Cost classification is the process of grouping costs

Cost classification is the process of grouping costs according to their common characteristics and establishing a series of special groups according to which costs are classified. Thus it involves two step first the determination of the class or groups in which the overhead costs are subdivided. Secondly the actual process of classification of the various items of expenses into one or the other of the groups. The method to be adopted for the classification of overhead costs depends upon the type and size of the business, nature of product or services rendered and policy of the management, the various classification are

1. Functional classification
2. Element wise classification
3. Classification according to nature of expenditure
4. Classification with regards to behavior of the expenditure

A concern may adopt one or more of the above classification. For example, the overhead expenses in a concern may be first divided according to functions i.e. manufacturing, administration, selling and distribution groups. The expenses pertaining to one group say manufacturing may further be classified into fixed, variable, semi variable. Each of these groups may then be grouped into the elements i.e. indirect material, indirect labour and indirect expenses and under each element, the expenses may be further subdivided according to their nature i.e. depreciation, salary, repair and maintenance.