Cost can be
classified in many ways. It can be classified by:
classified in many ways. It can be classified by:
1.) Nature
2.) Function
3.) Alternative
forgone
forgone
4.) Management
decision
decision
5.) Time
First Classification
By Nature
Cost can be
classified first by nature; here anything nature falls into this group.
classified first by nature; here anything nature falls into this group.
Second Classification
By Function
Cost can be
classified by function or by department. For example administrative cost,
production cost, e.t.c. That is in the various departments, any cost that is
incurred in the process of production goes to production cost.
classified by function or by department. For example administrative cost,
production cost, e.t.c. That is in the various departments, any cost that is
incurred in the process of production goes to production cost.
Cost can
also be classified by their response or by their variability to production.
Here the cost is look at as the levy of production. E.g. when you produce more,
what will be the cost?
also be classified by their response or by their variability to production.
Here the cost is look at as the levy of production. E.g. when you produce more,
what will be the cost?
Third Classification
By Alternative Forgone
Cost is said
to be a measure of forgone alternative. Alternative forgone is concerned with
making a choice between alternatives and frequently an importance factor in
decision making. Making a choice is the financial implications of the various
alternatives. Correctly presented cost information can be of great value to
management in decision making and accordingly material on short and long term
decision making is included later in the book. Therefore, cost is said to be
classified as alternative forgone when you select the important thing to do and
the cost is incurred on the thing.
to be a measure of forgone alternative. Alternative forgone is concerned with
making a choice between alternatives and frequently an importance factor in
decision making. Making a choice is the financial implications of the various
alternatives. Correctly presented cost information can be of great value to
management in decision making and accordingly material on short and long term
decision making is included later in the book. Therefore, cost is said to be
classified as alternative forgone when you select the important thing to do and
the cost is incurred on the thing.
Fourth Classification
By Management Decision
Cost can be
classified in this respect by making management make timely and reasonable
decision. Under this, we look at relevant and irrelevant cost.
classified in this respect by making management make timely and reasonable
decision. Under this, we look at relevant and irrelevant cost.
A cost is
relevant if it will add quantity to decision making process while irrelevant
cost will not add or may not even be considered at times in decision making
process. For example, sunk cost.
relevant if it will add quantity to decision making process while irrelevant
cost will not add or may not even be considered at times in decision making
process. For example, sunk cost.
Example of
relevant cost is marginal cost.
relevant cost is marginal cost.
v Marginal
cost is the cost of producing additional unit.
cost is the cost of producing additional unit.
v Sunk cost is
an already incurred cost that does not affect your present decision.
an already incurred cost that does not affect your present decision.
Fifth Classification
By Time
Cost can be
classified by time. Under this, we have historic and current cost.
classified by time. Under this, we have historic and current cost.
v Historic
cost: These are the cost that has been incurred in the past but are still in
the books of accounts.
cost: These are the cost that has been incurred in the past but are still in
the books of accounts.
v Current cost
are cost incurred on present time
are cost incurred on present time
v Direct cost:
This is an expense that can be traced or (identified with) a specific
department, process or product. Direct costs (such as for labour, material,
fuel or power) vary with the rate of production, and are usually under the
control and responsibility of the department manager.
This is an expense that can be traced or (identified with) a specific
department, process or product. Direct costs (such as for labour, material,
fuel or power) vary with the rate of production, and are usually under the
control and responsibility of the department manager.
