cost and classification

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Cost and Contribution

Managers want to know businesses cost in detail to assist them in running the business. It helps them make decisions, plan for the future and control expenditure.

There are now 3 types of accountant: management, financial and cost. The cost accountant analysis information about cost daily or weekly. All the accountants take information from the same transactions. It is the cost accountants job to lower the cost as much as possible while trying to increase the profit – just because one thing is cheaper doesn’t mean it’s better as it could make less turnover.

Classification of costs

Manufactures can classify cost in three ways; factory, warehouse and office.

Factory this is where the productions take placed and finished products are made.

Warehouse – this is where finished goods are stored and from where they are dispatched from when sold.

Office – support functions take place here. Such as marketing and sales etc.

To prepare reports managers need to classify costs. Costs can be classified by:

  • Element

  • Behaviour

Classification of cost by element

The three elements of cost are:

  • Materials (components to make the product)

  • Labour (wages of employee)

  • Expenses (rent and rates)

This can then be split into direct costs and indirect costs.

Direct costs can be linked directly to each unit.


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