General Classifications Of Costs Accounting Essay

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General classifications of costs based on behavior includes classification 1-Categories, according to Elements of a product, classification 2-Relationship to production, classification 3-Relationship to volume, classification 4-Ability to trace, classification 5-Department where incurred, classification 6-Functional areas, classification 7-Period charged to income, classification 8-Relationship to planning, controlling, and decision making.

The first one, elements of a product. Elements of a product are direct labors, direct materials and factory overhead as illustrated below. (Referencing on websites: )

Here is showing the relationship between direct materials, indirect materials, direct labors, indirect labors and factory overhead. This classification provides information necessary for management to able to realize and manage the price of the product and income measurement.

Material means is resources. It used in input resources to transform into the final products. The cost of material types can be divided into two types, there are direct material and indirect material. Direct materials are those materials can direct identify, easy to measure, and the material also can direct charge to the cost of producing that product. Therefore, raw material that becomes a part of unit produced, easily charge the raw material transform into the final product and also that can be easily traced to the unit of the final product. Example of direct material is timber transform become furniture. Indirect materials are those materials more difficult to identify, hard to allocate the cost of the unit. It does not form part of the final product and as part of factory overhead. Example of indirect material pin & paste for making furniture.

Labor is workers as a group under a company or employers expended in the production of the product. Labor cost can be divided into two types, there are direct labor and indirect labor. Direct labor is directly in the production of the final product, that easily traced to the unit of the product. Indirect labor is in the production of the product are not considered direct labor. Indirect labor as part of factory overhead.

Classification 2, cost relationship to production. This classification is related to the elements of the product, related it's because the elements of product include labor cost and material cost. The cost relationship to production has classified into two categories, there are prime costs and conversion costs. Prime costs are direct material and direct labor while conversion costs are costs transforming direct materials into a final product, direct labor and factory overhead. Factory overhead which includes indirect materials, indirect labor and others the indirect costs.

Classification 3, cost relationship to volume. The cost will be vary with changes according to the changes in the volume of production. The cost relationship to volume has classified into two categories, there is variable cost and fixed cost. The variable cost is a periodic cost that change in step with the volume and output of the company. Example of variable cost includes raw material, labors, distribution cost, energy usage and others. The fixed cost is a periodic cost that is constant or less unchanged to the volume and output of the company. Example of fixed cost includes interest, income, wages, rents and others. Variable cost and fixed cost will influence each other in the company, if high fixed cost that the variable cost will be high.

Classification 4, management's ability to trace. Consider of management' ability that will be influencing and decide the cost is direct cost or indirect cost, management will to trace it to each specific job, department and others where aspects are required. Direct cost that is easily traced to the particular cost object under consideration. An example of the direct cost is specific product needed direct material and direct labor. An indirect cost that is difficult to be traced to the particular cost object under consideration. Example of indirect cost is usually charged to techniques items, the indirect manufacturing accumulated the cost of this product in a factory overhead.

Classification 5, department where incurred. In the business, department is a major functional division of the business and segment into small group for the business able to do well in the infrastructure. Department helps the management to control the factory overhead and to measure income in cost. The department has classified into two categories there are production department and services department. Production department are directly assists to the production of the product and conversion department or production processes. Production department directly through manual and machine operations to manufacture products. Production department are concentrate the quality of product, if the production ignore this point that will influence decrease in demand and also affect the cost. Service department are assists with the manufacturer. Service department are not directly related to production, it is provide service for other department. Responsible of the service department are cost incurred in service department. Some of example services department includes payroll, repair department, cafeteria, purchasing department, plant security, human resources department and others. Usually the cost of service department separate to production department because service department provide service to them so that may get benefit from there.

Classification 6, functional areas. Functional areas of cost classified according to the activity performed. In functional areas, cost of manufacturing factory has divided into four categories there is manufacturing cost, administrative cost, financing cost and marketing cost. Manufacturing cost is the cost of direct material, direct labor and factory overhead costs in the assembly and testing of the finished product. Example of manufacturing cost is property tax on factory building. Administrative cost is cost for planning, controlling, directing and operating for internal of business. Example of administrative cost is salary, welfare, bonus and wages for staff. Financing cost is the costs are related to the loan capital and funds for the operating of the company. The financing are also provide credit to the customers and cost of interest must be pay on loans.

Classification 7, period charge in income. Cost classified also based on the charge against revenue. This classification of cost related to the periods, the aim of this classification are preparing financial statements, measuring income and in the right period to match expenses to revenue. Period charge in income of cost has divided into two categories used in here there are product costs and period costs. Product cost consist direct material, direct labor and factory overhead. When the product sold, the money as expense that called cost of goods sold. And also cost of goods sold is matched against sales revenue. Period cost is all cost not consist product costs. Such as not included purchased and manufactured goods. Income statement requires expenses on period costs. All cost are required ensure send to the customer are safety, examples of period cost include sales commissions, factory rent and, advertising and salary.

The last classification, relationship to planning, controlling and decision making. This classification of costs into difference categories. Categories of cost relationship to planning, controlling and decision making include Standard and Budget Costs, Differential Costs, Shutdown Costs, Opportunity Costs, Controllable and Non-controllable Costs and so on. Standard and budget cost is concern per-unit in direct material, direct labor and factory overhead. Management used standard and budget cost first to plan future performance of cost and second used variance analysis to control actual performance. Differential costs refer to the difference between costs of selectivity courses of action. If the cost increasing that is called incremental cost; while if the cost decreasing that is called decremented cost. For example, if one of cost expends production on limited range, both of the fixed assets and variable assets will affects and increases. Controllable and Non-controllable Costs, controllable costs are unit manager will give a period time that will directly influence the cost. Non-controllable Costs are the costs are not directly to control by the manager. For example, controllable Costs; if a factory manager have authorized to control and gain so that the cost will controllable by the manager and non-controllable Costs are the manager authorized are not direct control the cost. Opportunity cost defined as the benefit require made selectivity, where decision to get this opportunity that means other one need to forgone. Opportunity cost is not record in the accounting statement. Hence, for the opportunity cost when decision making must be considered select the suitable one that will more help and benefit in the business.

At the last, these eight classification have each functional to help in financial accounting statement. The manager should these classifications properly that able to help effectively the company or business balance in accounting.

Sole trading



It also known as sole proprietorship and individual proprietorship.

A sole trading company is owned and headed by one individual only.

A partnership is a business run by two or more people together.


The liability of the sole trader i.e. the owner, although entitled to receive all of the net income, is also personally liable for the debts of the business. Besides that, the Sole Trader has to bear the liability for the business losses wholly and personally. This is known as"unlimited liability"

Every partner is jointly and severally liable for the debts of the Partnership in its entity. This means that a creditor of the firm may sue all the partners or any one partner for the reimbursement of his debts.


Sole traders must pay quarterly tax payments to the IRS each year. The tax filing process is very simple. The entities' income passes down to the individual tax return of owners who report the business profits or losses.

A sole trader will file the individual tax form 1040, ensuring that Schedule C (Profit or Loss from a Business) of this form is completed.

The partnership must pay quarterly tax payments to the IRS each year. The tax filing process is very simple, The entities' income passes down to the individual tax return of owners who report the business profits or losses.

Partnerships will file form 1065, U.S. Return of Partnership Income, as well as individual 1040 tax return forms.

The nature of the organization

It is the simplest form of business organization

Its business organization is relatively simple and flexible to form, manage and run.

The establishment procedure:

Establishment is very simple, involving more practical problems (such as finding a suitable place to work) than legal considerations.

Establishment is relatively simple and inexpensive. The partnership agreement is the most important consideration.


Only one person uses the resources in the business. He may suffer from shortage of capital. That is because the resources of one person will generally be limited.

Capital is contributed by all of the partners of the firm. The partners pool their resources and knowledge to run the business efficiently. However, there is no bar on a person becoming a partner without bringing any capital.

Continuity of existence:

The business will end when the death of the sole trader. That is because it is tied to the trader.

The partnership does not exist for an indefinite period of time. The death, insolvency or lunacy of partners will end the partnership.

Control of the organisation

The trader owns and manages the business and makes all the decisions.

The partners own and manage the business and make all the decisions equally. So, some of the decisions must be made jointly by all of the partners and some decisions require unanimity.


Administration is simple and the costs are low.

Administration is relatively simple and costs are low, because there are no necessary formalities involved in establishing a partnership.

Admitting new investors or participants

There is generally no problem in involving new investors or participants, although certain professional bodies may impose requirements. The nature of the business organisation may change if an investor or participant is admitting the business.

The size of the partnership has limitations. With some exceptions (such as lawyers and accountants) a partnership cannot have more than 20 partners. Besides that, also some professions (such as lawyers and doctors) cannot enter into a partnership with an unqualified person because they are specifying that they are a qualified person.

Selling the business interest

On the ability to sell there have few restrictions, but the practical difficulties may arise because a sole tradership is so closely tied to the owner.

It is not as easy to transfer an interest as to transfer shares in a partnership company.

Cessation of business

It is generally simple to terminate and to carry on a sole tradership. Besides that, all of the profits and assets of the business remain with the trader

It can be simple or complicated to end a partnership. That is because Dissolution of a partnership can be achieved voluntarily, by court order or by happening of contingent event.


The business form by only one owner

A partnership form by minimum 2 people and maximum 20 people.


The whole risk is shared by the sole-trader.

The business risk is shared by all the partners in proportion of their shares


There is a complete secrecy in the business. That is because the owner does not share the secrets with anybody else. Only the owner knows that.

The secrets of the business are in the knowledge of all the partners; so there is a fear of leaking them out and it is not a complete secrecy.


There is no need of agreement in this business. That is because a sole trader does not require any formality to start the concern.

There is required of agreement in the form of a partnership contract. The agreement among partners may be approve and agreed.


All of sole trade business is not require registration, except under ships and Establishment Act.

All of partnership are needs registration to get advantages of registration. This is not restrict must to register but if non-registration bars it from taking legal remedies.

Governing law

There is freedom legislation to control about the government law than other business organisations.

Partnerships are governed by statute law, common law and private agreement (the partnership agreement). However, they are less stringently regulated than companies or trusts in term of laws governing the formation.


The ease of raising capital and it will generally be determined by the trader's personal credit.

It will not be dependent on a single person's credit finance. So, it may be easier to rise than in the case of a sole trader.


Profit of sole trader after subtract to cost, the profit all by own no need to share with other person.

Profit of partnership after subtract to cost is required to share the profit among people together.