WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Accounting Tutorials » Budgeting Tutorials » Cost Classification

Cost Classification

What is Cost Classification?

Cost Classification is the process of segregating costs of the company into different categories that gives a fair idea to the decision-maker about the spending pattern. This bifurcation allows teams to efficiently use the data for accounting purposes and for financial modeling which leads the management to decide which cost is important than others.

Types of Cost Classification

Let us discuss some types of cost classification.

Types of Cost

#1 – Fixed and Variable Cost

These are the two primary categories to segregate the costs; fixed costs include which can be accounted for during the start of any project, and a part of variable expenses can be anticipated too. However, variable cost accounts for the cost associated with the units produced and also for any unaccounted cost coming along.

#2 – Distribution Channel Cost

These are the expenses that are channelized into different segments like retail, wholesale, internet. Revenues from each of the channels come after deducting the cost from sales.

#3 – Customer Cost

These are the costs a company gets involved in to maintain its reputation and after-sale service for the customers. This cost includes returns, warranties, or customer service. This information pertaining to the individual consumers is then evaluated by the company to increase profitability and customer targeting.

#4 – Departmental Cost

Expenses related to individual departments are assigned to respective departmental managers, which is then used to analyze the performance of the manager and develop trend analysis to identify the potential of the manager.

Basis of Cost Classification

Now since we have seen the categories of the cost classification briefly, let us examine the basis on which the costs are segregated:

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

#1 – By Nature

As the category itself suggests that this is the expense to be recorded in the way the company bears it, and for the purpose, it is used for, some major categories can be material and labor. For instance, raw material costs and all other costs related to the procurement of the raw material will fall under Material charges. Similarly, salary and wages will belong to labor costs.

#2 – By Functions

Here the costs are divided as they are allocated to different functions in the company, like Production costs, Commercial costs, Administration Costs, Distribution Costs, and Research and Development cost. All the categories include the costs pertaining to their nature of occurrence throughout the whole production cycle.

#3 – By Behaviour

It depends on the nature of the cost, like if its fixed, variable, semi-variable cost. Rent, Lease, salary comes under Fixed expenses; Packaging, commission falls under the variable head; lastly, management cost, power consumption cost, maintenance cost comes under semi-variable cost.

#4 – By Management Decision Making

As we know, costs to the company are not only a number but also as a tool to make managerial decisions. So, management decides how to distinguish the costs and what categories should they be bifurcated into like Marginal Cost, Differential cost, Sunk Cost, Abnormal Cost, Replacement cost, and so on.

#5 – By Production Process

This type of category is generally used by the companies involved in manufacturing business where there is a lot of processes to be followed by the product to become a finished good. Some examples of this cost may be Batch cost, Process cost, Contract cost, Joint cost, and so on.

#6 – By Time

The cost comes to the company as it depends on the time frame the cost has occurred. The expense which is of importance today may not hold any value tomorrow, so the basic categories in this can be Historical, pre-Determined, Standard, and Estimated costs. Based on these sub-categories helps the management to effectively distribute the costs as per their occurrence time, which eventually leads to a broader picture of cost evaluation.

Conclusion

As much as cost is an expense to the company, it is also considered a tool for future evaluations. Categorizing the costs into appropriate categories allows us to have a clear picture of the whole business model and gives the management an eagle-eye view of the entire process.

Recommended Articles

This article has been a guide to What is Cost Classification & its Definition. Here we discuss what cost along with its classification is. You may learn about from the following articles –

  • Cost Allocation
  • Cost Overrun
  • Objectives of Cost Accounting
  • Cost Drivers
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More