Costing and Taxation · Ch 2 — Classification of Cost (Cost Sheet)
Function-Based Classification of Cost
Function-Based Classification of Cost
Function-based classification groups cost according to the business function it relates to — not by what resource was consumed (as in the previous section), but by why the business incurred it. This is the classification WBCHSE tests most directly in Cost Sheet numericals, since the standard Cost Sheet proforma (Section 2.iv) is literally built stage by stage around these five functions.
Factory Cost (Works Cost)
Prime Cost plus Factory Overhead (also called Works Overhead) — all the indirect costs of running the factory/production department: factory rent and rates, depreciation of plant and machinery, indirect material and indirect labour used in production, power and fuel for running machines, factory supervision. Factory Cost represents the full cost of manufacturing the product, before it leaves the production floor.
Administration Cost
The cost of the general management and administrative function of the business — costs that keep the organisation running as a whole, not tied to production, selling, or distribution specifically: office rent, salaries of administrative staff (accounts, HR, general management), office stationery, audit fees, general office lighting.
Selling Cost
The cost incurred specifically to create demand and secure orders for the product — advertisement, salaries and commission of sales staff, cost of samples, market research aimed at promoting an existing product, showroom expenses.
Distribution Cost
The cost incurred in making the already-produced (and sold) goods available to the customer — warehousing of finished goods, packing for despatch, carriage/freight outward, running and maintenance of delivery vehicles. Distribution Cost is easy to confuse with Selling Cost — remember: Selling Cost is about winning the order; Distribution Cost is about physically getting the goods to the customer once the order exists.
Research and Development Cost
Cost incurred in developing a new product or improving an existing one — cost of a market survey to design a new product, cost of prototype development, laboratory/testing expenses. R&D Cost is distinct from Selling Cost precisely because it relates to a product that does not yet exist in its final, sellable form.
| Function | What it covers | Typical items |
|---|---|---|
| Factory Cost | Running production | Factory rent, machine depreciation, factory supervision, power |
| Administration Cost | Running the office/organisation | Office salaries, office rent, audit fees, stationery |
| Selling Cost | Winning orders | Advertisement, sales commission, showroom expenses |
| Distribution Cost | Delivering goods already produced/sold | Warehousing of finished goods, carriage outward, delivery-van running cost |
Prime Cost plus Factory (Works) Overhead — the full cost of running production, before administration, selling, or distrib …
Cost incurred to develop a new product or improve an existing one — market surveys for new-product design, prototype development, laboratory testing — distinct from Selling Cost, which relates onl …