Answer:
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:
- Material Cost
- 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:
- effective cost control
- financial planning
- determination of selling prices
- Budgetary conrol
- apportionment of overheads
- decision making etc.
Sincere regards
Cheers!
