Cost classification are needed for the development of the cost data that are useful to management with regard to the five purposes or aims described on pages 40-43. therefore cost are classified:

  1. By the nature of the item (a natural classification).

  2. With respect to the accounting period to which they apply.

  3. By their tendency to vary with volume or activity.

  4. By their relation to the product.

  5. By their relation to manufacture departments.

  6. According to their nature as common and/or joint costs.

  7. For planning and control.

  8. For analytical process.

The process of classifying cost and expense can begin with total cost which may be considered as all costs or deductions from sales revenue before income tax. In a manufacturing concern total operating cost in divided into (1) manufacturing cost and (2) commercial expenses.

Manufacturing cost often name production cost or factory cost is the head during the accounting period the part of manufacturing past represent work completed is transferred to finished goods while incomplete works remain in work in process.

Expenditure can be divided in to two broad classes: (1) capital expenditure and (2) revenue expenditure. A capital expenditure is intended to benefit future periods is classified as an asset; a revenue expenditure benefit the current period as is termed is expense. An expenditure classified originally as assets will ultimately flow into the expense stream when the assets is either consumed or charged off.