The cost of production is an extremely important indicator. It is not only fundamental in calculating the price of a product, but is also one of the indicators of the success of a business. Unreasonably high cost of production indicates the inability of managers to effectively allocate resources. Effective distribution, however, requires the company’s managers to work continuously and find ways to reduce costs. Of great importance in this difficult matter is the classification of costs of production . It allows you to determine in which direction managers will have to work in order, all other things being equal, to reduce production and sales costs.
Of all the classifications, the classification of costs by economic elements is considered the most complete. According to this classification, five main cost groups are distinguished : material costs, labor remuneration, depreciation charges, social expenses and other expenses.
The cost of paying salaries to employees is fundamental in the production process. Despite the automation of the process, it is impossible to create a unique and high-quality product without human efforts. The success of sales depends entirely on the personal qualities of managers. However, this same cost group is also the most problematic. Quite often, an enterprise overpays its employees for the time they spend idle. In addition, work with this group of costs is complicated by rather harsh labor legislation.
The 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, fulfills its duty to the state in whose territory it carries out its activities. Today it is called the social responsibility of business. Social responsibility is mandatory and includes contributions to pension funds, medical care funds, etc. Payments of this kind are usually regulated by rather complicated legislation.
On the other hand, the simplest group, which includes the classification of costs by economic elements, is material costs. This group includes all costs associated with the acquisition of everything that is directly involved in the production process and changes its form during it. Simply put, these are raw materials, such as milk used in the production of cheese. The only problem that exists here is the efficient distribution of all available raw materials across all commodity items.
The cost of objects that are also involved in the production process, but are in working condition for several cycles, is deducted using depreciation. Imagine an expensive machine that the company acquired for the production of parts for 10 years. It is quite difficult to accurately calculate how much of its value the machine gave to each part, therefore, various methods are used to calculate depreciation , and some calculations are carried out literally by eye.
Everything that is not included in the above groups, the classification of costs by economic elements relates to the group of “other”. This may include payment of insurance, costs associated with defective work, etc.
As you can see, the classification considered is quite complete and objective, but for a deeper analysis, the classification of costs in accounting for those is used. process, method of inclusion in the cost of production and other factors. In any case, the main thing for the manager is to find the weakness in the production process, so the choice of classification depends entirely on the situation.