COST CLASSIFICATION BY NATURE

J.O. EMMANUEL
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Cost classification can be defined as the process of grouping costs according to common characteristics.

It is the grouping of costs according to similar characteristics.

Cost can be classified based on behaviour, nature, and functions, to name a few.

However, we shall discuss cost classification by nature in this post.

Forthwith, let's get started.

Cost classification by nature can be defined as the grouping of costs according to the natural elements of the cost.

Based on the nature of the cost, we can classify cost into material cost, labour cost and expenses.

1. Material costs: These are the costs of materials used in the production of goods and services.

They are costs associated with the acquisition and use of materials in the production of goods.

Some common subcategories of material costs include:

  • Spare parts: These are the costs of any replacement parts required for production.
  • Raw material costs: These are the cost of the raw materials that are used to create a finished product. The cost of the steel required to manufacture an automobile, for instance, would be categorized as a raw material cost.
  • Direct material cost: These are the cost of materials that are directly traceable to a specific product, process, process, or service. An example of direct material cost is the cost of the plastic used to make the toys.
  • Packaging material cost: These are the cost of the materials used to package and protect a finished product. 

2. Labour costs: These are the costs incurred by a company for salary and wages paid to employees involved in the production of goods and services.

Labour costs can be classified into direct and indirect labour costs.

  • Direct labour costs: As the name suggests, direct labour costs are wages and salaries paid to workers who are directly involved in the production of goods and services. Examples of direct costs are costs associated with assembly line workers, machinists and other workers who are directly involved in the production process.
  • Indirect labour costs: These refer to wages and salaries paid to workers who are not directly involved in the production of goods and services. In other words, Indirect labour costs are costs of employees who are not involved in handling raw materials. Examples of indirect labour costs are the costs of supervisors, maintenance workers, office staff and other employees who are not directly involved in the production of goods and services.

3. Expenses: These include all other costs associated with making and selling goods or services that are not labour costs or material costs.

Advertising, utilities, rent, and phone costs are a few examples of expenses.

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