adding your profit to the cost.

To control costs: Keep an eye on how much each unit costs to make sure
you don’t overspend.

To help in decision-making: Provide information that helps managers make

better business decisions.

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Material
By Element Labor
(Main types)
Expense

By Nature Direct costs

(Traceability) In-direct costs

Cost Classification
Variable costs
By Behavior Fixed costs
(Relationship between Cost &
Activity)
Semi-variable costs
Step Fixed costs

By Function Production costs

(Manufacturing & Non- Non-production costs
Manufacturing)

Cost Classification

1. By Element, (Main Types):

Material Costs: The cost of raw materials used in production.

e.g., wood for furniture.
Labor Costs: The cost of paying workers or employees.
e.g., wages, salaries.
Expenses: Other costs involved in production or operations.
e.g., rent, utilities.

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2. By Nature, (Traceability):

Direct Costs: Costs that can be directly traced to a specific product,

service, or department.
e.g.,
1. Raw material for a product
2. Direct labor wages & salaries
3. Packing
4. Royalty

Indirect Costs: Costs that cannot be directly traced and are allocated
across products or services.
e.g.,
1. Overheads like rent & utilities
2. Maintenance
3. Depreciation
4. Insurance
5. IT, HR... etc.

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3. By Behavior (Relationship between Cost & Activity):

Fixed Costs: Costs that do not change with the level of production.
e.g.,
1. Rent
2. Salaries
3. Depreciation
4. Insurance

Key Point:
Total fixed costs stay the same no matter how much you produce.

Fixed cost per unit decreases as you produce more, because the same
total cost is spread over more units.

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Variable Costs: Costs that vary directly with the level of production.
(Key Point: All direct costs are variable by behavior variable cost can be
direct or in-direct)
e.g.,
1. Raw materials
2. Direct labor
3. Packing
4. Utilities
Key Points:
Variable cost per unit stays the same regardless of how many units are

produced.
Total variable cost increases as more units are produced, because it’s the
sum of the variable costs for all units.

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Semi-Variable Costs: Costs that have both fixed and variable components.
e.g.,
1. Electricity, where there’s a basic charge plus usage-based charges).

Step fixed Costs: are a type of cost that remains constant within a certain
range of activity or production, but increases (or “steps up”) to a higher
level once that range is exceeded.
e.g.,
1. Supervisory Salaries
2. Factory Space

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4. By Function (Production & Non-production):

Production Costs: Costs related to the manufacturing process.

e.g.,
1. Factory rent
2. Machine maintenance

Non-production Costs: Which are not directly related to the manufacturing

or production of goods or services.
e.g.,
1. Administration, Sales & Distribution
2. Finance, IT, HR, R&D

Key Points:
1. Sum of all direct costs (direct material, labor, expense) known as
Prime Cost.
2. Sum of all in-direct costs (in-direct material, labor, expense) known
as Overheads.
3. Prime Cost + Production Overheads = Production Cost
4. Production Cost + Non-Production Costs = Total Cost
5. Direct Labour + Production Overheads = Conversion Cost

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Cost Card: A cost card is a simple summary that shows all the costs
involved in making a product. It helps a business understand how much it
costs to produce each item so they can set the right price and make a
profit.
Cost Element Cost
Direct Material $30.00
Wood $20.00
Screws and Glue $10.00
Direct Labor $25.00
Assembly Labor $25.00
Direct Expanse $15.00
Packing $15.00
Prime Cost $70.00
Production Overheads $15
Rent $8.00
Depreciation $7.00
Production Cost $85.00
Non-Production Cost $20.00
Administration $10.00
Finance $7.00
IT $3.00
Total Cost $105.0

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