There are a number of different ways that we can classify costs:
- by behavior:
How do costs fluctuate in response to changes in the volume of production
inputs (e.g., direct labor hours, board feet of lumber used) or production
outputs (e.g., number of chairs produced)?
- by function:
Costs incurred as part of the manufacturing or production process are
charged to inventory and then written off as part of cost of goods sold.
Selling and administrative expenses [often just S & A Expenses] are all those costs which are not
associated with the manufacturing or production process, such as sales
commissions, sales salaries, accounting, finance, general management
salaries and office supplies.
- by traceability:
Manufacturing costs are classified as either direct
or indirect. Indirect costs are also
known as overhead or
indirect costs are those costs which cannot be specifically associated with
a particular cost object (A cost object
is any organizational or physical entity to which costs are assigned or
charged. A cost object might be a completed unit of product, a subassembly,
a department, a worker in the department, a product line, or en entire
division of a larger corporation.) When we talk about manufacturing costs,
the typical cost object is a unit of output. Selling and
administrative expenses may also be traced to products, product lines,
organizational units [e.g., divisions or regions]. Such tracing MAY be useful
in determining the relative profitability of the associated cost object
[products or division, for example]. However, it is important to remember that
S & A expenses are never inventoried and are never written off as part of cost
of goods sold.
- by relevance to the decision that we
are making: In many decision making situations, certain costs are irrelevant.
Costs are irrelevant to a decision if the don't change as a consequence of the
Cost Classifications | Cost Behavior | Contribution Margin | Traceability | Function