Insurance charges, rent, rates, depreciation of warehouses and so on. Functional costs Classification by function Classification by function involves classifying costs as production/manufacturing costs, administration cost or marketing/selling and distribution costs. In a 'traditional' costing system for a manufacturing organisation, costs are classified as follows. (a) Production or manufacturing costs. These are costs associated with the factory. (b) Administration costs. These are costs associated with general office departments (c) Marketing, or selling and distribution costs. These are costs associated with sales, marketing, warehousing and transport departments. Classification in this way is known as classification by function. Expenses that do not fall fully into one of these classifications might be categorised as general overheads or even listed as a classification on their own (for example research and development costs).
9 Full cost of sales In costing a small product made by a manufacturing organisation, direct costs are usually restricted to some of the production costs. A commonly found build- up of costs is therefore as follows. $ Production costs Direct materials A Direct wages B Direct expenses C Prime cost A + B + C Production overheads D Full factory cost A + B + C + D Administration costs E Selling and distribution costs F Full cost of sales A + B + C + D + E + F Functional costs (a) Production costs are the costs which are incurred by the sequence of Operations beginning with the supply of raw materials, and ending with the completion of the product ready for warehousing as a finished goods item. Packaging costs are production costs where they relate to 'primary' packing (boxes, wrappers and so on). (B) Administration costs are the costs of managing an organisation, that is, planning and controlling its operations, but only insofar as such dministration costs are not related to the production, sales, distribution or research and development functions. (c) Selling costs, sometimes known as marketing costs, are the costs of creating demand for products and securing firm orders from customers. (d) Distribution costs are the costs of the sequence of operations with the receipt of finished goods from the production department and making them ready for despatch and ending with the reconditioning for reuse of empty containers. (e) Research costs are the costs of searching for new or improved products, whereas development costs are the costs incurred between the decision to produce a new or improved product and the commencement of full manufacture of the product. (f) Financing costs are costs incurred to finance the business such as loan interest.
10 Other cost classifications Avoidable costs are specific costs of an activity or business which would be avoided if the activity or business did not exist.
- Fall '18
- Cost Accounting, Cost Accountant