The various groups, into which costs are classified, are known as ' classes'. Costs may be classified according to different bases or characteristics, such as:
1. On the basis of production and process
2. On the basis of element or nature
3. On the basis of function
4. On the basis of behavior or variability
5. On the basis of controllability.
1. On the basis of Production and Process:
In cost accounting, a factory has to bear various types of cost in the process of production. These production costs may be sub-divided into following two types:
A. Direct Expenditure:
It included all those expenditures which can be easily identified wholly with a unit of cost. It contains material expenses, labor expenses and direct expenses e.g. wood, labor are the good examples of direct expenses for a furniture manufacturer.
B. Indirect Expenditure:
Indirect expenditure are those expenditure which are incurred for the advantage of number of cost center and are not easily identified with a particular cost center e.g. paints, nail etc. on furniture.
2. On the Basis of Element or Nature:
On the basis element, cost can be divided into material, labor and expense. They have been mentioned in details in the following:
A. Materials:
Materials are needed to produce or provide services. They can be classified into direct and indirect are given below:
i) Direct Material Cost: means the materials which from part of finished output and can be identified with the finished product easily.
For example: wood, plywood, adhesive, wood polish, mails etc. in case of manufacturing cloth, cost of iron in case of manufacturing machinating cotton yarn, cost of yarn in case of manufacturing furniture, cost of iron in case of manufacturing machinery etc. the main feature of direct materials in that enter into and form part of the finished product.
ii) Indirect Material Cost: refers to the material cost, which cannot be allocated but can be apportioned to or absorbed by cost centers or cost unit. These are the materials, which cannot be traced as part of the product, and their cost is distributed among the various cost center or cost units on some equitable basis.
Examples of indirect materials are cost and fuel for generating power, cotton waste, lubricating oil and grease used in maintaining the machinery, materials consumed for repair and maintenance work, dusters and brooms used for cleaning the factory etc.
B. Labor:
Labour is needed to convert the raw materials into finished products. It is also needed to supply the goods in the hand of ultimate consumer. It can further be divided into two types as given below:
i) Direct Labor: is the workforce, which is directly involved on production. It refers to lab our cost, which can be identified with and allocate to cost centers or cost units. It includes the remuneration paid for converting the raw material into finished products or for altering the construction, composition or condition of the or ducts manufactured by an undertaking.
For example, wages paid for spinning yarn inn case of spinning mills, wages paid for weaving cloth in case of cloth mills, wages paid to a mason for construction of a building by a building contractor etc.
ii) Indirect Labor Cost: refers to the labor cost or wages, which cannot be allocated but can be apportioned to or absorbed by cost centers or cost units.
For example; salary paid to factory manager, salary paid to factory supervisor or foremen, salary paid to general manager or sales manager etc.
C. Other Expenses:
The expenses which are needed in course of production and distribution except material and labor fall into this category. They can be divided into two types as mentioned below:
i) Direct Expenses: These costs are also called chargeable expenses. They are the expenses other than direct material and labor cost, and can be identified with and allocated to cost centers or cost units.
Direct expenses are those which are incurred for each unit of manufacture specifically and identifiable with them.
For example, royalties paid on the basis of output, hire charges of special plant or machinery, carriage and freight on direct material purchased, import duty and octopi paid on the purchase of imported direct materials, amount payable to sub-contracts etc.
ii) Indirect Expense: refer to the expenses, which cannot be allocated but can be apportioned to or absorbed by cost centers or cost units, for example; rent taxes, and insurance of factory building, factory lighting, repairs to factory building, depreciation to plant and machinery, repairs to machinery, depreciation and insurance of office building, depreciation and insurance of showroom building etc. are known as indirect expenses.
3. On the basis of Faction:
Based on the functions, the cost be classified into production cost, administration cost, selling and distribution cost, and research and development cost.
A. Production Cost:
It includes all direct material, direct labor, direct expenses and manufacturing expenses.
It refers to cost concerned with manufacturing activity, which starts with supply of material and ends with primary packing of the product.
B. Administration Cost:
It is incurred for carrying the administrative function of the organization i.e. cost of policy formulation and its implementation to attain the objective of the organization. It should not be related to research, development, production, distribution or selling activities. It is also called office cost.
C. Selling and Distribution Cost:
The selling cost refers to the cost of selling function i.e., the cost of activities relating to create and stimulate demand for company's products and to secure orders.
The distribution costs are incurred to make goods available to the customers. These costs include the cost of maintaining and creating demand of product, making the goods available in the hand of customer. They are also called total cost or cost of sales.
D. Research and Development Costs:
The research cost is the cost of searching for new products, new manufacturing process, improvement of existing products, processes or equipment and the development cost is the cost of putting research result on commercial basis.
4. On the basis of Behavior or Variability:
On the basis of the behaviors in relation to changes in the volume of activity, cost may be classified as, fixed cost, various costs and semi-variable cost.
A. Fixed Cost:
The costs, whose total amount remains constant, up to a certain capacity is called fixed cost.
The level of production changes, but total amount of fixed cost remains constant. Fixed cost is also called capacity cost, periodic cost, standing cost and burden cost. If the level of production increase then per unit cost decreases and vice-versa, but total amount of fixed cost remain constant. These costs remain fixed in total but their per unit cost changes with changes in output or sales. The per unit fixed cost increase with decrease in output and vice versa.Rent, depreasciation and salary of permanent staff are the examples of fixed cost.
Feature of Fixed Cost:
i. The amount of fixed cost is never zero, even thought the production is zero.
ii. The amount of fixed cost is constant up to a certain range.
iii. Per unit fixed cost charges in opposite direction of production activity.
iv. Fixed cost are either capacity costs or periodic and by the lower level responsibility.
v. Generally, fixed costs are unavoidable and uncontrollable costs.
B. Variable Cost:
The costs that change proportionately with the change in output are known as variable costs.
An increase in the volume means a proportionate increase in the total variable costs and decrease in volume will lead to a proportionate decline in the total variable costs. There is a linear relationship between volume and variable costs. The variable cost per unit is always constant.
When production is zero, the total amount of variable cost is also zero. Variable cost is also called margin cost, direct cost, pocket costs etc. direct material cost; direct labor cost and direct expenses are the example of variable costs.
Feature of Variable Cost:
i. Per unit variable cost remains constant.
ii. When the production is zero, then the total amount of variable cost is also zero, but per unit variable cost will never be zero.
iii. Total amount of variable cost changes according to changes in level of production.
iv. Variable cost is a controllable cost.
C. Semi-Variable Cost:
The costs which are neither perfectly variable nor absolutely fixed in relation to changes in volume are called semi-variable costs. Neither total amount nor per unit cost of semi-variable cost remains constant. If the levels of production increase than total amount of semi-variable cost also increase and per unit cost decreases but not proportionately.
These costs have the characteristics of both fixed and variable costs. Electricity charges, telephone charges, water supply charge re the example of semi-variable costs. They are also called mixed costs, combined costs or semi-fixed costs.
Features of Semi-Variable Cost:
i. Neither total amount nor per unit cost remains constant.
ii. Semi-variable cost can never be zero.
iii. When the level of production increase then total amount of semi-variable cost also increase but per unit semi-variable cost decreased and vice-versa.
5. On the basis of Controllability:
An effective cost control requires knowledge of cost controllability. Controllable may be defined in terms of charge or alternatives of costs.
A. Controllable Cost:
The cost subject to control or substantial influence of a particular manager or individual is called controllable cost. The cost than can be changed or alternated by the action of a specific manager is treated as controllable costs.
B. Uncontrollable Cost:
Cost that is not subject to influence by the action of manage is called uncontrollable costs. These costs remain unchanged.
