Classification of Costs based on Functions / Activities

Costs can be classified based on functions or activities in an organization. All the costs of a business can be classified into production costs, administration costs, finance costs, selling costs, distribution costs, research and development costs. These are just the major functions or activities in a business but there can be more detailed classification.

Production Costs

All the costs relating to the production of goods or services, whether direct or indirect, are included in the production cost. We can classify production costs into direct and indirect production costs.

  • Example of Direct Production Costs (also known as direct manufacturing costs)
  • Direct Raw Material
  • Direct Labor
  • Other Direct Expenses such job work charges relating to particular product, etc.

Examples of Indirect Production Costs (also known as Production or Manufacturing Overheads)

  • Salaries of Supervisors, Production Heads, Technical and Planning Staff etc
  • Quality control costs
  • Other labor-related expenses
  • Store expenses etc

Administration Costs

These costs are incurred in connection with the general management of the business. These are normally indirect costs and are also known as administrative overheads. Example of such costs can be following:

  • Salaries of staff in general management
  • Office related expenses such as rent, rates, taxes, telephone, stationery etc.
  • Charges levied by bank
  • Audit and legal fees
  • Office related depreciation etc.

Selling Costs

Selling costs include all kinds of expenses incurred for achieving sales of the products and services. These are also considered indirect expenses are known as selling overheads. Examples of such costs are as follows:

  • Salaries of selling staff
  • Commission, conveyance, discount etc
  • Product market research
  • Royalty etc

Distribution Costs

Distribution costs include all kinds of expenses are incurred for distributing the products from its point of production to its customers. Examples of distribution costs are as follows:

  • Transportation costs
  • Warehouse rents
  • Commission to Distribution channel etc

Research and Development Costs

Costs under these heads are the costs comprising of development costs of new products, improvement related expenses etc. 

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