1. Classification of Cost
Cost AccountIng-I
Classification of Cost

2. Classification of Cost
The term cost itself is without any significant meaning and therefore, it is always advisable to use it with an adjective or phrase such as prime, direct, indirect, fixed, variable, controllable, opportunity cost and the like.

3. Classification of Cost
In order to ascertain, control, manage, forecast and interpret cost, the elements of cost must be classified. The elements of cost are;
Material
Labor and
Other Expenses

4. Classification of Costs
According to Nature and Function
Nature
Material
Labor
Other Expenses (Wages, Salaries, Depreciation, Utility, etc.)
Function
Production Costs
Selling Costs
Administrative Costs
Research and Development Costs
According to the Identifiable (Cost Center and Production)
Direct Costs
Indirect Costs
According to Behavior (Variability)
Fixed Costs
Variable Costs

5. Classification of Cost According to Nature and Function
This classification is the basis of the recording system (Uniform Accounting System). According to Uniform Accounting System the costs are to be recorded on the basis of function (7/A) and nature (7/B).
Uniform Accounting System (Uniform Chart of Accounts)
Balance Sheet Accounts (1-5)
Cost Accounts
(7/A-7/B)
Other Accounts
Income Statement Accounts
(6)

6. Other Expenses (Wages, Salaries, Depreciation, Utility etc.)
Classification of Cost
According to Nature
Material Cost
Labor Cost
Other Expenses (Wages, Salaries, Depreciation, Utility etc.)

7. Classification of Cost According to Nature
Material Costs
Cost of materials used for the manufacture of a product, a particular work order, or provision of a service. All raw materials are material costs.
Example: Cloth for making a dress or wood in furniture or desk, cotton in textiles etc.

8. Classification of Cost According to Nature
Material Costs
Material costs involve not only raw material costs but also the material used for a service is called material costs.
Example: Cooking material for catering or stationary and office supplies, cleaning materials, material for repairs and lubricant.

9. Classification of Cost According to Nature
Labor Costs Labor cost is defined as the total expenditure incurred from employers in order to employ workers. Labor cost is all labor expended in altering the construction or composition of the product.

10. Classification of Cost According to Nature
Labor Costs
Direct wages means the wages of labor which can be identified wholly to a particular job, product or process in converting raw materials into finished goods.
It may also be defined as prime labor cost, process labor cost, operating labor cost, manufacturing labor cost etc.

11. Classification of Cost According to Nature
Labor Costs
Labor costs include the direct costs linked to work carried out such as wages, salaries, vocation payments, or other benefits.
Labor costs also include indirect costs such as social benefits, vocational and training costs.

12. Classification of Cost According to Nature
Other Expenses Expense is defined as money expended or cost incurred in a firm's efforts to generate revenue, representing cost of doing business. They may be in the form of actual cash payments (such as wages and salaries) or a computed 'expired' portion (depreciation) of an asset.

13. Classification of Cost According to Nature
Other Expenses Example: Rent, telephone expenses, insurance, lightening, oil and gas, fees paid to consultants, depreciation, Other Expenses involve overheads such as manufacturing overhead, administration overhead, selling overhead, etc.

14. Classification of Cost According to Function
Functional Classification
Production Costs
Research and Development Costs
Selling and Distribution Costs
Administrative Costs
Functional classification of costs defines how the cost was applied (manufacturing, administration or selling). A functional classification expresses that the business performs various functions for which costs are incurred.

15. Classification of Cost According to Function
Functional Classification
Production Costs
Research and Development Costs
Selling and Distribution Costs
Administrative Costs
Functional classification is also important in giving an opportunity to the management to calculate the efficiency of departments performing various functions in the firm.

16. Classification of Cost According to Function
Production or Manufacturing costs are all production cost incurred to manufacture the products and to bring them to a saleable condition, including direct materials, direct labor and indirect manufacturing (or factory overhead) costs.

17. Classification of Cost According to Function
Selling costs are the costs of marketing function. Distribution costs include expenditure incurred in packing, unpacking, and transporting activities.

18. Classification of Cost According to Function
Administrative Cost is the cost of formulating the policy, directing and controlling the business activities which is not related directly to a production, selling & distribution, research or development activity or function.

19. Cost (Favorable and Normal Expenditures and Expired Costs)
Manufacturing Costs
Direct Material
Direct Labor
Factory Overhead (Indirect Material, Indirect Labor, factory and machinery depreciation etc.)
Research and Development Costs
Material, Labor and Other Expenses Related with Research Function
Administrative Costs
Material, Labor and Other Expenses Related with Administrative Function
Selling and Distribution Costs
Material, Labor and Other Expenses Related with Selling Function

20. Classification of Cost Example
The economic events that ABC Company met in December 2015 are as follows:
Date
Events
Classification
Nature
Function
1st December
Woods priced at TL has been used in manufacturing furniture.
5th December
The wages of manufacturing employee 800 TL has been paid.
10th December
The factory electricity invoice has been paid with a total price of 200 TL.
11th December
The factory depreciation cost is 200 TL, the fixture cost of Sales Department is 100 TL.
15th December
The wages of general administration personnel 250 TL and sales department 100 TL have been paid.
20th December
The catering cost has been paid as 1200 TL
25th December
Estimated factory building depreciation is 350 TL.

21. Classification of Costs
According to Nature and Function
Nature
Material
Labor
Other Expenses (Wages, Salaries, Depreciation, Utility, etc.)
Function
Production Costs
Selling Costs
Administrative Costs
Research and Development Costs
According to the Identifiable (Cost Center and Production)
Direct Costs
Indirect Costs
According to Volume (Variability)
Fixed Costs
Variable Costs
Semi-Variable Costs

22. Direct Cost Indirect Cost Classification of Cost
According to Identifiable (Relation Between Product and Cost Center)
Direct Cost
Indirect Cost

23. Direct Costs Classification of Cost
According to Identifiable (Direct-Indirect Costs)
Direct Costs
The expenses that can be completely attributed to the production or cost center.
In the process of production of articles, material cost, labor cost and other expenses incurred directly related with manufacturing activity.

24. Direct Costs Classification of Cost
According to Identifiable (Direct-Indirect Costs)
Direct Costs
For example in producing furniture the cost of wood and the cost of labor (converting wood to future) is directly related with manufacturing activity and will be defied as direct costs.

25. Classification of Cost
According to Identifiable (Direct-Indirect Costs)
Cutting& Molding Department
Assembly Department
Polishing Department
For example in manufacturing furniture, the cost of wood is directly traceable to Cutting & Molding Cost Center, and the cos of wood is directly attributable to cost of production activity.

26. Classification of Cost
According to Identifiable (Direct-Indirect Costs)
Indirect Costs Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product, and therefore are considered indirect costs.

27. Classification of Cost
According to Identifiable (Direct-Indirect Costs)
The expenses incurred on those items which are not directly chargeable to production or cost center are indirect costs. Example: In production, salaries of timekeepers, storekeepers, are indirect costs.

28. Classification of Cost
According to Identifiable (Direct-Indirect Costs)
The costs that cannot be conveniently allocated to production are called indirect costs.

29. Classification of Cost
Material
Direct
Indirect
Labor
Expenses
Selling
& Distribution Overheads
Administration Overheads
Factory / Works Overheads

30. Classification of Cost
According to Behavior
Fixed Cost
Variable Cost

31. Classification of Cost
According to Behavior
In this classification, costs are classified by their behavior to changes in the level of activity.
This is the analysis of how cost or profits change as volume changes.

32. Classification of Cost
According to Behavior
In this context volume might be an activity such as the number of machine hours, the number of units produced, the number of pounds processed, the number of units sold, or the TL of goods sold.

33. Classification of Cost According to Behavior- Fixed Costs
The cost which does not vary but remains constant within a given period of time or range of activity is called fixed costs. Example: Rent, insurance of factory buildings, depreciation etc. remain the same for different levels of production.

34. Classification of Cost According to Behavior- Variable Costs
The costs tend to vary with the volume of output called variable costs . Any increase in the volume of production results in an increase in the variable cost. Example: cost of material, cost of labor etc.

35. Classification of Cost Summary
According to Nature and Function
Nature
Function
According to the Identifiable (Cost Center and Production)
Direct Costs
Indirect Costs
According to Volume (Variability)
Fixed Costs
Variable Costs

36. Classification of Cost Function and Nature
A. Production Costs
Direct Material (Variable)
Prime Cost
Direct Labor (Fixed or Variable)
Factory Overheads (Fixed or Variable)
Indirect Material
Indirect Labor
Rent, Utility Costs, Repairs, Depreciation etc.
Indirect Cost
B. General Administrative Costs (Fixed or Variable)
Material
Reported in Income Statement
Labor (Wages and Salaries)
Other Expenses
Rent, Utility Costs, Repairs, Depreciation etc.
C. Selling and Distribution Costs (Fixed or Variable)
Material
Reported in Income Statement
Labor (Wages and Salaries)
Other Expenses
Rent, Utility Costs, Repairs, Depreciation etc.

37. Classification of Cost Production Costs
The cost of inventory will be reported in balance sheet. The categories of inventory are as follows:
Raw Material
Work-in-progress
Finished Goods
The cost of product will be reported as Work-in-Progress (Process). The cost of finished goods will be reported as finished goods in Balance Sheet.

38. Cost of Raw Material (Direct Cost) =
Classification of Cost
Production Costs
The cost of Raw Materials involves acquisition costs. The cost of consumed raw material will be a part of production cost and will be reported as Work-in-progress or Finished Goods in Balance Sheet. The cost of raw material will be ascertained as;
Cost of Raw Material (Direct Cost) =
Beginning Inventory of Raw Material +
Net Purchases
Ending Inventory of Raw Materials -
Total Cost of Raw Material

39. Cost of Ending Work-in Progress Inventory
Classification of Cost
Production Costs
Work-in-progress is semi finished goods at the time of finding of Total Cost of Production. Work- in-progress consists of :
Cost of Direct Material
Cost of Direct Labor and
Factory Overheads
Cost of Ending Work-in Progress Inventory
Beginning Inventory of Work-in Progress +
Current Period Production Costs
Total Cost of Production xx
Cost of Finished Goods -

40. Classification of Cost Production Costs
The cost of finished goods consists of :
Cost of Beginning Finished Goods
Cost of Direct Material
Cost of Direct Labor and
Factory Overheads
Cost of Finished Goods
Beginning Inventory of Work-in Progress +
Current Production Costs
Ending Inventory of Work-in Progress -
Total Cost of Current Period’s Finished Goods xx

41. Classification of Cost Production Costs
Cost of Goods Sold consist of
Cost of Beginning Finished Goods
Total Cost of Current Period (Direct Material, Direct Labor and Factory Overhead)
Cost of Goods Sold
Cost of Beginning Finished Goods (Involve: Direct Material, Direct Labor and Factory Overhead) +
Current Period’s Production Costs (Involve: Direct Material, Direct Labor and Factory Overhead)
Cost of Ending Finished Goods (Involve: Direct Material, Direct Labor and Factory Overhead) -
Cost of Goods Sold (Involve: Direct Material, Direct Labor and Factory Overhead) xx

42. Statement of Cost / Cost Sheet
Cost Of Direct Material (+)
Cost Of Beginning Raw Material (+)
Net Purchases (+)
Cost Of Ending Raw Material (-)
Direct Labor Wages (+)
Factory Overheads (+)
Indirect Materials
Indirect Labor
Depreciation On Factory Building
Depreciation On Factory Equipment
Insurance
Repairs And Maintenance
Other Factory Overheads
 Current Period’s Total Cost
Work-in-progress (Beginning) (+)
Work-in-progress (Ending) (-)
Current Period’s Cost of Finished Goods
Finished Goods (Beginning) (+)
Finished Goods (Ending) (-)
Cost of Goods Sold
General Administrative Expenses
Office Material, Wages, Rents, Insurance, Depreciation etc.
Selling And Distribution Expenses

43. Classification of Cost Production Costs
Example:
The cost of beginning raw material is 400 TL, work-in progress is 350 TL, finished goods is 600 TL. The economic events occurred in October are as follows:
Purchased raw material costs 800 TL,
The direct labor cost 300 TL and indirect labor cost 100 TL paid.
Depreciation cost is 150 TL, fuel-oil cost is 75 TL, factory building rent is 125 TL.
The cost of ending raw material is 500 TL, work-in progress is 750 TL and finished goods is 450 TL
Sales incurred in October are TL.
Required: Ascertain the current period’s total cost, cost of finished goods, cost of goods sold and gross sales profit.