Costs may be classified in a variety of ways according to their name and information needs of management". Explain and discuss this statement giving examples of classification required for different purposes.
Answers
HomeCosting TermsTypes of Costs and their Basis of Classification
Cost classification can be done in various ways depending on its nature and a specific purpose. There are various types of costs classified into logical groupings. These groups are such that each and every item of cost can be classified. These classifications of costs make the cost information meaningful. It is of utmost importance to the management of a manufacturing concern. It is the first step towards their decision-making process relating to costs and costing.
Cost is a very vague term and barely has any meaning until it is classified into logical groups. For example, if we know total expenses are of $500 Million against $550 Million revenue.What insight can we derive? Nothing. Now if we add one more information say $350 Million is direct material cost and $100 Million is a direct labor and other overheads. Now, the management can focus on direct material cost because that forms the major part of the total cost as far as cost control initiatives are concerned.