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Cost Classification

>> February 9, 2011

We can classify the cost into 3 main parts. This classification will only apply on the production area. Now we explain each part.

Ist : Direct Material Cost

Direct material cost comes in the first part of cost classification. Its cost is also important for calculation of prime cost of any product. Raw material is the main source of any finished product. So, it may be 70% to 90% of total cost of production.

Example of Direct Material Cost :  Cost for buying plywood, wooden battens, fabric for the seat and the back, nails, screws, glue ( Used in the production of furniture )

2nd : Direct Labour Cost

Direct labor cost also the part of cost classification. Without use of labor, we can not convert raw material into finished product. Like direct material cost, labor cost is also important for calculating the prime cost of production. What % of total cost will be the labour cost? It depends only the nature of production. If nature of production need large numbers of processes, then we need large labor and cost may be very high % of total cost.

Direct Labor Cost Example : Cost for sawyers, drillers, assemblers, painters, polishers, upholsterers ( Used in Production of furniture )
3rd : Overhead

Overhead may be indirect material, factory overheads and other overheads. These do not effect production directly but without this production may be delay. Suppose, you want to produce cable in night, at that time, you need light for doing production activities. So, you have to pay more bill for supply of electricity in night also. If we add direct labor cost into factory cost, it will be conversion cost. It is only to know but we always interested to calculate production cost.

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