Q.Explain the various bases on which costs may be classified.
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Start your 14-day free trial to unlock the full solution →Costs can be classified in several different ways, each suited to a particular purpose.
1. By nature or element — into material cost, labour cost and expenses, each further split into a direct and an indirect part.
2. By traceability (direct/indirect) — a direct cost can be conveniently traced to a particular cost unit; an indirect cost cannot. All indirect costs together — indirect material, indirect labour and indirect expenses — are collectively called overheads.
3. By function — according to the function to which the cost relates: production (factory/works) cost, administration (office) cost, selling cost and distribution cost.
4. By behaviour (variability) — according to how cost responds to a change in output:
- Fixed cost — constant in total within a range regardless of output (e.g. rent); per unit it falls as output rises.
- Variable cost — varies in total in direct proportion to output (e.g. direct material); per unit it stays roughly constant.
- Semi-variable cost — has both a fixed and a variable part (e.g. a telephone bill or electricity charge).
5. By controllability — controllable cost (which the manager of a cost centre can influence) versus uncontrollable cost (which he cannot, at his level). …
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