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.