Division of costs to various categories

Costs can be divided into different categories according to their drivers or behavior. In general, cost classification helps understand the costs by studying their behavior and drivers with the aim of their reduction or optimization. And as in other life situations, it is much easier to influence things by knowing them.

If you know details about your costs, it is then much easier to:

• plan the costs and keep costs under control
• start cost optimization or reduction program - cost classification is a kind of starting point if you intend to optimize or cut costs
• make decisions, for example  about production capacity or whether or not shut-down poorly performing factory

Cost division for sure brings its benefits. But remember that the effort of analysing them costs money (even though only internal) which shall not be higher than the benefits.

SO IN WHICH WAYS YOU CAN ANALYSE YOUR COSTS, I.E. CLASSIFY THEM?

1. According to traceability to cost object (most often product or service):

• direct costs
  • direct material costs
  • direct labor costs
  • direct expenses
• indirect costs (overheads)
  • production indirect costs (production overheads)
    • production indirect material costs (material overheads)
    • production indirect labor costs (labor overheads)
    • production indirect expenses
  • non-production indirect costs (overheads)
    • administrative indirect costs (administrative overheads)
    • selling indirect costs (selling overheads)
    • distribution indirect costs (distribution overheads)

2. According to function:

• production (manufacturing) costs
• non-production costs

3. According to relationship with the level of production:

• fixed costs – specific type are stepped costs
• variable costs
• semi-variable costs or semi-fixed costs

4. According to measurement basis:

• historical cost
• standard cost
• estimated cost

5. According to cost source:

• external (primary) costs
• internal (secondary) costs

6. According to controllability:

• controllable (relevant) costs
• uncontrollable (irrelevant) costs – specific type are sunk costs

7. According to irreversibility:

• avoidable costs
• unavoidable costs – specific type are shut-down costs

8. According to actual existence:

• explicit costs
• implicit costs