Question

Write a memo to management detailing the various classifications of costs and provide two reasons for which it is important to classify cost.

Answer 1

Classifications :

1. Direct Costs
2. Indirect Costs
3. Product Costs
4. Period Costs
5. Variable Costs
6. Fixed Costs

Reasons for classifying costs :

1. Inventory valuation
2. Profit Measurement

Step-by-step explanation:

The first step in Cost Classification if to Identify the Cost object.The Cost object is the unit or entity for which determination of cost is required.

By observing the cost accumulating on the cost object we would identify two types of costs :

1. Direct Cost - Costs that can be traced on the cost object
2. Indirect Cost - Costs that can not be directly traced on the cost object

Another category used to classify costs is whether or not they will be included in product valuation.

1. Product Cost - Attached to Product and included in valuation
2. Period Cost - Not attached to product and thus not included in product valuation

Lastly the Costs Behaviors bring about different classifications as follows :

1. Variable Costs
2. Fixed Costs
3. Semi-fixed Costs
4. Semi - Variable Costs