Rent and insurance of building, depreciation on plant and machinery, the salary of employees, etc., are some examples of fixed costs. If the production increases fixed cost per unit decreases and as there is a decrease in production, the fixed cost per unit increases. Per unit fixed cost varies with the change in the volume of production. Indirect Expenses = Indirect cost – Indirect material – Indirect laborĬlassification based on Behavior or Volume: Term Cost BehaviorĪnswer: Costs are classified as 3 categories based on behavior or volume which are:Ī cost that remains constant within a given period and range of activity despite changes in production. Indirect expenses (An item of overheads).Expenses are classified into two categories: Labor can be classified into two categories:Īll costs incurred in the production of finished goods other than material cost and labor cost are termed as expenses. Labor cost is the main element of cost in a product or service. Material is classified into two categories:įor the conversion of raw material into finished goods, human resource is needed, and such human resource is termed as labor. To produce or manufacture material is required.įor example, to manufacture shirts cloth is required and to produce flour wheat is required.Īll material that becomes an integral part of the finished product and which can be conveniently assigned to the specific physical unit is termed as “Direct Material”. These are the elements of cost which can be divided into three groups: The cost of production/manufacturing consists of various expenses incurred on the production of goods or services.
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Classification based on the ability to trace.Classification based on Behavior or Volume.In Cost Accounting costs are classified into the following categories: When the merchandise is sold, the cost of the merchandise sold is removed from Inventory and is reported on the income statement as the expense entitled Cost of Goods Sold.Ĭlassification / Types of Cost in Cost AccountingĬlassification of cost is very important to understand the nature of cost for controlling the product cost.
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A retailer’s purchase of merchandise is initially reported as the current asset Inventory. However, in each accounting period, the company will report part of the. The cost of equipment used in manufacturing is initially reported as the long-lived asset Equipment.
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The unexpired portion of the cost will continue to be reported as the asset Prepaid Insurance. However, in each of the following six months, the company will report the Insurance Expense of $1,000 the amount that is expiring each month. Initially, the cost of $6,000 is reported as the current asset Prepaid Insurance. The following examples will illustrate the difference between a cost and an expense.Ī company has a cost of 6,000 takas for property insurance covering the next six months. An expense is a cost that has expired or was necessary to earn revenues. A cost might be an expense or it might be an asset.