COST CLASSIFICATION

DEFINATION
Cost classification involves the separation of a group of expenses into
different categories. A classification system is used to bring to management's
attention certain costs that are considered more crucial than others, or to engage in
financial modeling.
Cost classification is the logical process of categorizing the different costs involved
in a business process according to their type, nature, frequency and other features
to fulfil accounting objectives and facilitate economic analysis. Cost refers to the
value sacrificed with the aim of gaining something in return.
Every business process involves some cost. It is the basis of profit determination
for an organization.
Classification of Cost is the process of organizing costs into categories for better
understanding and analysis. It involves dividing costs into fixed, variable, direct, indirect,
and semi-variable to help in better decision-making.
The process of categorizing a company’s expenses for the decision-maker to have a
clearer understanding defines the cost classification

Types of Cost Classification.

The list below highlights the four different types of cost classification.

Fixed and Variable Cost: The primary way of classifying costs is by

considering one as fixed and the other as a variable. Fixed costs are accounted for
before the start of any project. In contrast, the anticipation of the variable costs is
difficult to attain. Thus, these are those units generated at an unaccounted cost.

Distribution Channel Cost: Another way of classifying costs is to

distribute the expenses into various channels. These include retail, wholesale, etc.
Then, the collection of revenues from these channels is done after deducting the
sales cost.
Customer Cost: A company uses expenses to maintain its reputation and
build good customer relationships. Therefore, this cost includes warranties, returns,
customer service, etc. The company then evaluates this information about their
customers to improve its targeting approach and increase profitability.

Departmental Cost: These are the costs allocated to the respective managers

of different departments. They use this cost as a medium to analyses each
manager's performance and identify their potential.