Question

write a memo to management detailing the various classification of costs and provide two reasons for which it is important to classify cost. The memo should contain 200 words

Answer 1

The Management

XYZ Company Ltd

Dear Sir/Ma'am,

Memo: Costs and the Importance of Classifying them

Below are the following classifications of cost:

Cost grouped by Nature

• Product of Service cost- This can be further categorised as:

1. Material Cost
2. Labour Cost: This is further classified into - Immediate Monetary Benefits, Future Monetary Benefits, Non-Financial Benefits, Expenses

Cost grouped according to location or centre

• Direct Costs
• Direct Material Costs
• Direct Labour
• Direct expenses
• Indirect Costs
• Indirect materials
• Indirect Labour
• Indirect expenses

Cost classified according to time

• Historical Costs
• Predetermined Costs
• Standard Costs
• Estimated Costs

Cost Classified by Decision Making

• Marginal Cost
• Differential Cost
• Opportunity Cost
• Relevant Cost
• Sunk Cost
• Replacement Cost
• Normal Cost
• Abnormal Cost
• Avoidable Cost
• Unavoidable cost
• Pre-production cost
• Production cost
• Period cost
• Traceable cost
• Common Cost
• Controllable cost
• Uncontrollable cost
• Short-run Cost
• Long-run Cost
• Past Cost
• Future Cost
• Explicit Cost
• Implicit cost
• Book cost
• Shut down cost
• Abandonment Cost
• Urgent cost
• Postponable cost
• Conversion Cost

Cost Category according to Type of Production Process

• Batch Cost
• Process Cost
• Operation Cost
• Operating cost
• Contract Cost
• Joint Cost

Categorising costs helps with:

1. effective cost control
2. financial planning
3. determination of selling prices
4. Budgetary conrol
5. apportionment of overheads
6. decision making etc.

Sincere regards

Cheers!