Give Some Explanation Of The Purpose Of Classification Of Costs?

In order to be more useful for the costing of products and services, for cost control, and for a variety of other purposes, costs should be accumulated under three major classifications: by types of expense; by department or cost center; and by job, process, or service.

Account classifications of costs by type of expense for the company as a whole and by its major divisions can provide information by time periods on individual operating costs, such as the amount spent for a given period on direct labor or repairs. This type of information is both helpful to executives by enabling them to keep in touch with current activities and useful for control purposes in broad sense when compared with past costs for a similar time period or with estimated costs of financial budget.

For budgeting purposes, as well as other forms of cost control, it is further desirable to identify costs by type of expense within specific departments or cost centers. Thus the individuals at these levels of management may have this information for control purposes and be held accountable for cost performance.

The identification of costs with individuals responsible for them is the essence of what is known as responsibility accounting.