II.
COST TERMS, CONCEPTS AND CLASSIFICATION
Cost – value foregone or sacrifice of resources to achieve benefit which will promote profit-
making ability of the firm.
Incurred when resource is used for some purpose.
Outlay/Expenditure of money to acquire goods/services.
Cost Pools – cost collected into meaningful groups.
1. Types of Cost (Labor cost in one pool, materials costs in another)
2. Source (Dept. 1, Dept. 2 and so on)
3. Responsibility (Manager 1, 2 and so on)
Cost Object – any product, service or organizational unit which cost are assigned for some
management purpose.
any item where cost can be traced.
Cost Drivers – any factors that has the effect of changing the level of the total cost.
Cost Assignment – assigning costs to costs pools or from cost pools to costs objects.
Cost Allocation – assignment of indirect cost to cost pools.
A. COST CLASSIFIED BY NATURE MANAGEMENT FUNCTION
NOTE: Direct labor and overhead are called CONVERSION COSTS.
Manufacturing Costs - all cost associated with production of goods.
Direct Materials – Raw Materials Costs, an integral part of the finished product.
- invoice price + other cost paid
- trade and cash discounts should reduce materials costs.
Direct Labor – labor costs related to time on products that can be conveniently and
economically assigned to specific units manufactured.
Manufacturing Overhead – third element of manufacturing costs.
- all manufacturing costs except Direct Materials and Labor.
Indirect Materials – materials and supplies used in the manufacturing operation.
- DO NOT BECOME part of the product.
Indirect Labor – labor cost not identified or traced to specific units manufactured.
Other Manufacturing Overhead - include overtime premiums (extra compensation paid for
overtime) and cost of idle time.
Nonmanufacturing Costs - cost related to selling and other activities not related to production.
Marketing Cost – all costs associated with marketing/selling product or all costs
incurred by marketing division.
- advertising, shipping, sales commissions and storage costs.
General Administrative Cost – all executive, organizational and clerical costs
associated with general management.
B. COSTS CLASSIFIED ACCORDING TO THE TIMING OF RECOGNITION EXPENSE
Product Cost – costs involved in acquiring or making product.
- also called as INVENTORIABLE COSTS (cost attached to the units produced and
reported as assets until goods are sold)
Period Cost – costs that are identified with accounting periods, not included in product costs.
- not included as part of cost of either purchased/manufactured goods.
- selling & administrative expenses (sales commissions, office rent and transportation
expense)
C. COSTS CLASSIFIED ON FINANCIAL STATEMENT
Statement of Financial Position – presents three classes of inventories;
Raw Materials – used to make product.
Work in Process – units of products produced and partially completed.
Finished Goods – units of products that been completed by not yet sold.
Income Statement – the same with merchandise but has different caption.
D. COSTS CLASSIFICATION FOR PREDICTING COST BEHAVIOR
Cost Behavior – how cost will react/respond to changes in the business activity.
Variable Costs – change directly in proportion to changes in activity (volume), examples are
direct labor and materials.
Fixed Costs – remain unchanged to given time period regardless with the change of activity
(volume), examples are rent, insurance, maintenance, repairs and depreciation of factory.
Semivariable Costs or Mixed Costs – contains both fixed and variable elements. Examples
are SS taxes, materials handling, personnel services, heat, light and power.
E. COSTS CLASSIFIED BY TYPES OF INVENTORY
Raw Materials Inventory – cost of raw materials and production supplies that have been
purchased but not used at the end of accounting period.
Work-in-Process Inventory – cost of goods partially completed at the end of the accounting
period.
Finished Goods Inventory – cost of goods that have not been sold at the end of the
accounting period.
Merchandise Inventory - cost of purchased merchandise by retailers/wholesalers, not sold at
the end of the accounting period.
E. COSTS CLASSIFICATION ACCORDING TO TRACEABILITY OF COST OBJECTIVE
Direct Costs (traceable; separable) – can be economically traced to a single costs object.
Indirect Costs – not directly or easily traceable to the costs object.
G. COSTS CLASSIFICATION ACCORDING TO MANAGERIAL INFLUENCE
Controllable Cost – subject to significant influence by a particular manager within the time
period.
Noncontrollable Cost – cost oven w/c a given manager does not have significant influence.
H. COSTS TERMINOLOGIES USED FOR PLANNING AND CONTROL
Standard Costs – predetermined cost estimate that should be attained. Expressed in terms
cost per unit.
Budgeted Costs – represents expected/planned cost for the given period.
Absorption Costing – includes all manufacturing costs (direct materials and labor & variable
and fixed manufacturing overhead.
- referred as Full Cost Method.
Direct Costing – fixed cost are charged against revenue incurred not assigned to specific units
of products manufactured.
- referred as Variable Costing.
Information Costs
Ordering Costs – cost that increase with the number of orders placed in inventory.
Out-of-Pocket Costs – must met with a current expenditure or cash outlay.
I. COST CLASSIFICATION ACCORDING TO A TIME-FRAME PERSPECTIVE
Committed Cost - is the inevitable consequence from a previous commitment.
Discretionary Cost (programmed; managed cost) – size or time of incurrence is a matter of
choice.
J. COSTS CLASSIFIED ACCORDING TO TIME PERIOD FOR WHICH THE COST IS INCURRED
Historical Costs (past costs)
Future Costs – budgeted costs, expected to be incurred in a future period.
K. COSTS CLASSIFICATION FOR DECISION-MAKING AND OTHER ANALYTICAL PURPOSES
Relevant Costs – future costs, different under one decision alternative than the other.
Incremental Costs – difference between two or more alternatives.
- is an additional cost to determine the feasibility of the particular
alternative.
- must be future costs and be different under various alternatives.
Sunk Costs - past costs incurred and irrelevant to future decision.
Opportunity Costs – value of best alternative forgone as the result of selecting a different
strategy.
Marginal Costs - associated with the next unit/project/incremental cost, associated with
additional project as opposed to the next discrete unit.
Value-Added Costs – costs that add value to the product from activities that is needed to
satisfy the needs of the consumer.
