Classification of Costing


On the basis of Identification :

 On the basis of identification of cost with cost units or jobs or processes, costs are classified into –

1) Direct Costs

2) Indirect Costs


1) Direct Costs : These are the costs which are incurred for and conveniently identified with a particular cost unit process or department. These are the expenditures which can be directly allocated to a particular job, product or an activity.

Eg. Cost of Raw Material used, wages paid to laborers etc.

2) Indirect Costs : These are general costs and are incurred for the benefit of a number of cost units, processes or departments. These costs can not be conveniently identified with a particular cost unit or cost centre.

Example : Depreciation of Machinery, Insurance, Lighting, Power, Rent of Building, Managerial Salaries, etc.


On the basis of behavior of Cost

Behavior means change in cost due to change in output. Costs behave differently when the level of production rises or falls. Certain costs change in direct proportion with production level while other costs remain unchanged. As such on the basis of behavior of cost – costs are classified into

1) Fixed Costs.

2) Variable Costs.

3) Semi Variable Costs.


1) Fixed Costs : It is that portion of the total cost which remain constant irrespective of output upto the capacity limit. It is the cost which does not very with the change in the volume of activity in the short run. These costs are not affected by temporary fluctuation in the activity of an enterprise. These are also known as period costs as it is concerned with period. Rent of premises, tax and insurance, staff salaries, are the examples of fixed cost.


Characteristics of Fixed Cost are :

1) Large in value

2) Fixed amount within an output range

3) Fixed cost per unit decreases with increased output

4) Indirect Cost

5) Lesser degree of controllability

6) Influence Variable Cost and Working Capital

behaviour of fixed cost bcca 2nd

Variable Cost: It is that cost which directly very with the volume of activity. In other words, it is a cost which changes according to the changes in the volume of output. It tends to very in direct proportion to output. It means when the volume of output increases, total variable cost also increases when the volume of output decreases, total variable cost also decreases. But the variable cost per unit remains same. Direct material, Direct Labor, Direct Expenses are the examples of variable costs.

Characteristics of Variable Cost are :

1) Total cost changes in direct proportion to the change in total output.

2) Cost per unit remains content.

3) It is quite divisible.

4) It is identifiable with the individual cost unit.

5) Such costs are controlled by functional manager.

behaviour of variable cost 2nd bcca

Semi-Variable Cost : This is also referred as semi-fixed costs. These costs include both a fixed and a variable component. i.e. These are partly fixed and partly variable. They remain constant upto a certain level and registers change afterwards. These costs vary in some degree with volume but not in direct or same proportion. Such costs are fixed only in relation to specified constant condition.

For example : Repairs and maintainance of machinery, telephone charges, maintainance of building, supervision, professional tax, compensation for accidents, light and power etc.

behaviour of semi-variable cost 2nd bcca

On the basis of Controllability

On the basis of controllability, costs are classified into two types :

1)      Controllable Cost

2)    Uncontrollable Cost


Controllable Cost : These are the costs which can not be influenced or controlled by the concerned cost centre or responsibility centre. These costs may be directly regulated at a given level of management authority.

Uncontrollable Cost : These are the costs, which can not be influenced or controlled by the action of a specific member of an enterprise. For eg. it is very difficult to control costs like factory rent, managerial salaries etc. The important points to be noted regarding this classification. First, controllable cost can not be distinguished from non-controllable costs, without specifying the level and scope of management authority. It means cost which is uncontrollable at one level of management may be controllable at another level of management.

Eg. Rent and Factory Building may be beyond control for the production department but can be controlled by the administrative department by negotiations. Secondly all costs are controllable in the long run and at the some appropriate management level.


On the basis of Functions

An organization performs many functions. On the basis of functions costs can be classified as follows :

Manufacturing Costs : It is the cost of all items involved in the manufacturing of a product or service. It includes all direct costs and all indirect costs related to the production. It includes cost of direct materials, direct labor, direct expenses, and overhead expenses related to production. Overhead expenses, means all indirect costs involved in the production process. This is termed as factory overhead or manufacturing overheads.

Eg. Salaries of staff for production department, technical supervision, Expenses of stores department, Depreciation of Plant and Machinery, Repairs and maintenance of Factory Building and Machineries etc.

2) Administration Cost : These are costs incurred for general management of an organization. It is the cost which is incurred for formulating the policy, directing the organization of controlling the operations. These are in the nature of indirect costs and are also termed as administrative overhead.

Eg. Salaries of Administrative Stall, General Office expenses like rent, lighting, telephone, stationery, postage etc.

Selling and Distribution Costs : Selling costs are the indirect costs relating to selling of products or services. They include all indirect cost in sales management for the organization. Selling costs include all expenses relating to regular sales and sales promotion activities.

Examples of expenses which are included in selling costs are :

1) Salaries, Commission and traveling expenses for sales personnel

2) Advertisement cost

3) Legal Expenses for debt realization

4) Market research cost

5) Show room expenses

6) Discount allowed

7) Sample and free gifts

8) Rent on Sales room

9) After sale services


Distribution costs are the costs incurred in handling a product from the time it is completed in the works until it reaches the ultimate consumer. Distribution expenses include all these expenses which are incurred in connection with making the goods available to customers.

These expenses include the following.

1) Packing charges

2) Loading charges

3) Carriage on Sales

4) Rent of warehouse

5) Insurance and lighting of warehouse

6) Transportation costs

7) Salaries of godown keeper, driver, packing staff etc.

Research and Development Cost : Research and development costs are incurred to discover new ideas, processes, products by experiment. It includes the cost of the process which begins with the implementation of the decision to produce or improved product.






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