What type of cost is depreciation classified as?

Depreciation is classified as a fixed cost because it represents the allocation of an asset's expense over its useful life, independent of the level of production or sales. Unlike variable costs, which fluctuate with changes in production levels or business activity, fixed costs such as depreciation remain constant in total regardless of output, thereby providing stability in financial forecasting.

When assessing the nature of depreciation, it is important to recognize that it systematically reduces the book value of physical assets, which is a distinct accounting practice meant to match the expense of using the asset with the revenue it generates over time. This aligns with the matching principle in accounting, where costs are matched with the revenues they help generate within the same accounting period.

Furthermore, while depreciation can be considered an indirect cost when it is not easily traced to specific products or services, it generally aligns more closely with fixed costs in the broader context of how businesses manage their overhead and capital expenditures. This systematic allocation is crucial for businesses to understand the ongoing costs of their assets as they produce goods or deliver services.