Classification of Costs

Production Costs

All the costs relating to the production of goods or services, whether direct or indirect, are included in the production cost. We can classify production costs into direct and indirect production costs.

  • Example of Direct Production Costs (also known as direct manufacturing costs)
  • Direct Raw Material
  • Direct Labor
  • Other Direct Expenses such job work charges relating to particular product, etc.

Examples of Indirect Production Costs (also known as Production or Manufacturing Overheads)

  • Salaries of Supervisors, Production Heads, Technical and Planning Staff etc
  • Quality control costs
  • Other labor-related expenses
  • Store expenses etc

Administration Costs

These costs are incurred in connection with the general management of the business. These are normally indirect costs and are also known as administrative overheads. Example of such costs can be following:

  • Salaries of staff in general management
  • Office related expenses such as rent, rates, taxes, telephone, stationery etc.
  • Charges levied by bank
  • Audit and legal fees
  • Office related depreciation etc.

Selling Costs

Selling costs include all kinds of expenses incurred for achieving sales of the products and services. These are also considered indirect expenses are known as selling overheads. Examples of such costs are as follows:

  • Salaries of selling staff
  • Commission, conveyance, discount etc
  • Product market research
  • Royalty etc

Distribution Costs

Distribution costs include all kinds of expenses are incurred for distributing the products from its point of production to its customers. Examples of distribution costs are as follows:

  • Transportation costs
  • Warehouse rents
  • Commission to Distribution channel etc

Research and Development Costs

Costs under these heads are the costs comprising of development costs of new products, improvement related expenses etc. 

Last updated on : February 20th, 2017
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About The Author

Sanjay Bulaki Borad
Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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