Cost classification
Classification of Cost
Cost may be classified into different categories depending upon the purpose of classification. Some of the important categories in which the costs are classified are as follows:
1. Fixed, Variable and Semi-Variable Costs
The cost which varies directly in proportion with every increase or decrease in the volume of output or production is known as variable cost. Some of its examples are as follows:
• Wages of laborers
• Cost of direct material
• Power
The cost which does not vary but remains constant within a given period of time and a range of activity in spite of the fluctuations in production is known as fixed cost. Some of its examples are as follows:
• Rent or rates
• Insurance charges
• Management salary
The cost which does not vary proportionately but simultaneously does not remain stationary at all times is known as semi-variable cost. It can also be named as semi-fixed cost. Some of its examples are as follows:
• Depreciation
• Repairs
Fixed costs are sometimes referred to as “period costs” and variable costs as “direct costs” in system of direct costing. Fixed costs can be further classified into:
• Committed fixed costs
• Discretionary fixed costs
Committed fixed costs consist largely of those fixed costs that arise from the possession of plant, equipment and a basic organization structure. For example, once a building is erected and a plant is installed, nothing much can be done to reduce the costs such as depreciation, property taxes, insurance and salaries of the key personnel etc. without impairing an organization’s competence to meet the long-term goals.
Discretionary fixed costs are those which are set at fixed amount for specific time periods by the management in budgeting process. These costs directly reflect the top management policies and have no particular relationship with volume of output. These costs can, therefore, be reduced or entirely eliminated as demanded by the circumstances.
Cost may be classified into different categories depending upon the purpose of classification. Some of the important categories in which the costs are classified are as follows:
1. Fixed, Variable and Semi-Variable Costs
The cost which varies directly in proportion with every increase or decrease in the volume of output or production is known as variable cost. Some of its examples are as follows:
• Wages of laborers
• Cost of direct material
• Power
The cost which does not vary but remains constant within a given period of time and a range of activity in spite of the fluctuations in production is known as fixed cost. Some of its examples are as follows:
• Rent or rates
• Insurance charges
• Management salary
The cost which does not vary proportionately but simultaneously does not remain stationary at all times is known as semi-variable cost. It can also be named as semi-fixed cost. Some of its examples are as follows:
• Depreciation
• Repairs
Fixed costs are sometimes referred to as “period costs” and variable costs as “direct costs” in system of direct costing. Fixed costs can be further classified into:
• Committed fixed costs
• Discretionary fixed costs
Committed fixed costs consist largely of those fixed costs that arise from the possession of plant, equipment and a basic organization structure. For example, once a building is erected and a plant is installed, nothing much can be done to reduce the costs such as depreciation, property taxes, insurance and salaries of the key personnel etc. without impairing an organization’s competence to meet the long-term goals.
Discretionary fixed costs are those which are set at fixed amount for specific time periods by the management in budgeting process. These costs directly reflect the top management policies and have no particular relationship with volume of output. These costs can, therefore, be reduced or entirely eliminated as demanded by the circumstances.