Classification of costs by economic elements

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2020-07-03 02:08:06

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Cost of goods – this is an extremely important indicator. It not only is fundamental when calculating the price of a product, but is one of the indicators of the success of the business. Unreasonably high cost of production testifies to the inability of managers to effectively allocate resources. Effective distribution requires managers enterprise permanent work and find ways to reduce costs. Huge value in this difficult case is of classification of costs of production. It allows you to determine the direction in which Manager will operate that, ceteris paribus, to reduce the cost of production and sale.

Of all the classifications considered the most complete classification of expenses by economic elements. According to this classification, highlighted are five major groups of costs: material costs, wages, depreciation, expenses on social needs and other expenses.

The cost of the payment of wages employees are fundamental in the production process. Despite the automated process, without human effort it is impossible to create a unique and quality product. The success of sales and is solely dependent on personal qualities of managers. However, this group of costs is the most problematic. Quite often a company overpays its employees for the time they spend idle. In addition, work with this group of costs is difficult enough, the harsh labor laws.

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Classification of costs on economic elements also includes another group of costs associated with the payment of people – social spending. In this case, the company as it executes its duty to the state in whose territory it operates. Today it is called social responsibility of business. Social responsibility is mandatory and includes payment of funds to pension funds, medical support, etc. Such payments generally are governed by rather complicated laws.

On the other hand, the most simple group, which includes the classification of costs by economic elements – the material costs. This group includes all costs associated with the acquisition of everything that is directly involved in the production process and changes it shape. Simply put, it is – raw materials, such as milk used in cheese production. The only problem that exists here – effective distribution of all available raw materials for all commodities.

The Cost objects, which are also involved in the production process, but are in good condition for several cycles, is deducted through depreciation. Imagine an expensive machine that the company purchased to produce parts for 10 years. Calculate exactly how much the machine gave every detail is difficult, therefore, for the calculation of depreciation, different methods are used and some calculations are conducted literally in the eye.

All that is not included in the above group, the classification of expenses by economic elements belong to the group of "other”. These include insurance payments, costs associated with production waste, etc.

As you can see, the classification is sufficiently complete and objective, however for deeper analysis, using the classification of costs in the accounting records in the technical process, the method included in cost of sales and other factors. In any case, for the Manager is important to find weaknesses in the production process, so the choice of classification depends entirely on the situation.


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Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

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