Cost classification

In this lesson

1. 0:00 Classifying costs in management accounting
2. 0:28 How costs behave with activity levels
3. 1:31 Why management needs cost information
4. 5:24 Cost classification by function and nature
5. 9:16 Production costs explained in detail
6. 10:41 Direct and indirect production costs
7. 14:01 Worked example: Identifying cost types
8. 19:46 Valuing inventory with production costs
9. 25:07 Direct versus indirect costs

About this lesson

You'll discover the distinction between production and non-production costs, understand why classifying costs correctly matters for inventory valuation and financial reporting, and work through practical examples that show how to categorise materials, labour, and overheads in real business scenarios. Cost classification is fundamental to providing management with the information they need to make sound decisions about production volumes, pricing, break-even analysis, and economies of scale. The lesson covers three key classification methods: function (production versus non-production), nature (materials, labour, overheads), and traceability (direct versus indirect costs). You'll learn why production costs are the focus of management accounting analysis and why non-production costs—such as admin, selling, and distribution—are treated differently in financial statements. A critical takeaway is understanding which costs can be included in inventory valuation under international accounting standards. Only production costs—direct materials, direct labour, and production overheads—can be capitalised as inventory; non-production costs must be expensed immediately. The lesson also explains what costs to exclude, such as abnormal waste, storage of finished goods, and admin overheads, ensuring you grasp the practical application of these rules in real business situations. By the end, you'll be confident identifying cost classifications in exam questions and applying them correctly to support management decisions and accurate financial reporting.

Duration: 30m