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Introduction to Classification of Cost:

Classification of cost means its grouping according to the common characteristics. It can be classified in various ways. Some of the ways include:

  1. By nature or element:
  • Material Cost
  • Labor Cost
  • Expenses
  1. By identifiably:
  • Direct andIndirect Cost
  1. By functions:
  • Production andSelling Cost
  • Distribution andAdministrative Cost
  • Research and Development Cost
  • Pre-production andConversion Cost
  • Product Cost
  1. By variability:
  • Fixed andVariable Cost
  • Semi-variable andStep Cost
  1. By normality:
  • Normal andAbnormal Cost
  1. By controllability:
  • Controllable andUncontrollable Cost
  1. Other Costs:
  • Decision-making and Accounting Cost
  • Imputed Cost
  • Out of Pocket Cost
  • Opportunity Cost

Normally, students face problems when it comes to understand thisclassification. As there are various characteristics related to each classification, it is thus important to identify the right type of cost for a preferred operation.

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Fixed, Variable and Semi-Variable Cost:

In addition to the above classifications, these are important to understand by the students. If the cost changes with time and fluctuates as per increase or decrease in the production, then it considered as avariable cost.

When the cost does not vary with time and remains constant for a specific period of time whether there is an increase or decrease in production, it is termed as fixed cost.To understand the concept of fixed and variable costs, students should think about their grades.

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