Cost Classification: The 5 Types of Costs

Cost accounting is the task involving the classifying, recording, allocating, summarizing and reporting on the current and future costs so as to meet the information requirements of a business organization (Maher, et al 2005). According to Kaplan, et al (1987) cost classification involves appropriate grouping of expenditure and revenues in the organization. The following are the main types of costs;

1) Direct Costs

These are the costs that are attributable to the products manufactured or the service being offered (RDI Online materials 2012). These are then classified into direct labour, materials and direct expenses.

2) Indirect Costs or Overheads

These are costs incurred by the organization but cannot be directly traced to the product or service. These are also classified into indirect materials, indirect labour and indirect expenses.

Other types of costs that are characterized by their behavior in terms of activity or production level include;

3) Fixed Costs

These are costs that tend to remain constant and are not changed by the level of production especially in the short term (Horngren, et al 2003). They may include salaries, rent and insurance. These costs are incurred even when there is no activity. This behavior can be illustrated in the following figure;

Fixed Costs Curve

4) Variable costs

These are costs which change depending on the level of output or activity. They include all the prime costs and the costs on raw materials(Sapp, et al 1990). There would be no costs incurred if there was no production at all. This cost behavior can be illustrated by the following figure. Costs

Variable Costs Curve

5) Semi-Variable Costs

These are cost that tend to remain constant despite the level of activity and at the same time tend to vary as output changes (RDI Online materials 2012). For instance, electricity expenses have a constant standing charge that is paid regardless of whether the power was used and an outstanding bill charged according to how much power was used.  Other costs of this nature include depreciation and repairs(Maskell & Baggaley, 2003). These costs can be illustrated as

Semi-Variable Costs

The graph does not start at zero due to the fixed element associated with these costs.

Leave a Reply

Your email address will not be published. Required fields are marked *