Define Cost & Cost classification

Cost Concept & Classification

Cost: An amount that has to be paid or spent to buy or obtain something.

Business entity:

1. Merchandise Organization: one of the most common types of businesses we interact with daily. It is a business that purchases finished products and resells them to consumers.
2. Manufacturing Organization: Manufacturing industries are those that engage in the transformation of goods, materials or substances into new products. The transformational  process can be physical, chemical or mechanical. Manufacturers often have plants, mills or factories that produce goods for public consumption.
3. Service Organization: Service organization means a third-party organization that provides services to user entities that are part of those entities' information systems relevant to financial reporting.

Cost Classification

On the basis of cost, cost are two types:

• Manufacturing Cost
• Non- Manufacturing Cost 

Manufacturing Cost:-

1. Direct Labor: labor involved in production rather than administration, maintenance, and other support services.
2. Direct material: Direct materials are those materials and supplies that are consumed during the manufacture of a product, and which are directly identified with that product. Items designated as direct materials are usually listed in the bill of materials file for a product.
3. Manufacturing overhead: involves a company's manufacturing operations. It includes the costs incurred in the manufacturing facilities other than the costs of direct materials and direct labor.
4. Indirect Labor: Indirect labor is the cost of any labor that supports the production process, but which is not directly involved in the active conversion of materials into finished products.
5. Indirect material: Indirect materials are materials used in the production process, but which cannot be linked to a specific product or job. Thus, they are consumed as part of the production process, but are not integrated in substantial amounts into a product or job.  

We also include the cost of factory such as factory insurance, factory depreciation, factory       utility costs etc. In the name of product cost under factory such as royalty of the product.

Non- Manufacturing Cost :-

1. Administrative cost : An expense incurred in controlling and directing an organization, but not directly identifiable with financing, marketing, or production operations.
2. Selling Cost: Selling costs are the costs associated with distributing, marketing and selling a product or service.

Product Cost: The cost which is incurred to produce a product. The cost which is needed to acquire the product.

Period cost: The cost which is incurred within a particular period. Period costs are all the costs that are not product costs. All selling and administrative expenses are treated as period costs.

Fixed Cost: fixed is fixed or constant within a relevant range. A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity.

Variable cost: the cost which is changed with respect to its production.

Differential cost: the cost which is different found between the project is called differential cost.

Differential Revenue: the revenue which is varied between the project is called differential revenue.

Sunk cost: The cost which is incurred but cannot recovered through any business decision.

Opportunity Cost: Opportunity cost is the opportunity lost.

Mixed Cost: The combination of fixed & variable cost is called mixed cost.

Conversion Cost: The summation of direct labor and manufacturing overhead is called conversion cost.

Prime Cost: The combination of direct material and direct labor is called prime cost.