This is a classification that represents costs in respect of why the cost was incurred.
For financial accounting purposes, costs are split into production and non-production
costs:
Production costs – this is also known as “cost of sales”. This category would include
production labour costs, materials, factory supervisor salaries, factory rent. These
are any costs which are directly linked with organisations production process.
Non-production costs include:
– Selling & distribution costs- this will include any selling and distribution costs incurred
by the organisation in getting the products to its end users. This category would
include sales team commission, delivery costs.
– Administration costs- this will include any other costs that are incurred in the
organisations operations. This category would include all other head office costs, IT
support, HR support.
One cost you may meet in the exam is depreciation. This is an allocation of the cost
of fixed assets which represents the wear and tear or usage of the asset. The
classification will depend on which asset is being depreciated. Depreciation can be
classified by function, in the following manner:
- Production costs- depreciation of a factory machine used in production.
- Selling & distribution costs- depreciation of a delivery van.
- Administration costs- depreciation of an asset used in the HR department.