Cost Classification

Classification from ‘Function’ point of view

• Product cost (Manufacturing/Factory/Production cost)
o The cost of making a product like material, labour, and
production overheads.
• Period cost (Non-manufacturing/Non-production cost)
o The cost which does not relate to production and therefore is
not charged to the product like selling/marketing & distribution
costs and administrative costs.
Classification from ‘Traceability’ point of view
• Direct cost (Prime cost)
o A cost which is easily/fully/directly chargeable to a product
or service like direct material, direct labour, and direct expenses.
• Indirect cost (Overheads)
o A cost which is not easily/fully/directly chargeable to a
product or service like indirect material, indirect labour, and
indirect expenses.
Classification from ‘Behavior’ point of view
• Fixed cost
o A cost that remains unchanged within a range of activity or
within a short period say a year.
• Step cost
o A cost that remains constant up to a certain activity level,
suddenly rises, and again becomes constant up to another activity
level.
• Variable cost
o A cost that directly changes with every unit of activity.
• Semi-variable cost (Mixed cost)
o A cost that is composed of a fixed as well as a variable element.
Classification from ‘Controllability’ point of view
• Controllable cost
o A cost is controllable for a manager if he can influence it by his
decision.
• Uncontrollable cost
o A cost is uncontrollable for a manager if he can’t influence it
by his decision.
Costs from Decision-making point of view
• Sunk cost
o A cost which is already incurred before taking a decision.
• Committed cost
o A cost for which a commitment is made before taking a
decision.
• Differential cost
o The difference in the cost of alternatives
• Opportunity cost
o The benefit from the second best alternative
foregone/sacrificed in favor of the best alternative.
Miscellaneous
• Standard cost
o A careful estimate of the per unit cost of a product/service.
Some More Terms to Learn
• Cost object(ive)
o Anything for which cost is desired by the management.
• Cost unit
o A unit of product or service for which cost is determined.
• Responsibility centre
o A department/function whose performance is the direct
responsibility of a specific manager.
• Cost centre
o A responsibility centre whose manager is accountable for costs
only. Performance is measured by the cost incurred.
• Revenue centre
o A responsibility centre whose manager is accountable for
revenues only. Performance is measured by the revenue earned.
• Profit centre
o A responsibility centre whose manager is accountable for costs
as well as revenues. Performance is measured by the amount of
profit generated.
• Investment centre
o A profit centre whose manager has additional accountability for
capital investments. Performance is measured by return on
investment (ROI).

‘A’ ‘B’
Deptt. Deptt.
Profit Rs. Rs.
100,000 200,000
Investment Rs. Rs.
500,000 2,000,000
ROI 20% 10%