Classification of costs by function

By function can costs be divided into PRODUCTION and NON-PRODUCTION.   Production costs are incurred during product production. They are opposite to non-production costs which include: Administrative costs Selling costs Distribution costs Research and development costs Finance costs

Classification of costs by measurement basis

Historical cost Standard cost Estimated cost – cost estimated prior to the production without any connection to actual costs; therefore, estimated cost is less precise than standard cost

Types of costs used in decision-making

According to cost controllability: Controllable costs / Relevant costs Uncontrollable costs / Irrelevant costs – specific type of uncontrollable costs are sunk costs   According to cost irreversibility: Avoidable costs Unavoidable costs – specific type of unavoidable cost

Uncontrollable costs / Irrelevant costs

Uncontrollable costs (also known as irrelevant costs) are costs that cannot be influenced by certain decision. These are usually costs where is the entity obliged to pay fixed costs based on the contract - for example rent or telephone charges. It does not make any sense to consider these costs du

Avoidable costs

Avoidable costs are costs that can be avoided if the activity (mostly production) is discontinued. Opposite to avoidable costs are unavoidable costs.

Cost object

Cost object is an item (object) to which costs are separately measured. Cost object can be a cost center, cost unit, department, process, activity etc.

Methods used to split semi-variable costs into fixed and variable components

Graphical method   Past data concerning production volume (x-axis) and their corresponding level of costs (y-axis) are plotted onto the chart. Cost function will be visible after linking these points.   If the points are fragmented, the costs and volume of production are not correlate

Classification of costs by their source

Costs can be divided based on where they arise into: External (primary) costs arise from the external sources, e.g. cost of raw material, power, wages and salaries. Internal (secondary) costs arise from internal sources, i.e. from the activities performed within the entity. They may consist of a

Controllable costs / Relevant costs

Controllable costs (also known as relevant costs) are costs that can be influenced by certain decisions / actions. These are the costs to be considered during decision-making between different alternatives. Opposite to controllable costs are uncontrollable (irrelevant) costs.

Sunk costs

Sunk costs are type of irrelevant costs. They are usually fixed costs incurred before the production starts (e.g. research and development, feasibility study, initial training etc.). As such, they are driven by past decisions and shall not be considered when deciding between continuing with the pro

Unavoidable costs

Unavoidable costs are costs that cannot be avoided if the activity (mostly production) is discontinued. Certain type of unavoidable costs are shut-down costs. Opposite to unavoidable costs are avoidable costs.

Cost unit

Cost unit is a type of cost object representing a quantity or unit of product or service, for which costs are ascertained. Different cost units may be applicable in different situations – it depends on the nature of products and production process. Cost unit is not the same as unit cost. Un

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