Cost Classification Essay

1.0 Purpose of Cost Classification

Cost is known as monetary value that will contribute to the benefit or obtaining any other resources. In other words, cost is a resource that we sacrifice in order to capture profit in the business companies. As an example, we sacrifice electricity, material, labour and value of machine’s life which known as depreciation during the production of a car. Therefore, these sacrifices are known as cost. There are many different views or thoughts from different individual. From a buyer’s perspective, cost of an item or product is known as prices which are charged by the sellers that may include additional charges such as mark-up cost and production cost which make the products more expensive than the original prices

On the other hand, from a seller’s perspective, cost is referring to the sum of money that is used in the production of goods and services. Sellers usually sell their products at a price which is higher than the production price to ensure that they are able to make profit through the sales. If they were to sell their products at the production price, then they will neither facing losses in their sales nor making profit from the sales. Basically, cost can be categorized under certain basis such as basis of variability, function, and time period, direct and indirect nature of cost. Therefore, this categorization is known as classification of cost. Cost classification in other words is the categorisation of costs based on their mutual characteristics. There are few purposes of cost classification in several factors, mainly production costs, cost

It can be defined as basic or unprocessed substance used as an input in the process of production that transform from a natural substance to a finished goods. As an example, furniture is made of woods, clothes are made of cotton and soda can are made of aluminium. Basically, there are two types of materials in production, namely direct materials and indirect materials.

2.1 Direct Material

Direct materials are resources that are used during the production of goods and it is directly linked to the product, while direct material cost is referring to the cost of raw materials used to manufacture a product. Those items which known as direct material is normally included in the file of the bill materials for a product. The bill of materials is the list of standard costs and unit of quantities of all materials used in the product as well as including the allocation of overhead. Direct materials do not take in materials that are used as one of the general overhead in a business. As an example, the air filters that are used in the ventilation system of a production facility are included in production overhead instead of direct materials. Alternatively, the cotton used to produce clothes and fabrics as well as the paper used to produce paper bags are known as direct materials. Referring to the cost classification, direct material is classified under product costs