The Secret of all victory lies in the organization of the non-obvious.

Classification of Costs

The Secret of all victory lies in the organization of the non-obvious.

Marcus Aurelius

In cost accounting we classify and group costs according to their common characteristics. The basic characteristics are what we have just discussed.

There are four basic categories for organizing costs: element, traceability, function and structural. There are three elements of costing: material, labor and overhead. Traceability refers to Direct and Indirect Costs. Functions have to do with departments and how the operation is organized like production, administration, selling and distribution, and R&D. Structural classification means whether a cost is fixed or variable.

Allocating Indirect Costs

In order to allocate an indirect cost to a specific product, we need to determine a function or cost driver that will attribute the proper portion of the indirect cost to the product (cost object). This driver can be related to one of the direct inputs like labor or material, or calculated as a function of time. In this manner standard cost accounting typically determines indirect and overhead costs as a…