Classification of costs
Classification of costs is done for the development of the cost data that are useful to management. The cost classification is a process of grouping costs according to their common characteristics. It is important as it identifies the cost with cost centers or cost units. Classification of costs is done on the basis of a number of ways.
The classification of the costs of the basis of elements includes material cost, material labor and expenses. These are further sub divided for each element. For example materials are divided into raw material components, and spare parts, consumable stores, packing material etc. This helps in finding total cost, how such total cost is constituted and valuation of work-in-progress.
On the basis of functions it is classified as Production, Administration, and Selling & Distribution. Production and manufacturing cost are incurred in the course of manufacture. It includes power, lighting, heating, rent, depreciation etc. office and administration cost is incurred in the general administration of the enterprise. It includes salary of office staff, rent of office building, electricity charges, audit fee, printing and stationeries etc. Selling and distribution Cost includes both selling cost as well as distribution cost. Selling costs are those costs which are incurred in connection with the selling of goods and services.
According to variability there are direct and indirect costs. Direct costs are easily traced to a unit of product or other cost objective. Indirect costs are those which are not easily traced to a unit of a product or a cost object. According to the behavior it is fixed, variable and semi-fixed variable. On the basis of association with products it is product costs and period costs. On the basis of controllability there are controllable and uncontrollable costs. On the basis normality there are normal costs and abnormal costs. The classification is also based on relevance which includes sunk and opportunity costs etc.