In cost accounting, the same expense can be viewed in different ways depending on the purpose. For example, electricity can be a factory overhead (function), an indirect cost (traceability), and a semi-variable cost (behaviour). Cost classification means arranging costs into meaningful groups so that they can be measured, controlled and used for decisions.
Note: Material and labour can be direct or indirect.
Tip: In exams, always write: “within a relevant range” for fixed cost.
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Classification by elements groups costs into material, labour and expenses.
A cost centre is the place/person/equipment for which costs are collected for control (e.g., machining department, canteen).
A cost unit is the unit of output/service for which cost is expressed (e.g., per kg, per litre, per passenger-km).
In short: cost centre helps in cost collection and responsibility, while cost unit helps in measuring unit cost.
Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.
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In cost accounting, the same expense can be viewed in different ways depending on the purpose. For example, electricity can be a factory overhead (function), an indirect cost (traceability), and a semi-variable cost (behaviour). Cost classification means arranging costs into meaningful groups so that they can be measured, controlled and used for decisions.
Note: Material and labour can be direct or indirect.
Tip: In exams, always write: “within a relevant range” for fixed cost.
Exam point: Abnormal costs are often excluded for performance evaluation and treated separately.
These are used for budgeting, standard costing and control.
Common pair to remember:
Example sentence (exam-ready): “A cost centre is used to collect costs for control, whereas a cost unit is the unit in which cost is expressed.”
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Costs can be classified in several ways depending on the purpose of analysis, control and decision-making. The major methods are:
By elements (nature): Material, Labour and Expenses. This helps in preparing cost sheets and tracking resource consumption.
By function (activity): Production/Factory, Administration, Selling and Distribution. This helps in knowing where the cost is incurred and in overhead analysis.
By behaviour (variability): Fixed, Variable and Semi-variable. This is useful for marginal costing, budgeting and CVP analysis.
By controllability: Controllable and Uncontrollable costs. It helps in responsibility accounting by fixing accountability to managers.
By normality: Normal and Abnormal costs. Abnormal costs are shown separately to avoid distortion in cost and performance.
By time: Historical (actual) and Estimated/Standard costs. Standards and estimates support planning and control.
By relevance for decisions: Relevant/Irrelevant, including concepts like sunk cost (irrelevant) and opportunity cost (relevant).
A good answer should include short definitions and examples under each method to clearly show understanding.
