Importance of Cost Classification

Analysis of cost behaviour is significant to all organizations for effective management. It is since many organizations have a unique cost structure. As an example like, fixed costs account for 60 percent - 80 percent of all hospital costs. Conversely, unlike many organizations of this variety, labour costs largely involve the hospital's fixed costs.

Labour costs not like depreciation need a cash outflow. It is characteristic of labour intensive organizations. On the other hand Capital-intensive organizations, contain low labour costs, as an example like: computerized manufacturing organizations. Some organizations as an example like: hospitals allocate 10 -15 percent of their space for standby emergency events providing them built in idle capacity. This prevents them from enjoying benefits of higher profits such a capital-intensive organization understands at higher volumes beyond the break-even volume. Hence the cost structure of healthcare institutions presents challenges to accountants since of their labour intensive and capital-intensive characteristics.