Essay on Cost Classification

805 Words Aug 17th, 2010 4 Pages
Cost classification is the process of grouping costs according to their common characteristics. A suitable classification

of costs is of vital importance in order to identify the cost with cost centres or cost units. Cost may be classified

accounting to their nature, i.e., material, labor and expenses and a number of other characteristics. The same cost figures

are classified according to different ways of costing depending upon the purpose to be achieved and requirements of

particular concern. The important ways of classification are:

On the basis of Identity: According to this classification, the costs are divided into there categories i.e., Materials,

Labor and Expenses. There can be further sub-classification of
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Example of selling and distribution costs are: sales men salary,

packing charges, carriage, out ward, advertisement, ware house charges etc.

On the basis of Variability: The behavior of cost varies from one another as production increases, some cost remains

constant or varies in direct proportion to the volume of out put, or others may vary partially. Thus on the basis of

variability, costs can be classified into the following three categories.

(a) Fixed Cost / Period Cost: Fixed costs are those costs which remain fixed irrespective of the change in volume of out

put. As production increases cost per unit of the fixed cost decreases and as production decreases fixed costs are, rent of

the factory building depreciation, salary of the office manager etc.

(b) Variable Cost / Product Cost: Variable costs are those costs which very in direct proportion to the volume of out put.

As production increases total cost increases but also per unit remains constant. As production decreases total cost

decreases and cost per unit also decreases. Example of variable costs are, cost of raw materials labor etc.

(c) Semi-Variable Cost / Semi-Fixed cost: These costs are partly fixed and partly variable. Examples of variable costs are

telephone rent. It includes partly fixed charge up to a certain level and then varies according to the calls.

On the basis of controllability: From

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