Cost classification is the process of grouping expenditures according to common characteristics, facilitating the proper allocation and management of expenses within an organization.
A cost item refers to a category of costs incurred by an organization that are similar in nature. These costs are collected together both for reporting purposes and because they can be subjected to similar treatment by the costing system. Examples include rent, consumable materials, and sundry selling expenses.
Direct materials cost is the expenditure on materials that are used directly in the production process to manufacture a product. This cost is a part of various costing methods and significantly influences the overall production cost.
Distribution overhead, also known as distribution cost or distribution expense, refers to the costs incurred in delivering a product to the customers. These costs are a key component of cost classification in businesses.
Understanding the elements of cost is fundamental for businesses to ensure efficient production and optimal pricing strategies. The three primary cost elements in a production process include material, labor, and expenses.
General expenses are those expenditures by an organization that cannot be conveniently categorized into any other specific cost classifications, encompassing a wide variety of costs essential for business operations.
