Cost Accounting classifies costs in different ways to assist management in planning, control, and decision-making.
1. Classification by Nature or Traceability
Costs are classified according to whether they can be directly identified with a cost object.
| Type | Meaning |
| Direct Cost | Directly traceable to a cost object |
| Indirect Cost | Cannot be directly traced and is allocated or apportioned |
Exam Point: Direct Costs are traceable, whereas Indirect Costs are allocated or apportioned.
2. Classification by Function
Costs may be classified according to business functions.
These include:
- Production Cost
- Administration Cost
- Selling and Distribution Cost
- Research and Development Cost
3. Classification by Behaviour
Cost behaviour describes how costs change with changes in production volume.
Fixed Cost
Fixed Costs remain unchanged irrespective of production volume during a given period.
Variable Cost
Variable Costs change according to production volume.
Semi-Variable Cost
Semi-variable costs are partly fixed and partly variable.
| Type | Behaviour |
| Fixed Cost | Constant |
| Variable Cost | Changes with output |
| Semi-variable Cost | Partly fixed and partly variable |
4. Classification by Controllability
Controllable Cost
These costs can be controlled or influenced by management.
Uncontrollable Cost
These costs cannot be controlled or influenced by management.
5. Classification by Normality
Normal Cost
Normal Costs arise during routine day-to-day business operations.
Abnormal Cost
Abnormal Costs arise due to abnormal events that are not part of normal business operations.
Examples include:
- Accidents
- Natural disasters
6. Classification by Time
Historical Cost
Historical Costs are costs already incurred in the past.
Predetermined Cost
Predetermined Costs are calculated in advance based on expected factors affecting costs.
7. Costs Used in Managerial Decision Making
Several special costs assist management in decision-making.
Marginal Cost
Marginal Cost is the change in total cost resulting from increasing or decreasing production by one unit.
Exam Point: Marginal Cost = Change in Total Cost due to one additional unit of output.
Differential Cost
Differential Cost is the difference in total cost between two alternative decisions.
Opportunity Cost
Opportunity Cost is the value of the benefit sacrificed when one alternative is selected over another.
Exam Point: Opportunity Cost represents the benefit forgone.
Relevant Cost
Relevant Cost is a cost that is relevant for a specific management decision.
Replacement Cost
Replacement Cost is the cost of replacing an existing material or fixed asset either now or in the future.
Shutdown Cost
Shutdown Costs are costs incurred when business operations are temporarily stopped and would not arise if operations continued.
Capacity Cost
Capacity Cost is the cost incurred to maintain production, administration, selling, and distribution capacity.
According to the provided content, these are normally fixed costs.
Sunk Cost
A Sunk Cost is a cost that has already been incurred and cannot be recovered.
Such costs should not influence future decisions.
Exam Point: Sunk Cost = Already incurred and non-recoverable cost.
Summary of Important Decision-Making Costs
| Cost Type | Meaning |
| Marginal Cost | Change in total cost for one additional unit |
| Differential Cost | Difference in cost between alternatives |
| Opportunity Cost | Benefit sacrificed |
| Relevant Cost | Cost relevant for a decision |
| Replacement Cost | Current/future replacement cost |
| Shutdown Cost | Cost incurred during shutdown |
| Capacity Cost | Cost of maintaining business capacity |
| Sunk Cost | Cost already incurred and irrecoverable |
Key Points
- Costs can be classified by:
- Nature
- Function
- Behaviour
- Controllability
- Normality
- Time
- Decision-making
- Fixed Costs remain constant.
- Variable Costs change with output.
- Semi-variable Costs are partly fixed and partly variable.
- Marginal Cost is the additional cost of one more unit.
- Opportunity Cost is the benefit forgone.
- Sunk Cost cannot be recovered.
- Capacity Cost is generally a fixed cost.
- Historical Costs relate to the past, whereas Predetermined Costs are estimated in advance.
Quick Revision Summary
Costs are classified by nature, function, behaviour, controllability, normality, time, and managerial decision-making. Important decision-making costs include Marginal Cost, Differential Cost, Opportunity Cost, Relevant Cost, Replacement Cost, Shutdown Cost, Capacity Cost, and Sunk Cost.