Classification of costs by economic elements

The cost of production is an extremely important indicator. It is not only fundamental in the calculation of the product price, but it is also one of the indicators of the success of doing business. The unjustifiably high cost of production testifies to the inability of managers to efficiently allocate resources. An efficient distribution requires constant work by the company's managers and the search for ways to reduce the cost price. The classification of production costs is of enormous importance in this difficult business. It allows you to determine in what direction the managers are to work, in order, other things being equal, to reduce the cost of production and sale.

Of all classifications, the most complete classification is the classification of costs by economic elements. According to this classification, five main groups of costs are distinguished : material costs, labor costs, depreciation, social costs and other costs.

The costs of paying employees are fundamental to the production process. Despite the automation of the process, without human efforts it is impossible to create a unique and high-quality product. The success of sales does not depend solely on the personal qualities of managers. However, this same cost group is also the most problematic at the same time. Quite often the company overpays its employees for the time they spend idle. In addition, work with this group of costs is hampered by rather harsh labor laws.

Classification of costs by economic elements also includes another group of costs associated with paying people - these are social expenses. In this case, the enterprise, as it were, performs its duty to the state in whose territory it operates. Today this is called the social responsibility of business. Social responsibility is compulsory and includes contributions to pension funds, medical support funds, etc. Such payments, as a rule, are regulated by rather complicated legislation.

On the other hand, the simplest group that includes the classification of costs by economic elements is material costs. This group includes all costs associated with the acquisition of everything that directly participates in the production process and changes its form in the course of it. Simply put, it is raw materials, such as milk used in the production of cheese. The only problem that exists here is the effective distribution of all available raw materials for all commodity items.

The cost of objects that also participate in the production process, but are in working order for several cycles, is deducted by depreciation. Imagine an expensive machine, which the company acquired to manufacture parts for 10 years. It is rather difficult to calculate exactly how much the machine has paid for each part, so different methods are used to calculate depreciation , and some calculations are carried out literally by eye.

All that is not included in the above-described groups, the classification of costs by economic elements refers to the group "other". This includes the payment of insurance, the costs associated with the marriage in production, etc.

As you can see, the considered classification is quite complete and objective, however, for a deeper analysis, the classification of costs in accounting is used for those. Process, the way of including in the cost price and other factors. In any case, for the manager the main thing is to find the weak side in the production process, therefore the choice of classification completely depends on the situation.