Classification Of Cost
On Basis of
Nature of Relation to object Functions / Behaviour Time Period Production Management
Expense - Traccability Activities Process Decision making
1) Material Cost = Cost Incurred on commodities or substances used for manufacture product or service.
Ex: Cloth for making dress, paper in books, etc.
2) Labour Cost = Cost of Human efforts involved in process of production, administration and sale.
Ex: Salary to employees, wages to worker, etc
3) Other Expense = Expenses other than material and labour cost involved in activity
Ex : Rent, rates, taxes etc.
On basis of Relation to object or Tracebility
1) Direct Cost = Cost that directly attributed to production of product or service. - Usually variable means
change based on amount of production.
Ex: Direct material, Direct labour, Direct Expenses, etc.
2) Indirect Cost = It is related to production process but doesn’t directly impact on it.
Ex: Electricity or cleaning supplies.
On basis of Functions / Activities
1) Production or Manufacturing cost = Cost of all items involved in production of product & service or
Manufacturing cost = Prime cost + Factory overhead
Ex: Cost of power fuel, factory repair & maintenance, etc.
2) Administration Cost = Cost incurred for general management of organization. Nature= Indirect Cost.
Also called administrative overheads.
Ex: Cost of formulating policy, manager salary etc.
3) Selling and Distribution Cost = Indirect costs related to selling and distribution of product & services.
Ex: Advertising cost,handling cost, etc.
4) Research & Development cost = Cost of researching for new & improved product, new application of
Material, or improved methods.
Ex: Cost of new design, improvement of existing product, etc.
On basis of Behaviour
1) Fixed/ Period Costs = Cost not vary with change in volume or level of production. Total cost remain
constant but per unit of fixed cost change with level of production.Ex: Rent, Depreciation, etc.
2) Variable Cost = Cost of elements which directly vary with volume or level of production. Per unit remains
Constant. Ex: Cost of material, wages of labour, etc.
3) Semi-Variable/ fixed cost = Cost which contains elements of both fixed & variable cost. It partly affec-
ted by fluctuation in level of activity & partly fixed. Ex: Tele bill, Electricity bill, etc.
On basis of Time Period
1) Historical Cost = Post-mortem costs ascertained after incurred & It represent actual cost performance.
Ex: Purchase of building before 5 year ago.
2) Pre-Determined Cost = Cost for a product computed in advance of production process, on basis of
specification of all factors affecting cost & cost data.
Ex: Estimated production cost upcoming period.
On Basis of
Nature of Relation to object Functions / Behaviour Time Period Production Management
Expense - Traccability Activities Process Decision making
1) Material Cost = Cost Incurred on commodities or substances used for manufacture product or service.
Ex: Cloth for making dress, paper in books, etc.
2) Labour Cost = Cost of Human efforts involved in process of production, administration and sale.
Ex: Salary to employees, wages to worker, etc
3) Other Expense = Expenses other than material and labour cost involved in activity
Ex : Rent, rates, taxes etc.
On basis of Relation to object or Tracebility
1) Direct Cost = Cost that directly attributed to production of product or service. - Usually variable means
change based on amount of production.
Ex: Direct material, Direct labour, Direct Expenses, etc.
2) Indirect Cost = It is related to production process but doesn’t directly impact on it.
Ex: Electricity or cleaning supplies.
On basis of Functions / Activities
1) Production or Manufacturing cost = Cost of all items involved in production of product & service or
Manufacturing cost = Prime cost + Factory overhead
Ex: Cost of power fuel, factory repair & maintenance, etc.
2) Administration Cost = Cost incurred for general management of organization. Nature= Indirect Cost.
Also called administrative overheads.
Ex: Cost of formulating policy, manager salary etc.
3) Selling and Distribution Cost = Indirect costs related to selling and distribution of product & services.
Ex: Advertising cost,handling cost, etc.
4) Research & Development cost = Cost of researching for new & improved product, new application of
Material, or improved methods.
Ex: Cost of new design, improvement of existing product, etc.
On basis of Behaviour
1) Fixed/ Period Costs = Cost not vary with change in volume or level of production. Total cost remain
constant but per unit of fixed cost change with level of production.Ex: Rent, Depreciation, etc.
2) Variable Cost = Cost of elements which directly vary with volume or level of production. Per unit remains
Constant. Ex: Cost of material, wages of labour, etc.
3) Semi-Variable/ fixed cost = Cost which contains elements of both fixed & variable cost. It partly affec-
ted by fluctuation in level of activity & partly fixed. Ex: Tele bill, Electricity bill, etc.
On basis of Time Period
1) Historical Cost = Post-mortem costs ascertained after incurred & It represent actual cost performance.
Ex: Purchase of building before 5 year ago.
2) Pre-Determined Cost = Cost for a product computed in advance of production process, on basis of
specification of all factors affecting cost & cost data.
Ex: Estimated production cost upcoming period.
