How a cost can be classified?
Cost classification is the process of grouping costs according to their nature or function within a business. It is an important tool for decision-making, as it helps businesses understand the different types of costs they incur and make more informed decisions about how to manage them.
There are several ways that costs can be classified, including:
Nature
This refers to the physical or intangible nature of the cost. Examples of costs classified by nature include direct materials, direct labor, and manufacturing overhead.
Function
This refers to the role that the cost plays within the business. Examples of costs classified by function include research and development, marketing and selling, and administrative expenses.
Behavior
This refers to the way that costs change as the level of activity changes. Costs that remain constant regardless of the level of activity are called fixed costs, while costs that vary with the level of activity are called variable costs.
Controllability
This refers to whether or not a cost can be directly influenced by management. Costs that can be directly controlled by management are called controllable costs, while costs that are beyond the control of the management are called uncontrolled costs.
Normality
This refers to whether or not a cost is expected to occur under normal business conditions. Costs that are expected to occur under normal conditions are called normal costs, while costs that are unexpected or one-time in nature are called abnormal costs.
Cost classification is an important tool for businesses, as it helps them understand the different types of costs they incur and make more informed decisions about how to manage them. By classifying costs accurately, businesses can improve their profitability and make more informed business decisions.
