Classifications of Costs
There are many ways to classify costs. Some of the most common classifications include:
- By nature: Costs can be classified by their nature as direct costs or indirect costs. Direct costs are costs that can be easily traced to a specific product or service. Indirect costs are costs that cannot be easily traced to a specific product or service.
- By behavior: Costs can be classified by their behavior as variable costs or fixed costs. Variable costs are costs that vary in proportion to the level of production. Fixed costs are costs that do not vary in proportion to the level of production.
- By traceability: Costs can be classified by their traceability as traceable costs or non-traceable costs. Traceable costs are costs that can be traced to a specific cost object. Non-traceable costs are costs that cannot be traced to a specific cost object.
- By controllability: Costs can be classified by their controllability as controllable costs or uncontrollable costs. Controllable costs are costs that can be influenced by management decisions. Uncontrollable costs are costs that cannot be influenced by management decisions.
Elements of Cost
The elements of cost are the different types of costs that are incurred in the production of a product or service. The most common elements of cost include:
- Direct materials: Direct materials are the materials that are used in the production of a product.
- Direct labor: Direct labor is the labor that is used in the production of a product.
- Overhead: Overhead is the cost of all of the other resources that are used in the production of a product, such as rent, utilities, and insurance.
Cost Center and Cost Unit
A cost center is a unit within an organization that incurs costs. A cost unit is a unit of output that is used to measure costs. For example, a factory might have a cost center for each department, and each department might have a cost unit for each product that it produces.
The Relationship Between Cost Centers and Cost Units
Cost centers and cost units are related to each other in that the costs of a cost center are typically allocated to cost units. For example, the costs of the factory department might be allocated to the products that are produced in the factory.