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 each element; for example, material into raw material
components, and spare parts, consumable stores, packing material etc. This classification is important as it helps to find
total cost, how such total cost is constituted and valuation of work-in-progress. On the basis of Function: Production, Administration, Selling & Distribution are three important functions of a business
concern. Taking these functions into consideration, costs have been classified by:
(a) Production or Manufacturing Cost: Manufacturing costs are those costs which are incurred in the course of manufacture.
It includes cost of raw material, cost of labour, other direct cost and factory indirect cost. Example of production or
manufacturing costs may be power, lighting, heating, rent, depreciation etc.
(b) Office and Administration Cost: These costs are incurred for the general administration of the enterprise. It includes
office costs as well as administration cost. For example, salary of office staff, rent of office building, electricity
charges, audit fee, printing and stationeries etc.
(c) Selling and Distribution Cost: It includes both selling cost as well as distribution cost. Selling costs are those
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