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3 Classifications of Costs PDF

The document discusses different ways to classify costs. It outlines that costs can be classified based on their origin in production, sales, or other departments. Costs are also classified according to the type of business operations like service, merchandising, or manufacturing. Additionally, costs can be direct materials, direct labor, factory overhead, selling/marketing expenses, or general/administrative expenses. Finally, the document discusses classifications based on factors like behavior (fixed, variable, mixed), timing (period, product), significance to production (direct, indirect), and whether they are controllable, cash-based, or relevant to future decisions.

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Ei Hmmm
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85 views3 pages

3 Classifications of Costs PDF

The document discusses different ways to classify costs. It outlines that costs can be classified based on their origin in production, sales, or other departments. Costs are also classified according to the type of business operations like service, merchandising, or manufacturing. Additionally, costs can be direct materials, direct labor, factory overhead, selling/marketing expenses, or general/administrative expenses. Finally, the document discusses classifications based on factors like behavior (fixed, variable, mixed), timing (period, product), significance to production (direct, indirect), and whether they are controllable, cash-based, or relevant to future decisions.

Uploaded by

Ei Hmmm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COST

 Anything of value foregone to attain an objective


 Value of an expense or an asset (Prepaid Expense, Depreciation of Equipment,
Merchandise Inventory : Cost of Sales)
 An expense, the benefit or the life of which is short-term in nature because
they are consumables.
 Cost should be matched with the revenues (Matching Principle)
 Cost are classified in various categories.

COST and PROFITS


 Objective of setting up a business ---> to have profits
 A specific cost may be categorized into different classifications.

CLASSIFICATION OF COSTS
 Origin of Cost
o Production Department – Raw Materials, Direct Labor & Factory
Overhead, Cost of Goods Sold (CGS), Freight-in
o Sales Department – Selling, Advertising, Commission of Salesmen,
Freight-out
o Other Departments – Administrative expenses (Accounting Dept.,
HRD, etc.)

 According to Operations (Income Statement)


o Service – Operating expenses
o Merchandising – Operating Expenses, CGS
o Manufacturing – Operating Expenses, CGS, Cost of Goods
Manufactured (CGM)

 Product Costs
o Direct Materials – Prime Cost
o Direct Labor – Prime Cost
o Factory Overhead – Other costs (Indirect Materials, Indirect
Labor, Other costs charged to Manufacturing/Production department
[Rent, Depreciation, Utilities])

 Operating Expenses Classification of Income


o Selling/Marketing Expenses – Statement
Costs incurred by Sales department *Function of Expense – CGS,
o General/Administrative Expenses Selling, Administrative
– Costs incurred by other departments
*Nature of Expense – Costs
(HRD, Personnel, Accounting, Building
Admin) are listed

 Capital Expenses v. Revenue Expenses


o Capital Expenditures – Costs incurred before actual usage of asset
or cost that would increase the life of the asset (Freight, Installation,
Dry-run & Testing)
o Revenue Expenditures – Maintenance cost, regular check-up,
improvement/replacement
 Period Costs v. Product Costs
o Period Costs – Matched against
revenues charhed in the income statement
every period; Cannot be associated with
the products sold; Selling &
Administrative Expenses.
o Product Costs – Assigned to product
produced.

 According to Product Significance


o Direct Costs – Direct Materials, Direct Labor
o Indirect Costs – Factory Overhead

 Based on Planning and Control


o Standard Costs – Predetermined costs per unit of finished product
- Gathered from previous records
- Ideal Scenario
- For Estimates
o Budgeted Costs – Estimated to be incurred in undertaking an
activity/project
- A little higher than standard costs.
o Actual Costs

 According to Behavior
o Fixed Costs – Remain unaffected by the volume of production or
sales
- Inversely proportional to relative range
o Variable Cost – Directly related to volume or number of units
produced or sold
o Mixed Cost – Mixed costs change, but is not related to change in
sales or production
- Can be a mix of variable and fixed component.
Units Price
0 1,000 (Fixed portion)
10 1,500
45 3,000
o Step Cost – “Semi-fixed”

 Opportunity Costs and Differential Costs


o Opportunity Costs – Forgone/given up from one alternative in
favour of another choice/alternative
o Differential Costs – Positive or negative difference between two
alternatives

Cost of riding a …
TAXI JEEP
120 7.50
1,000
120 <- Difference between -> 1,007.50
is the Differential Cost
 Incremental Costs and Marginal Costs
o Incremental Costs – Total increase in cost due to additional
production
o Marginal Costs – Increase in cost per unit

5 Units 10 Units
5 (D.M.) 10
5 (D.L.) 10
10 (F.O.H.) 10
20 +10 Incremental Cost 30
÷5 ÷10
4 -1 Marginal Cost 3

 Controllable and Non-controllable Costs


o Controllable Costs – Can be regulated by the management
- Production Manager can control production costs
o Non-controllable Costs – Can’t be regulated
- Depreciation, Rental Expense, etc.

 Out-of-Pocket (OOP) and Non-Cash Costs


o OOP Costs – Cash disbursements
o Non-cash Costs – Does not require cash
- Depreciation, Amortization of Intangibles, Bad Debts

 Sunk Costs and Future Costs


o Sunk Costs – Historical or past costs
- Constant, not differential and irrelevant (in terms of decision
making, can be used for comparison)
o Future Costs – Cost to be incurred in the coming periods
- Relevant and are of value in making decisions
- Can affect the future where the manager should plan, organize,
direct and control
- a.ka. Planned costs, Budgeted costs, Estimated costs.

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