What Cost Category Does Employee Salary Fall Under in Accounting Applications?

Employee salary refers to the regular payments made by a company to its employees or workers. These payments are compensation for the employees' hard work. Employee salaries include not only the base amount known as basic salary but also other components such as overtime pay, allowances, insurance, incentives, and so on. Below is a detailed discussion about the cost category that employee salaries fall under in accounting applications.

What Cost Category Does Employee Salary Fall Under in Accounting Applications?

Simply put, employee salaries can be considered part of production costs. However, upon closer examination, production costs can be divided into two types: fixed costs and variable costs.

In accounting applications, employee salaries that fall under operational costs are recorded as part of production costs or service costs provided by the company. Meanwhile, employee salaries categorized as fixed costs are recorded as overhead or fixed costs.

How a company manages these costs is crucial as it can impact decision-making concerning the company's financial situation. This is because employee salaries are an investment to achieve the best performance from employees.

Types of Employee Salaries Categorized as Production Costs

To answer the question of what cost category employee salaries fall under in accounting applications, you need to understand the explanation below:

Employee Salaries Categorized as Fixed Costs

Fixed costs are a type of expenditure that does not depend on the fluctuating amount of production. These costs are more stable and can be estimated with certainty. As such, the company can create a budget plan that does not require many changes. Fixed costs continue to be incurred during the production process.

Examples of fixed costs include building or warehouse rent and employee salaries. Employee salaries fall under this category because they are considered production costs. Simply put, employee salaries become part of the fixed costs associated with production.

Employee Salaries Categorized as Variable Costs

The next type of cost is variable costs, which are required during the production process. These stages include everything from preparing raw materials to processing them into finished goods. The magnitude of this type of cost depends on the amount of goods produced. If production increases, the costs also increase.

This cost serves as the basis for determining the amount of output recorded in the report. Examples of variable costs include purchasing production raw materials. If the company stops producing, the variable costs will be zero. This type of cost is also crucial as a reference for setting product prices.

Marginal Cost

Marginal cost is a type of additional cost, which is the expense of increasing the company's production volume. The method of calculating marginal cost is by summing fixed and variable costs, and then dividing the result by the increase in cost and the change in production targets.

Fixed costs are included in the calculation during the production process. Meanwhile, variable costs are only added if the company wants to increase production volume.

What cost category does employee salary fall under in accounting applications? If employee salaries are categorized as fixed costs because they are incurred routinely every month, then overtime or additional pay falls under marginal cost. This is because additional wages are calculated on a daily basis when employees work overtime.

Average Cost

This type of cost can be obtained by dividing the company's total expenses by the total production output. This cost is considered essential because it serves as a basis for the company when making decisions for business development.

By adhering to the average cost, the company can easily monitor how fixed and variable costs affect total expenses. From this data, the company can make more accurate decisions and determine the minimum expected profit.