Question

In your own words describe in detail the types of cost classifications and how they relate to business as well as giving examples of those costs. Additionally discuss the overlap, i.e. how costs can be classified as more than one type of cost classification.

Answer 1

Cost classification

1) By nature

Direct cost - cost which are directly related to production which change with change in production level is consider as direct cost, it requires to be incurred for production

E.g material cost , Labour cost etc

Indirect cost - Cost which are not directly related to production but which has to incurred.

E.g rent , utilities , Salary of account department

2)Behaviour  

Variable - it change at constant rate with change in production units , it directly related production units

E.g Direct material, direct labour etc..

Semi variable - it will change with change in production level but not at constant rate ,it involves some portion of variable cost and some portion of fixed cost

Up some level it is fixed and below that level it becomes variable

E.g Electricity bill

Fixed - it is fixed in nature and not going to change with change with production level up to certain level

E.g Rent, Depreciation etc

3) Control

Controllable - the cost which are within the control of management and which are within the control of management is consider as controllable cost

E.g - Direct material , direct labour etc

Uncontrollable - the cost which are not under the control of management is consider as uncontrollable cost

E.g - Employee rate of pay ,Rent of premises

4) Function

Manufacturing - cost which are incurred for manufacture a unit and such related expenses is consider as manufacturing overhead

E.g - material expense , labour expenses, factory general expense,

Administration - Cost related to administration department is admin cost

E.g - Accounting staff expense, admin office general expense

Selling - Cost related to selling a product and that of selling department is consider as selling cost

E.g - advertising of product

R&D - Cost of new techniques and innovation and R&D department is consider as R&D cost

Some cost can be classified as more than one cost classification

E.g material cost can be classified as

Variable coat

Direct cost

Controrable

Manufacturing cost etc