Cost classification

Cost classification is a process of separation of expenses into different categories (and sometimes also accounts). The purpose of cost classification is to provide the necessary information:

• for analysis,
• for effective company management,
• to control,
• for the correct determination of the tax base,
• for reporting purposes.

Types of costs

To make it easier current and periodic analysis of the structure and dynamics of costs and their impact on the financial result, proper grouping them in accounting books and calculation of manufacturing costs are classified the costs according to various criteria.

1.Type of business:

• basic activity costs - costs related to running business that is the main goal of the entrepreneur's tasks. These are the costs of production, trade and service activities,
• costs of auxiliary activity - costs connected with running departments performing auxiliary services for the benefit of basic activity (by their own transport department),
• general administrative costs - simple costs incurred in connection with maintaining administration, accounting and supervisory, control and organizing functions.

2.The degree of complexity of costs:

• simple costs - generic components of costs, which can not be divided into parts (consumption of materials, energy, external services),
• complex costs - are the sum of simple costs (transport costs of your own transport department, which include salary driver's, fuel consumption, car depreciation).

3. Costs by type:

• depreciation (depreciation deduction)
• material and energy consumption (costs of basic, auxiliary and office materials consumption, packaging consumption, fuel, electricity, heat, water,
• foreign service (services: transport, renovation, office, design, IT, banking, laundry, post, rents, renting a property),
• taxes and charges (property tax, value-added tax, notary fees, environmental fee),
• remuneration - costs related to the work done by employees,
• social security and other benefits (social insurance contributions, periodic medical examination, training costs, clothing, protective footwear),
• other costs (national and foreign business travels, parking fee).

4.The influence of production on the level of costs incurred:

• fixed costs - there are costs whose size does not depend on the size of production (property tax, energy consumption),
• variable costs - depend on the production volume (costs of materials consumption). (

5.The way of referring costs to products:

• direct costs - which are directly related to the product produced (direct materials with purchase costs),
• indirect costs - common costs for a larger group of products.

6.Indirect costs:

• faculty costs - production costs indirectly related to the basic business (depreciaton of machines and devices),
• general administrative costs - costs related to the organization and service of the company,
• sales costs - costs related with the sale of a product group,
• purchase costs - costs related with the purchase of the supply of materials.

Cost classification — recommended articles

Cost structure — Costs and expenses — Costs of production — Cost — Cost center — Standard productivity — Income from operations — Normal cost — Cost calculation

References

• Drury C. (1992) Management and Cost Accounting. Chapman & Hall Ltd., Third edition, London, 22-36.
• Hansen D. R., Mowen M. M., Guan L. (2009) Cost Management Accounting&Control. Cengage South-Western; Sixth edition, South-Western, 5-6, 23-27, 51-53.
• Gean F., Gean V. (2016) A three-way cost classification model for understanding the supply side of the firm. "Journal of Business & Educational Leadership" Vol. 6 Issue 1, 39-42.
• Sun, Y., Kamel, M. S., Wong, A. K., & Wang, Y. (2007). Cost-sensitive boosting for classification of imbalanced data. Pattern Recognition, 40(12), 3358-3378.

Author: Marta Bodzioch