The definition of cost has vague expression until its concept has been classified. The reasoning for its classification is so that the information captured serves a purpose when meaningfully applied. There are several bases cost classification can be done however it is broken into four major categories.
The first major category is the cost by nature or element which is classified by direct and indirect cost. Direct cost can be easily identifiable as it is allocated to the production of a particular product or service. This can be further defined by the following elements: direct material, direct labor, and direct expenses.
Direct material includes all supplies and materials that are an integral part of the final product. For example, a cake manufacture would include eggs, flour, milk and butter as these are raw materials needed to complete the product. Direct labor consists of salary to employee’s since they are involved in the final production of the cake. The second major category is the functionality of cost. This is classified under the following heads: prime cost, factory cost, cost of production and the total cost of sale (Business Management Ideas, 2018).
These costs are gained in relation to the general management of the cake business such as building expenses, quality control, and management salaries. The third major category is the cost on the bases of behavior. This refers to how the cost of production changes when the level of production changes. There are three cost functionalities that can be classified as this behavior. First is a fixed cost. As the name implies, these costs do not change with each level of production. For example, the rent expense for the bakery will remain the same even if no cakes are sold. On the other hand, variable cost does change with each change in production.
For example, when more cakes are sold, the bakery would need to buy more raw material to keep up with the growth of sale. However, if the sale of cakes is slow, the business will not purchase as much material to reduce the waste of resources. Finally, the mixed cost has a combination of both fixed and variable cost due to the presence of both. The last major category is the cost of managerial decision and control.
When management is considering their strategic and operational plan, the classification of controllable versus uncontrollable cost in the decision-making process. Controllable cost is expenses that can increase or decrease based management’s decision. Variable cost, incremental cost and stepped fixed cost are three aspects of cost that should be taking into consideration when management makes their decisions.
Uncontrollable cost is elements of the business that will not be affected by management decision. Regulated cost such as taxes and government levies are examples of uncontrollable cost (Difference Between, 2018). As explained, cost can be classified among a variety of categories, it just depends on the nature of the information to make managerial decisions.