Cost Classification

Cost Classification
Cost Definition
 Cost is the value sacrificed for the
purpose of achieving some economic
benefit which will promote the profit
making ability of the company.
 Cost may be viewed in different ways
because there are many types that may be
classified differently according to the
immediate needs of the management
1. Nature or Management Function
 Manufacturing costs- raw materials, direct
labor, manufacturing overhead
 Non Manufacturing cost- selling,

general/administrative cost
Non-manufacturing Costs
Marketing or Administrative
Selling Costs Costs
Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
Fall 2010 Mugan 5/82

2. Timing of Recognition as expense
 Product- costs involved in acquiring or
making a product. Also known as
inventoriable cost
 Period Cost- cost that are identified with
accounting periods and not included in
product cost.
Product Costs Versus Period Costs
Product costs include direct Period costs include all

materials, direct labor, and marketing or selling
manufacturing overhead. costs and
administrative costs.
Inventory Cost of Good Sold
Expense
Sale
Income Income
Balance
Statement Statement
Sheet

3. Cost on Financial Statements
 Statement of Financial Position-
inventoriable cost
 Income Statement- cost of goods sold
4. Cost Classifications for Predicting
Cost Behavior
By reaction to changes in the level of activity
within the relevant range.
◦ Total variable costs change when activity changes.
◦ Total fixed costs remain unchanged when activity
changes.
◦ Semi variable
◦ Stepped
Cost Classifications for Predicting
Cost Behavior
By reaction to changes in the level of activity
within the relevant range.
◦ Total variable costs change when activity changes.
◦ Total fixed costs remain unchanged when activity
changes.

Cost Classifications for Predicting
Cost Behavior
Behavior of Cost (within the relevant range)

Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
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Fall 2010 Mugan 2
Extent of Variable Costs
The proportion of variable costs differs across organizations. For example . . .
A public utility with A manufacturing company

large investments in will often have many
equipment will tend variable costs.
to have fewer
variable costs.
A merchandising company
A service company usually will have a high
will normally have a high proportion of variable costs
proportion of variable costs. like cost of sales.
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Fall 2010 Mugan 2
Examples of Variable Costs
 Merchandising companies – cost of goods sold.
 Manufacturing companies – direct materials, direct
labor, and variable overhead.
 Merchandising and manufacturing companies –
commissions, shipping costs, and clerical costs
such as invoicing.
 Service companies – supplies, travel, and clerical
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Fall 2010 Mugan 2
Types of Fixed Costs
Committed Discretionary
Long-term, cannot be May be altered in the short-
significantly reduced term by current managerial
decisions
in the short term.
Examples Examples
Depreciation on Advertising and
Equipment and Research and
Real Estate Taxes Development
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Fall 2010 Mugan 2
5. Cost Classified by types of
Inventory
 Raw materials inventory
◦ Cost of all raw materials and production
supplies that have been purchased but not
used at the end of the period
 Work in process-
◦ Cost associated with goods partially
completed at the end of the period
 Finished Goods Inventory
◦ Cost of the completed goods that have not
been sold at the end of the period
6. Cost according to traceability to
the cost object
 Direct cost
 Indirect cost
7. Cost according to Managerial
Influence
 Controllable cost
◦ Cost that is subject to significant influence by
a particular manager within the time period
under consideration
 Non Controllable cost
◦ Cost over which a given manager does not
have a significant influence
8. Cost terminologies used for
planning and control
 Standard cost
◦ A predetermined cost estimate that should be attained ; expressed in
terms of cost per unit.
 Budgeted Cost
◦ Used to represent the expected for a given period.
 Absorption Cost/ full cost method
◦ A cost method that includes all manufacturing costs variable and fixed
in the unit cost per product
 Direct Costing / Variable costing
◦ Includes only variable costs
 Information cost
◦ The cost of obtaining an information
 Ordering cost
◦ Cost to place an order
 Out of Pocket Expenses
◦ Cost that must b emet with a current expenditure or cash outlay
9. Cost according to a Time frame
Perspective
 Committed cost
◦ Cost that is inevitable consequence of a
previous commitment
 Discretionary cost
◦ Cost for which the size or the time of
incurrence os a matter of choice
Cost based on Time frame
Committed Discretionary
Long-term, cannot be May be altered in the short-
significantly reduced term by current managerial
decisions
in the short term.
Examples Examples
Depreciation on Advertising and
Equipment and Research and
Real Estate Taxes Development
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Fall 2010 Mugan 2
10. Cost classified according to time period
to which the cost is incurred
 Historical cost
◦ Past cost
 Future cost
◦ Costs that are expected to be incurred in the
future
Cost for decision making and other
analytical purpose
 Relevant cost
◦ Future cost that are different under one
decision alternative than under decision
alternative
 Incremental cost
◦ Difference in cost between two pr more
alternatives.
 Sunk Cost
◦ Past cost that had been incurred
Cost for decision making and other
analytical purpose
 Opportunity cost
◦ The value of the best alternative foregone as the
result of selecting a different use of resources
 Marginal cost
◦ Cost associated with the next unit or next
project
 Value added cost
◦ Cost that add value to the product. Cost
necessary to satisfy the requirements of the
consumer.
Classify the cost
 Julia Martin is the production manager of
a ready to wear manufacturing outfit. A
decision needs to be made about the type
of clothing material or fabric to be used
to make a shirt. The fabric that has been
used in the previous production cost P 40
per yard but it is not available currently.
Similar material from another supplier will
cost P 50 per yard

Cost Classification

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Cost Classification

 Non Manufacturing cost- selling,

Costs necessary to get All executive,

Fall 2010 Mugan 5/82

Product costs include direct Period costs include all

Fall 2010 Mugan 7/82

Fall 2010 Mugan 10/82

Behavior of Cost (within the relevant range)

A public utility with A manufacturing company

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