Functional Classification of Costs

Beneath this classification, costs are classified according to the function they execute in an organization.  Costs can functionally be classified like:

a) Production Costs: Are all the costs incurred in production of units throughout a time period as like an example of raw material costs, and production overheads and direct labour costs.

b) Administration Costs:  These are all costs incurred in making sure the smooth running of the organization so like to facilitate the production and sale of services and goods.  These involve: salaries for the managers, salaries for support staff like accountants, and secretaries and clerks

c) Distribution and Selling Costs:  These are costs such are incurred to enable the delivery of products and services to the real markets and complete or promote a sale. These costs include: saleswoman salaries, salesmen commission, advertising costs, depreciation on motor vehicles utilized through salesmen, the cost of fuel utilized through vehicles utilized for distribution reasons etc.

d) Other functional classifications