Question

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

Answer 1

Dear Management

Classifying costs in an essential part of the management of a business. Classifying costs help us identify more accurately where the money that the firm is spending is going, and this also allows us to identify what costs to raise or to cut.

Costs can be classified according to their nature: labor costs or material costs.

They can also be classified according to their traceability: direct costs (can be traced back to the final product), or indirect costs (cannot be traced back to the final product).

They can also be classified according to their behaviour: variable costs, mixed costs, and fixed costs.

And, they can be classified according to their function: production costs, commercial costs, administrative costs, and so on.

As can be seen, the classifications are numerous, and very important, and any well-run company makes use of these classifications in order to improve the performance of the business.