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Cost classification

Classifying costs

Costs can be classified in many different ways.

It is necessary to be able to classify all costs, that is, to be able to
arrange them into logical groups. The classifications selected and the
level of detail used in the classification groupings will depend on the
purpose of the classification exercise.

There are four main classifications:

NATURE ELEMENT

COSTS

FUNCTION BEHAVIOUR

2.1 Classifying cost by element

 Materials are the components bought in by the company which are used in
manufacturing the product.

 Labour costs are the costs of the people working for the organisation. These
costs include wages and salaries, together with related employment costs.

 Expense costs are external costs such as rent, business rates, electricity, gas,
postage, telephone and similar items.

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