Categorisation of Costs

Every business must have incurred costs throughout its operations, and your company is no exception (Also see Introduction to Cost Accounting). However, do you know how you should classify the costs? The categorisation of costs means that you need to separate your expenses into different groups. This is for you and the management to pay attention to some of the costs which are more crucial, or consider generating financial models for your company. Hence, proper categorisation of costs is vital if you want to understand the financial position of your company clearly. If you have no idea about how you can do so, you may ask for help from an accounting firm in Johor Bahru.

Listed below are some of the categorisation of costs:

Departmental costs

By using this type of categorisation, you should assign the expenses to those departments which are responsible for them. You may use this information on a trend line as this helps you in determining how capable the managers in various departments are in controlling the costs assigned to their respective departments.

Customer costs

You may also categorise the costs by your client, for example, the costs you have spent on customer service, giving warranties and so on. After getting such information, you will be able to know the profitability of each of your client.

Variable costs and fixed costs

You may separate your expenses into variable costs and fixed costs. Then, if you want to calculate the contribution margin of your company, you can subtract the variable costs from the revenues (Also see The Concept of Revenue Recognition).

Costs for distribution channels

If you use this type of categorisation, you need to separate the expenses into every distribution channel that you use, which may include internet sales, wholesale, as well as retail. To identify the profit (Also see Accounting – Understanding Profit and Loss Account) you earned by using each channel, you can minus the total sum of these categories from their respective channel revenues.

Discretionary costs

The expenses that fall under this category are the costs that you can eliminate or reduce temporarily. You may use this way of categorisation when you want to cut down your expenses for the time being, especially when you expect your company to experience a decrease in revenue for a short period.

After reading the examples above, you should have found out that you may use various ways to categorise your costs. However, in the accounting systems, you may only see a few of the categorisations mentioned above and the most common would be the categorisation based on departmental costs. If you wish to perform other categorisations, you need to do so manually by using electronic spreadsheets.