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Costing Insights for Managers

The document discusses cost classification for management information and costing purposes. It outlines that costs can be classified based on functions into production/manufacturing costs, administration costs, selling and distribution costs, R&D costs, and finance costs. Only production costs should be treated as "product costs" and allocated to inventory, while all other costs are "period costs" expensed in the period incurred. Production costs are further broken down into direct and indirect material, direct and indirect labor, and direct and indirect expenses. Direct costs can be traced to a specific product or service, while indirect costs cannot.

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yashwant ashok
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190 views8 pages

Costing Insights for Managers

The document discusses cost classification for management information and costing purposes. It outlines that costs can be classified based on functions into production/manufacturing costs, administration costs, selling and distribution costs, R&D costs, and finance costs. Only production costs should be treated as "product costs" and allocated to inventory, while all other costs are "period costs" expensed in the period incurred. Production costs are further broken down into direct and indirect material, direct and indirect labor, and direct and indirect expenses. Direct costs can be traced to a specific product or service, while indirect costs cannot.

Uploaded by

yashwant ashok
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Cost Classification

Cost Classification

Main Objectives for Management Information:

Management will usually require information for following purposes:

• Pricing
• Inventory Valuation
• Cost controlling
• Budgeting
• Product continuation or discontinuation decisions

For all above we need to calculate the cost per unit i.e. we have to do
costing.
Cost Classification

Before doing Costing we must know about the type of costs.

In a typical Manufacturing business cost can be classified on the basis


Functions as follows:

• Production/Manufacturing/factory costs
• E.g. Material Labor etc
• Administration costs
• Office rent, office staff salaries etc
• Selling and distribution costs
• Marketing costs, delivery costs etc
• Research & Development costs
• Finance costs
Cost Classification

For Inventory Valuation only production costs should be charged to product i.e production
costs should be treated as “product costs” all other costs spent should be treated as “period
costs” and shown as expense in the period they are incurred.
Cost Classification

Classification of Production costs:

Material = Direct + Indirect

Labor = Direct + Indirect

Expenses = Direct + Indirect

Production costs Prime cost Overheads


Cost Classification

Direct Material:

A material will be classified as Direct Material where:


• It becomes part of product
• It is directly traceable to one unit of the product
• It has a significant value

For example:

• Fabric in shirt
• Wood in a table/chair

Any other material will be classified as indirect material:

For example: thread in a shirt, nails in the chair/table


Cost Classification

Direct Labor

Worker who are directly involved in the production of product/services.

E.g. Brik layers, assembly workers etc

Indirect Labor

Supervisors, Store’s in charge, managers etc


Cost Classification

Direct Expenses:
An expense will be classified as an expense when it has a significant
value and can be traced to one unit of a product/service.

E.g. Royalty

Indirect Expenses:
Expenses are usually indirect in nature i.e. they can be directly traced to
a unit of product/service. E.g. factory building rent, maintenance costs,
depreciation etc.

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