Business Costs Classification

Business Costs Classification

Companies can categorize their expenses based on various criteria. Here are some common cost classification explanations:

[Classification Based on Cost-Business Volume Relationship]

• Variable Costs: Expenses that fluctuate with changes in business volume. For instance, production materials, labor costs, etc.

• Fixed Costs: Expenses that remain constant within a specific range of business volume changes. For example, factory rent, depreciation, etc.

[Classification Based on Cost-Product Relationship]

• Product Costs: Expenses directly attributable to a specific product or product batch. This includes direct materials, direct labor, and manufacturing overhead.

• Period Costs: Expenses not directly related to producing a specific product or product batch. Examples include selling expenses, administrative expenses, and financial expenses.

[Classification Based on Production Cost Inclusion in Product Cost]

• Directly Charged Costs: Expenses directly attributable to a specific product or product batch. This includes direct materials, direct labor, and manufacturing overhead.

• Indirectly Charged Costs: Expenses that cannot be directly attributed to a specific product or product batch but are allocated to each product or product batch according to a certain ratio. For example, factory water and electricity charges, depreciation, etc.

[Classification Based on Cost-Product Production Process Relationship]

• Direct Production Costs: Expenses directly involved in the product production process. This includes direct materials, direct labor, and manufacturing overhead.

• Indirect Production Costs: Expenses not directly involved in the product production process but provide auxiliary services for product production. For example, factory water and electricity charges, depreciation, etc.

The specific types and structure of costs for a particular company may vary. This depends on factors such as the company's industry, production methods, and management level.

[Examples of Common Cost Classifications]

• Manufacturing Companies: Product costs typically account for a large proportion of the company's total costs, including direct materials, direct labor, and manufacturing overhead. Period costs mainly include selling expenses, administrative expenses, and financial expenses.

• Retail Companies: Selling expenses typically account for a large proportion of the company's total costs, including sales staff salaries, rent, advertising expenses, etc. Product costs mainly include procurement costs, warehousing costs, etc.

• Service Companies (e.g., Beauty Industry): Labor costs typically account for a large proportion of the company's total costs, including employee salaries and benefits. Period costs mainly include selling expenses, administrative expenses, and financial expenses.

Company managers can analyze different types of costs to understand the company's cost structure and thus find ways to reduce costs and improve efficiency.

Additional Notes:

• The provided examples illustrate common cost classifications in different industries. The specific cost categories and their proportions may vary depending on the company's unique characteristics and operations.

• Understanding cost classification helps companies identify cost drivers, allocate resources effectively, make informed pricing decisions, and improve overall profitability.

• Regular cost analysis can help companies identify areas for cost reduction, optimize resource utilization, and enhance financial performance.