Cost Classification

800 Words Aug 7th, 2010 4 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
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(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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