For us to understand the costs incurred by our businesses, we should be able to classify them, otherwise it would be difficult to control them at a reasonable level. In fact, there are several ways to classify the costs. For example, we can analyze the cost based on their elements, behavior, or function.
For items, costs can be examined in terms of material, labor, or expenditure. However, this classification does not end. We have to go further and make sure that they are direct (primary costs) or indirect (overhead costs). If we are in manufacturing or service sectors, it is reliably cheaper to manage direct costs by tracking the products or services we know as different or as cost units.
On the contrary, general costs are difficult to handle. This is because head products can not be directly linked to any cost units. According to traditional costing systems, the general cost solution is that: Firstly, they are assigned or divided into cost centers, e.g. Production department, purchasing department, engineering department, etc. After this initial allocation and allocation, we redirect all the general costs to the cost centers that can be categorized into production cost centers. This is because, if there were no production, other departments would not have had general costs.
If this transfer is over, we need to find the right absorption base. This may be the basis of laboratory hours, machine hours, part of material costs, part of labor costs, some of the primary costs, etc. The choice depends on which management fees give you more precision in cost products. Subsequently, the absorption rate, overhead product recovery, was accumulated.
Another classification of costs may be based on behavior. This is because the costs are variable, semi-variable or fixed; that is, if we try to simplify it. This type of classification uses the Cost or Management Accounting in several ways. For example, if we only know the behavior of the cost, we can only make a cost-benefit (CVP) analysis. CVP analysis is a method we use to try to figure out how profits should change, say, to a certain extent, and so on. We change the costs.
And the costs would be classified based on production, marketing, procurement, distribution, financial, etc. This is the sort of classification per function of making the most common financial accounts.
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