Classification of Cost by Function

# Classification of Cost by Function

This classification groups costs based on the business function they relate to. It feeds directly into the structure of the Cost Sheet.

## The Five Functional Categories

### 1. Manufacturing / Production Cost

All costs incurred to convert raw material into finished goods — material, labour, factory overheads. Stops at the factory gate.

### 2. Administration Cost

Cost of formulating policy, directing the organisation and controlling operations of the undertaking which is not directly related to production, selling, or R&D — e.g., office salaries, audit fees, legal expenses.

### 3. Selling Cost

Cost of creating demand and securing orders — advertising, sales commission, salesmen salary, market research.

### 4. Distribution Cost

Cost of making the finished product available to the customer — warehousing of finished goods, packing for despatch, carriage outward, delivery van expenses.

### 5. Research & Development (R&D) Cost

Cost of researching new products / processes (R) and developing them into commercially viable products (D).

## Mapping to the Cost Sheet

```

Manufacturing Cost → Factory / Production OH section

Administration Cost → Administration OH section

Selling + Distribution → S&D OH section

R&D Cost → Either capitalised or charged depending on nature

```

## Selling vs Distribution — the common trap

> Both appear together as 'S&D OH' in cost sheet, but conceptually they are distinct.