Cost by Nature

Posted in Finance, Accounting and Economics Terms, Total Reads: 1549

Definition: Cost by Nature

The term “cost” can be defined in terms of resources consumed to achieve a particular objective.

The six main classifications of cost are:

a)     Cost classification by nature

b)    Fixed and Variable Cost

c)     Direct and Indirect (Overhead) Cost

d)    Cost classification by function

e)     Cost classification by cost centre

f)     Cost classification in relation to quality

Classification based on what resources have been consumed in basic categories such as wages, light and heat, advertisement and other expenses is termed as cost by nature. It is widely used in financial reporting for cost accounting.

Some of the accounting entries based on nature and found often in financial statements are Wages, salaries, social costs, Material, Write-down of inventories, Repair and maintenance costs, Depreciation of fixed assets, Amortization of intangible assets, Administration expenses and Marketing expenses.

A proper cost management requires a proper understanding of the causes of cost i.e. cost drivers, a focus on relevant costs and understanding the impact of cost structure on costs and profit. A holistic approach is important to understand the impact of cost structure.


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