The cost classification provides the detailed information regarding the various aspects of cost items. This information is used by the management for what purposes?

i. Product Costing
Product costing means to ascertain the total cost of a product which is manufactured by a company. The cost of a product consists of material cost, labor cost and overheads. The various cost items are classified under these headings. This information helps to find out the proportion of material cost, labor cost and overheads as compared to total cost. Similarly, the cost classification enables us to find out the ratio of manufacturing and non-manufacturing cost of a product.

ii. Decision Making
The cost classification is also helpful to make some important decisions. The classification of costs into material cost, labor cost and overheads or into manufacturing and non-manufacturing cost, is needed to make decisions regarding what goods should be produced and in how much quantity. A manufacturing company can make various products on the same machine and sell these goods at different prices. The company will prefer to produce that product which can be sold at a higher price but its production cost and selling cost are comparatively reasonable.

---

Wilfykil answered the question on April 15, 2019 at 08:59