Question

What accounting concepts are useful in classifying costs?

Answer 1

Costs can be classified basis various accounting bases viz. By Element, by Functions, by variability or behaviour, by controllability, by normality, by Costs for Managerial Decision making etc. These can be classified as follows:

(A) By element - The costs can be classified basis whether they are Material Costs, Labour Costs or Overheads and also basis whether they are direct or indirect in nature.

e.g. Direct Material, Indirect Material, Direct Labour, Indirect Labour, Direct Expenses, Indirect Expenses etc.

(B) By Functions - The classification is based on the function the work carries for which the costs are incurred.

e.g. Direct Material, Direct Employee (labour), Direct Expenses, Production/ Manufacturing Overheads, Administration Overheads, Selling Overheads, Distribution Overheads, Research and Development costs etc.

(C) By Variability - This classification depends on whether the costs change due ti change in production volume.

e.g. Fixed Costs, Variable Costs & Semi-Variable Costs etc.

(D) By Controllability - Costs are classified on the basis whether they can be controlled or not

e.g. Controllable Costs, Uncontrollable Costs

(E) By Normality - Costs are classified on the basis whether they are normally incurred during production cycle.

e.g. Normal Costs, Abnormal Costs etc.

(F) By Costs for Managerial Decision Making - The basis of classification useful for decision making

e.g. Pre-determined costs, Standard Costs, Marginal Costs, Estimated Costs, Differential Cost, Imputed Costs, Capitalised Costs, Product Costs, Opportunity Costs, Out-of-pocket Cost, Shut down Costs, Sunk Costs, Absolute Cost, Discretionary Costs, Period Costs, Engineered Costs, Explicit Costs, Implicit Costs etc.

I hope this answer helps. :)