How costs can be classified?

• Accounting Point Of View

Direct Cost

Indirect Cost 

• Cost Accounting Point Of View

Fixed Cost

Variable Cost

Semi Variable Cost

•  Decision Making Point Of View

Marginal Cost 

Opportunity Cost

Standard Cost

 

Classification of costs can be done on various basis, which I believe can be read upon in textbooks. But the most common basis in practice is by the nature of expenses. Accordingly, its classified into Material, Labor and Other Overheads. The Material & Labour can further be divided into Direct or Indirect. Overheads can be classified into production, or admin, or Selling & Distr, or R&D expenses. From Management Accounting purposes, the major classifications are done based on their.. 1. Occurrence-Fixed, semi-variable or variable; and 2. Decision making-Normal, abnormal, sunk, replacement etc.

Cost can be classified as fixed cost, variable cost, semi veriable, opportunity cost, production and sunk cost. On the other hand, accounting cost can be defined as either direct or indirect for a business.

Costs can be classified as per

1) their nature like material, labour and overheads. 

2) as per cost center direct costs, direct material, direct labour, direct expense, indirect costs, indirect material, indirect labour, indirect expenses, 

3) as per time like historical cost, predetermined cost, standard cost, Estimated cost

4) As per decision making like Marginal cost, Differential cost, Opportunity cost, Relevant cost, Sunk cost, Replacement cost, Normal cost, Abnormal cost, Avoidable cost, Unavoidable cost, Pre-production cost, Product cost, Period cost, Traceable cost, Common cost, Controllable cost, Uncontrollable cost, Short run cost, Longrun cost, Past cost, Future cost, Explicit cost, Implicit cost, Book cost, Shutdown cost, Abandonment cost, Urgent cost, Postponable cost, Conversion cost.

5) As per nature of production process like Batch cost, Process cost, Operation cost, operating cost, Contract cost, Joint cost

 

 

The separation of expenses into different categories. For example, cost classification in economics might involve categories of fixed, variable, opportunity, production and sunk costs. On the other hand, accounting costs can be classified as either direct or indirect for a business. Fixed costs : rent, salaries, administration cost etc, while cost of materials, labor, overheads lies under veriable costs...

Cost classification can be done in various ways depending on its nature and a specific purpose. There are various types of costs classified into logical groupings. These groups are such that each and every item of cost can be classified. These classifications of costs make the cost information meaningful. It is of utmost importance to the management of a manufacturing concern. It is the first step towards their decision-making process relating to costs and costing.

There can be various bases on which classification of costs can be done. Following are the important ones, we will discuss in brief.

1. Nature of Expense: By nature of expenses, costs are classified into material, labor and expenses. 

2. Relation to Cost Object – Traceability: This classification is based on the relation of cost element with the cost object. The classification is done into direct and indirect costs. The basis is cause and effect relationship between cost element and cost object or traceability of costs to its cost object.

3. Functions / Activities: Costs can also be classified into various functions / activities. Common functional classification of costs are done into following:

• Production
• Administration
• Finance
• Selling
• Distribution
• Research and Development
• Quality Check etc.

4. The behavior of Costs: The behavior of costs is seen with respect to the change in volume. On this basis, costs are classified into Fixed Costs, Variable Costs, and Semi-variable Costs. Fixed costs do not change with the small change in volume, variable costsdo change. Semi-variable costs have characteristics of both fixed and variable costs.

5. The purpose of Decision Making by Management: For decision-making purpose of management, costs can be classified into various types such as opportunity cost, marginal cost, differential cost, relevant cost, imputed cost, replacement cost, sunk cost, normal/ abnormal cost, avoidable/ unavoidable costs, etc.

6. Production Process: It’s an important classification for cost accounting of different manufacturing industries. Based on the production process of the industry, costs can be classified into following:

• Batch Cost
• Process Cost
• Operation Cost
• Operating Cost
• Contract Cost
• Joint Cost

 

7. Time Period: Based on a time period of assessment or any other specific purpose, costs can be classified into historical cost, pre-determined cost, standard cost, and estimated cost.

According to cost behaviour it can be classified into three categories- fixed, variable and semiveriable. There also some other costs which basically used for decision making process luke opportunity cost and sunk cost.

Costs can be classified as: Fixed cost: Constant cost over a given period, regardless of the level of production; for example, rent. Variable cost: Variable cost depending on the level of sales or production. For example, if you increase the number of books sold, the cost of paper and ink increases. Direct Cost: The cost you can clearly attribute to a product or service. For example, a direct cost in the book publishing industry is paper. Indirect cost: Cost that you can not attribute specifically to a product or service. For example, in the publishing industry, the cost of heating the building where books are produced is an indirect cost of producing books. It's a cost of doing business, but you can not attribute it specifically to a product.

There are various classification of costs. You may classify the cost as to behavior (Variable and Fixed Costs), as to its nature (Direct & Indirect Costs), as to its functions (Prime Costs and Conversion Costs), etc. 

The separation of expenses into different categories. For example, cost classification in economics might involve categories of fixed, variable, opportunity, production and sunk costs. On the other hand, accounting costs can be classifiedas either direct or indirect for a business.