Cost Classification Framework
Costs are classified on three independent axis, each answering a different question:
| Axis | Question | Categories |
|---|---|---|
| Direct vs Indirect | Can you trace it to the cost object? | Direct (yes) / Indirect (no) |
| Product vs Period | Where was it incurred? | Product (factory) / Period (elsewhere) |
| Variable vs Fixed | How does it behave with volume? | Variable (changes) / Fixed (constant) |
These axis are independent—a cost gets classified on all three simultaneously.
Example: Factory Supervisor Salary
| Axis | Classification | Reasoning |
|---|---|---|
| Direct/Indirect | Indirect | Can’t trace to specific units |
| Product/Period | Product | Works in manufacturing facility |
| Variable/Fixed | Fixed | Salary doesn’t change with output |
Why This Matters
Different classifications serve different purposes:
- Direct/Indirect → Assigning costs to cost objects (pricing, profitability)
- Product/Period → Financial reporting (inventory valuation, income statement)
- Variable/Fixed → Planning and decision-making (CVP analysis, budgeting)
North: Where this comes from
- Managerial Accounting (parent discipline)
- financial vs managerial accounting (why internal users need different views)
East: What opposes this?
- Single Classification Systems (treating all costs the same way)
South: Where this leads
- Cost-Volume-Profit Analysis (uses variable/fixed)
- Job Order Costing (uses direct/indirect)
- Inventory Valuation (uses product/period)
West: What’s similar?
- Dimensional Analysis (same object, multiple measurement axis)