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Cost Classifications

 

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 burden. 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 decision.

Cost Classifications | Cost Behavior | Contribution Margin | Traceability | Function

Copyright 2004 Gerald M. Myers. All rights reserved. This site has been developed as aid to instructors and students in managerial accounting. The scenarios contained herein are not intended to reflect effective or ineffective handling of managerial situations. Any resemblance to existing organizations is purely coincidental.
Last modified: August 03, 2005