C2 Types of Cost Classifications

Classification by Traceability
Direct costs Indirect costs
 Costs traceable to a  Costs that cannot
single cost object. be traced to a
 Examples: material single cost object.
and labor cost for a  Example: A maintenance
product. expenditure
benefiting two or
more departments.
C2

Types of Cost Classifications

Classification by Controllability
The degree of control depends on the
level of management in the organization.
C2 Types of Cost Classifications
Classification by Relevance
Sunk costs have already been incurred and cannot be avoided
or changed. Sunk costs should not be considered in decisions.

Example: An automobile purchased two years ago cost $15,000.

The $15,000 cost is sunk because whether the car is driven, sold,
traded, or abandoned, the cost will not change.

Out-of-pocket costs require future outlays of cash

and should be considered in decisions.

Example: You plan on buying a new car for $25,000 next month.
The cost of the new car is an out-of-pocket cost because you can
choose to spend or not to spend the $25,000 next month.
C2 Types of Cost Classifications
Classification by Relevance
An opportunity cost is the potential benefit lost by
choosing a specific action from two or more
alternatives
Example: If you were not
attending college, you
could be earning $20,000
per year. Your opportunity
cost of attending college for
one year is $20,000.
C3 Types of Cost Classifications
Classification by Function
Direct Direct Manufacturing
Labor Material Overhead

Product

Period costs are expenses

not attached to the product.

Administrative costs are

Selling costs are incurred to
non-manufacturing costs
obtain orders and to deliver
of staff support and
finished goods to customers.
administrative functions.