Classification of Cost: What It Is, Definition, Examples, Importance, Accounting

classifications of costs

A responsibility centre is a department or organisational function whose performance is the direct responsibility of a specific manager. Unavoidable costs are costs which would be incurred whether or not an activity or sector existed. (b) Sales commission is often a fixed percentage of sales turnovers, and so is a variable cost that varies with the level of sales. It is the cost used to indicate the presence of arbitrary or subjective elements of product cost having more than usual significance.

What are the 4 types of cost?

Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.

It is the net effect on costs that is important, not just the costs directly avoidable by the contraction. The sunk cost is one for which the expenditure has taken place in the past. This cost is not affected by a particular decision under consideration.

What are Direct Costs?

Non-production costs are taken directly to the profit and loss account as expenses in the period in which they are incurred; such costs consist of selling and administrative expenses. Many items of expenditure are part-fixed and part-variable and hence are termed semi-fixed or semi-variable costs. In costing a small product made by a manufacturing organisation, direct costs are usually restricted to some of the production costs. Differential Cost is that portion of the cost of a function attributable to and identifiable with an added feature, i.e. the change in costs as a result of change in the level of activity or method of production.

Revenue centres are similar to cost centres and profit centres but are accountable for revenues only. If the users of management information wish to know the cost of something, this something is called a cost object. A cost object is any activity for which a separate measurement of costs is desired. (c) The comparison of actual costs and budgeted costs (management control).

1.                        Classification by nature

If an auto manufacturer plans to produce a certain model of car, they will base their cost calculations on how many people need to be hired to work on the assembly of the car and how much raw material is required. These are variable costs based on the amount of production and demand for that product or service. Semi-variable costs are costs that tend to vary with changes in the volume of output or sales, but which do not vary in a directly proportional way relative to such changes.

These cost behaviour classifications, and the

assumptions behind them, are explained in greater detail in Chapter 3. Exhibit 2 summarises

these cost classifications, the basis of classification and the way these various classifications are used by

management accountants. This gives you an overview of the many different cost concepts used in this


Cost Classification by Relation to Cost Centre

It is also called notional cost, e.g., interest on capital —although no interest is paid. This is particularly useful while decisions are taken regarding alternative capital investment projects. Each of these categories offers unique insights into a company’s expenses and can help managers make informed decisions about resource allocation. The postponable cost is that cost which can be shifted to the future with little or no effect on the efficiency of current operations. These costs can be postponed at least for some time, e.g., maintenance relating to building and machinery.

Costs can be classified using different bases or characteristics, including element, nature, variability, controllability, normality, and function. The rest of this chapter explains each cost classification and describes its importance to project management. In 2006, lAG

committed to achieve voluntary carbon neutrality by the end of 2012.

What are the 3 classifications of costs?

Let us divide as per their natures. So basically there are three broad categories as per this classification, namely Labor Cost, Materials Cost and Expenses. These heads make it easier to classify the costs in a cost sheet. They help ascertain the total cost and determine the cost of the work-in-progress.

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