Cost Classification

Prepared by:
Talha Majeed Khan (M.Phil), Lecturer
UCP, Faculty of Management Studies
 Functional Costs
• Classification by Function:
1. Production of Manufacturing Costs:
These are costs associated with the factory
2. Administration Costs:
These are costs associated with general office
departments.
3. Marketing or Selling and distribution Costs:
These are costs associated with sales, marketing,
warehousing and transport departments.
 Functional costs include the following:
• Production costs:
These are the costs which are incurred by the
sequence of operations beginning with the supply of
raw materials, and ending with the completion of
the product ready for warehousing as a finished
goods items. Packing costs are production costs
where they relate to primary packing (boxes,
wrappers and so on).
• Administration Costs:
These are the costs of managing an
organization, that is, planning and controlling
its operations, but only insofar as such
administration costs are not related to the
production, sales, distribution or research and
development functions.
• Selling Costs:
Sometimes known as marketing costs, are the
costs of creating demand for products and
securing firm orders from customers.
• Distribution Costs:
These are the costs of the sequence of operations with the
receipt of finished goods from the production department
and making them ready for dispatch and ending with the
reconditioning for reuse of empty containers
• Research Costs:
These are the costs of searching for new or improved
products, whereas development costs are the costs
incurred between the decision to produce a new or
improved product and the commencement of full
manufacture of the product
• Financing Costs:
These are the costs incurred to finance the business such
as loan interest
 Fixed Costs and Variable Costs
• Fixed Costs
A fixed cost is a cost which is incurred for a
particular period of time and which, within
certain activity levels is unaffected by changes
in the level of activity.
• Examples of Fixed Costs are:
1. The rental cost of business premises is a constant
amount, at least within a stated time period, and so
it is a fixed cost.
• Variable Costs:
A variable cost is a cost which tends to vary with the level
of activity.
• Examples of Variable Costs are:
1. Direct material costs are variable costs because they rise
as more units of a product are manufactured.
2. Sales commission is often a fixed percentage of sales
turnover, and so is a variable cost that varies with the
level of sales.
3. Telephone call charges are likely to increase if the volume
of business expands, but there is also a fixed element of
line rental, and so they are a semi-fixed or semi- variable
overhead cost.
 Other Cost Classification
• Avoidable Costs:
These are specific costs of an activity or business
which would be avoided if the activity or business did
not exist.
• Unavoidable Costs:
These are the costs which would be incurred
whether or not an activity or sector existed.
• Controllable Costs:
A controllable cost is a cost which can be influenced
by management decisions and actions.
• Uncontrollable Costs:
An uncontrollable costs is any cost that cannot be
affected by management within a given time span.
• Discretionary Costs:
A discretionary costs are costs which are likely to
arise from decisions made during the budgeting
process. They are likely to be fixed amounts of
money over fixed periods of time.