Cost Classification

800 Words4 Pages
Cost classification is the process of grouping costs according to their common characteristics. A suitable classification of costs is of vital importance in order to identify the cost with cost centres or cost units. Cost may be classified accounting to their nature, i.e., material, labor and expenses and a number of other characteristics. The same cost figures are classified according to different ways of costing depending upon the purpose to be achieved and requirements of particular concern. The important ways of classification are: On the basis of Identity: According to this classification, the costs are divided into there categories i.e., Materials, Labor and Expenses. There can be further sub-classification of…show more content…
(a) Controllable Cost: These costs are regulated or controlled by specified member of an organisation. Most of the variable costs are controllable. Generally direct material, direct labor and direct expenses are controlled by the lower level of the management. (b) Uncontrollable Cost: These costs can not be regulated or controlled by specified member of an undertaking. Most of the fixed costs are uncontrollable. Example of uncontrollable costs are, factory rent, managers salary etc. On the basis of normality: On this basis the costs have been classified in to two categories as. (a) Normal cost: It is the cost which is normally incurred at a given level of out put. These costs are part of cost production. (b) Abnormal cost: It is the cost which is not normally incurred at a given level of out put. These costs are not charged to the cost of production. It is transferred to the costing profit and loss account. On the basis of Time: On this basis the costs have been classified as (a) Historical Cost: These costs are ascertained after they have been incurred such costs are available only when the production of a particular thing has already been done. (b) Pre-determined Cost: Pre-determined costs are estimated costs which are set in advance on a scientific way. It becomes standard cost and compared with the actual for adopting controlling measures. Submitted to RB by Ravi Assar
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