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,
- relation to time,
- avoidable and unavoidable
- controllable and uncontrollable
- 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
- responsibility centers to which they are connected
- their direct and indirect nature
- Sunk/committed and future/discretionary costs
This is not an exhaustive list and there are still so many ways that can be added to this list of cost classification. Readers are invited to let us know in the comment section below if there is any way of classifying cost which has not been mentioned here so that we can make this list close to being complete if not complete.