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How costs can be classified for planning, control and decision-making purposes?

Planning relates to the annual budgeting and long-term processes. Within these processes costs can be classified by the following:

• Behaviour – By classifying costs into fixed, variable, semi-fixed and semi-variable categories the outcomes from different activity levels can be examined.

• Function – Functions are the different responsibility centers within the organisation. The budget is built up by the functional levels so that everyone in the organisation has a clear understanding of the role that their responsibility center has in achieving the annual budget.

• Expense type – Classifying by expense types provides useful information on the nature, content and trend of different expense categories that is useful for planning how much should be authorised on spending within the different categories.

• Controllability – Classifying expenses by responsibility centres determines the individuals who are accountable for achieving the budget and who should thus be involved in setting the budget for the specific responsibility centres.

Relevance – Attention should only be focused on those expense categories where there are significant deviations from the budget. Insignificant deviations are not relevant for cost control.
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