The fundamental principle of classification of cost depends on the purpose for which costs are required.
Cost can be classified as follows:
|
(1) By Nature |
|
Based on nature of major costs like material, labour and other expenses.
Material can be sub-classified into: Raw material, semi-finished materials, components, consumables, maintenance materials
Labour can be sub-classified into: Maintenance, supervision, clerical and others
Other expenses can be sub-classified into: Rent, water, electricity and depreciation
|
|
(2) By Function: |
|
Costs are classified by function to which they relate.
They are:
Production Costs:
All costs involved in the acquiring of raw materials to the delivery of finished goods to the warehouse.
For example, production overheads, direct materials, direct labour and direct costs.
Administration Costs
All costs involved in the general administration including managing the operations of the organization For example: Depreciation, Electricity and Audit fee
Marketing Costs
Costs incurred in securing orders, selling, advertising, promoting, distributing of the finished products
For example: Salesmen salaries, commission and incentives Samples, cost of advertisement, trade fairs, warehouse rent, transport costs and others
Finance Costs
Relate to the financing the activities of the business.
For example: Overdraft interest, fixed term loan interest and commitment fees
Research Costs
Costs incurred in seeking new or improved ideas, designs, process/methods and new products
For example: Cost of salaries of researches personnel, laboratory maintenance and cost of feasibility
Development Costs
Costs incurred in developing new or improved ideas, methods/process or new products so that production can take place.
For example:
Cost of tests/trail runs |
|
(4) Based on Time |
|
Categorized into two types:
Historical or Sunk Costs: – costs that have already been incurred. For example like cost of fixed assets
Future Costs: – costs that needs to be predetermined like standard cost. |
|
(5) By Cost Units |
|
A cost unit consist of material, labor and other expenses. In turn they are analysed into direct and indirect costs. Direct costs are charged directly to a cost unit whilst indirect costs relate to more than one cost unit. Unlike direct cost, indirect cost cannot be charged to a cost unit.
Example of direct costs: direct material, direct labour and direct expenses
Example of indirect costs: indirect materials, indirect labour and indirect expenses/overheads. |
|
(6) By Controllability |
|
Categorized into two types:
Controllable or Managed Costs: – costs that are influenced by the decisions or actions of a manager like shut down costs -retrenchment wages
Uncontrollable Costs: – costs that are not influenced by the decisions or actions of a manager like increased price increase of raw materials. |
|
(7) By Normality |
|
Costs can be categorized into:
Normal costs are those costs that management expects to incur and is within a normal range for example: loss due to evaporation
while
Abnormal costs are those that are not expected to recur or one that is smaller or larger than expected for example lost production due to plant breakdown. |
|
(8) Product Or Period Costs |
|
Product costs are costs incurred in the manufacturing of the goods. These costs comprise all cost of production whether it is direct or indirect which can be assigned to the goods produced.
Period costs related to costs that cannot be assigned to the goods produced and are incurred during the period and are charged as that year’s expense in the profit and loss account.
|
|
(9) Relevant and Non-Relevant Costs |
|
Refer to earlier article on relevant and non-relevant costs |
|
(10) By Behaviour |
|
Refer earlier article on fixed, variable , semi-variable and step costs |