5. Cost Concepts and Classifications

8/8/2019 5. Cost Concepts and Classifications

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Cost Concepts and

Classifcations


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Nature o Cost

Cost is the value oregone or sacrifce o resources or the achieving some economic beneft which will promote the pability o the frm.

In managerial accounting, the term cost may be used in dibecause there are many types o costs that may be classifaccording to the immediate needs o management.


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Classifcation o Costs

Costs may be classifed into various categories as ollows

!. Costs classifed by nature

". Costs classifed by #ariability

$. Costs classifed by %ypes o Inventory

&. Costs classifcation according to %raceability to Cost 'b(ect

). Costs classifcation according to managerial in*uence

+. Cost classifed according to the generally accepted accountreatment

. Costs terminologies or planning and control

. Cost classifcation according to a %ime-rame perspective

. Cost classifed according to time period or which the cost

!/.Costs classifcations or other analytical purposes


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Cost classifed by Nature

!. 0anuacturing Costs 1 0anuacturing costs are re2uently classimaterials, direct labor, and actory overhead. 3ince costs attachedproducts or groups o products as they are manuactured, e4pendiregardless o their nature, usually are capitali5ed as inventory assebecome 6e4pired costs7 or 6e4penses7 until the goods are sold.

a. 8irect 0aterials 1 9ll raw materials that become an integral fnished product and that can be conveniently and economically as

specifc units manuactured.b. 8irect :abor 1 9ll labor costs related to time spent on produc

conveniently and economically assigned to specifc units manuact

c. ;actory 'verhead 1 Indirect materials, indirect labor, propertinsurance, supervisor


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". Nonmanuacturing costs 1 Include costs related to selling aactivities not related to the production o goods.

a. 0arketing or 3elling costs 1 all costs associated with ma

selling a product or all costs incurred by the marketing divisiotime the manuacturing process is completed until the producto the customer or all costs necessary to secure customer ordthe fnished product or service into to hands o the customer=order getting and order-fling costs.

b. >eneral 9dministrative costs 1 all organi5ational and classociated with the general management o the organi5ation

$. Common costs 1 Costs that beneft two or more operationsservices. %hus, the electricity used to head a building where sproducts are manuactured is a common cost.


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Costs Classifed by #ariability

!. #ariable costs 1 Costs that change directly in proportion to activity ?volume@. 8irect labor and direct materials are e4avariable costs.

". ;i4ed Costs 1 Costs that remain unchanged or a given timeregardless o the change in activity ?volume@. Aent, insuranproperty, maintenance, and repairs o buildings, and depreactory e2uipment as e4amples o f4ed costs.

$. 3emivariable Costs 1 costs that contain both f4ed and varielements.


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Costs Classifed by %ypes o Inv

!. Aaw 0aterials Inventory 1 the cost o all raw materials andsupplies that have been purchased but not used at the endperiod.

". Bork-in-process Inventory 1 the cost associated with goodscompleted at the end o the period.

$. ;inished >oods Inventory 1 Cost o completed goods that h

sold at the end o the period.


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Costs classifed according to %raceability to Cost 'b(ective

!. 8irect costs ?traceable= separable 1 Costs that can be econtraced to a single cost ob(ect.

". Indirect costs 1 costs that are not directly traceable to the


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Costs classifcation according t0anagerial In*uence

!. Controllable cost 1 Cost that is sub(ect to signifcant in*uenparticular manager within the time period under considera

". Noncontrollable cost 1 cost over which a given manager dosignifcant in*uence.


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Cost Classifed according to >e9ccepted 9ccounting %reatmen

!. roduct Costs 1 9ll costs that 6attach7 or 6cling7 to the unitproduced and are reported as assets until the goods are so

". eriod Costs 1 9 cost that must be charged against incomeincurred an cannot be inventoried.


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Cost %erminologies Dsed or laand Control

!. 3tandard Costs 1 9 predetermined cost estimate that shouusually e4pressed in terms o cost per unit.

". Eudgeted Cost 1 used to represent the e4pectedFplanned cgiven period.

$. 9bsorption Costing 1 9 costing method that includes all macosts 1 direct materials, direct labor and both variable and

manuacturing overhead 1 in the cost o a unit o product. reerred to as the ull cost method.

&. 8irect Costing 1 a type o product costing where f4ed costagainst revenue as incurred and are not assigned to specifproduct. 9lso reerred to a variable costing.


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). Inormation costs 1 Costs o obtaining inormation.

+. 'rdering Costs 1 Costs that increase with the umber o ordeinventory.

. 'ut-o-pocket costs 1 Costs that must be met with a currenor cash outlay.


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Cost classifcation according to %ime-rame perspective

!. Committed cost 1 Cost that is inevitable conse2uence o a commitment.

". 8iscretionary Cost ?programmed= management cost@ 1 Costhe si5e or the time o incurrence is a matter o choice.


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Costs Classifed according to %ieriod or which the Cost is Inc

!. Gistorical costs ?past costs@ 1 Costs that were incurred in a

". ;uture costs 1 Eudgeted costs that are e4pected to be incuuture period.


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Costs Classifcations or other9nalytical purposes

!. Aelevant Costs 1 ;uture costs that are dierent under one decisthan under another decision alternative.

". Incremental Costs 1 %he dierence in cost between two or mor

$. 3unk costs 1 past costs that have been incurred and are irrelevdecision.

&. 'pportunity costs 1 the value o the best alternative oregone aselecting a dierent use o resource or by choosing a particular

). 0arginal Costs 1 Costs associated with the ne4t unit or the ne4incremental cost associated with an additional pro(ect as opposdiscrete unit.

+. #alue 9dded Costs 1 cost that add value to the product. %hese rom activities that are necessary to satisy the re2uirements o

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5. Cost Concepts and Classifications