Cost Classifications

Cost is simply a monetary value of resources that outflowed. Costing on the other hand is any technique used to determine the value of resources sacrificed. To better understand costing principles and techniques, it is important to understand the ways in which cost or costs can be classified.

Cost classification is a simple process in which we group or categorize costs on the basis of common characteristics.

Grouping costs on the basis of their nature, form, source or any other attribution makes it really easy to understand their effects and ultimately to take decisions about costs and beyond any shadow of doubt classifying costs makes learning cost and management accounting much easier.

It is to be noted that most of the time the same cost can be classified in different ways therefore, in my opinion, saying that cost has different types is a bit loose understanding because many a times it is the same cost being classified differently as we look at the same thing from different perspectives. From this we can understand the pure power of cost accounting that enables a student or a manager to ascertain one thing in many different ways and putting him in a position to make the best possible decision.

Costs can be classified in number of ways however following is a list that contains some of the common ways of classifying costs:

  • components of production costs [product cost]
  • relation to time [period costs]
  • whether they are avoidable or controllable [avoidable or controllable costs]
  • their behavior towards production activity [fixed, variable and semi-variable]
  • real and notional costs
  • relevant costs
  • normal and abnormal costs
  • functions to which they are connected [functional costs]
  • responsibility centers to which they are connected [departmental costs]
  • their direct and indirect nature
  • Sunk/committed and future/discretionary costs
  • Opportunity costs