Every business has to handle incurred costs throughout its operations. Therefore, understanding cost and its different classifications in Business Accounting is essential for a Malaysia Accounting Company providing Malaysia Accounting Services. Classification of costs involves separating different types of costs based on their common characteristics, and proper categorisation of costs is important as it clearly determines the financial position of a company.
Malaysia Accounting Services
Cost in business operations are commonly classified under the following categories.
There are three broad categories under this classification, namely cost of labour, cost of material and expenses. Labour cost includes salaries and wages paid to permanent employees, temporary employees and also to employees of any contractor, while material cost includes any cost for materials used in the production of a product or a service, raw material costs, spare parts, etc, and also freight, taxes and duties. Costs other than labour or material that are associated with making and selling products or services would generally be classified under expenses.
These categories in a cost sheet will ascertain the total cost and determine the cost of the work-in-progress.
Direct costs and indirect costs fall under this classification, which is based on how much resources (labour, materials and expenses) went into manufacturing a product.
Direct Costs: Costs that are easily identified with a specific cost unit or cost centres. Examples include materials used in the manufacturing of a product or the labor involved in the production process.
Indirect Costs: Costs incurred, for example between many different cost centres or units, that are not easily identified to one particular cost centre. Examples include the rent of the building or the salary of the manager, which cannot be accurately ascertained to a particular cost unit.
Historical Cost: Cost of an asset at the price originally paid for (in contrast with the price that the asset is currently worth, i.e. market value). Costs reported by conventional financial accounts are based on historical valuations.
Predetermined Cost: Costs computed in advance of production, on the basis of all the factors affecting cost and cost data. Predetermined costs may be either standard or estimated.
Standard Cost: Costs, under specific working conditions, calculated based on a planned cost for a unit of product or service rendered, built up from an assessment of the value of materials, labour and other costs expected to be incurred during the period in which the standard cost is intended to be used.
Estimated Cost: Costs predetermined based on past performance adjusted to anticipated changes used for budgetary control, which can be used in any business situation or decision making which does not require accurate cost.
Batch Cost: Aggregated costs related to a cost unit, consisting of similar articles which maintain their identity throughout the course of production.
Process Cost: Cost incurred when the production process comprises a sequence of continuous or repetitive operations or processes, which is derived by dividing the process cost by number of units produced in the process during the period.
Operation Cost: Cost of a specific operation involved in a production process or business activity.
Operating Cost: In contrast with Operation Cost, Operating Cost refers to the cost of undertakings which do not manufacture any product. but only provide services.
Joint Cost: Cost of facilities or services employed in the output of two or more simultaneously produced or otherwise closely related operations, commodities or services. Examples include petrol, diesel oil, kerosene oil, naptha, tar, etc being produced jointly in the petroleum refinery industry.