SAINT COLUMBAN COLLEGE

College of Business Education

ACCTG 104 – COST ACCOUNTING & CONTROL I

COSTS – CONCEPTS AND CLASSIFICATIONS

Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to bring a current
or future benefit to the organization.
Costs are incurred to produce future benefits in a profit-making firm, future benefits usually mean revenue. As
costs are used up in generating revenues, they are said to expire. Expired costs are called expenses. In each period,
expenses are deducted from revenues in the income statement to determine the period’s profit. A loss is a cost that
expires without producing any revenue benefit. The focus of cost accounting is on costs, not expenses.

 CLASSIFICATION OF COSTS
I. Costs classified as to relation to a product
A. Manufacturing Costs / Product Costs
1. Direct Materials
2. Direct Labor
3. Factory Overhead
B. Non-manufacturing Costs / Period Costs
1. Marketing or Selling Expense
2. General or Administrative Expense

II. Costs classified as to variability

A. Variable Costs
B. Fixed Costs
C. Mixed Costs

III. Costs classified as to relation to manufacturing departments

A. Direct Departmental Charges
B. Indirect Departmental Charges

IV. Costs classified as to their nature as common or joint

A. Common Costs
B. Joint Costs

V. Costs classified as to relation to an accounting period

A. Capital Expenditures
B. Revenue Expenditures

VI. Costs for planning, control, and analytical procedures

A. Standard Costs
B. Opportunity Costs
C. Differential Costs
D. Relevant Costs
E. Out-of-pocket Costs
F. Sunk Costs
G. Controllable Costs

 MANUFACTURING COSTS / PRODUCT COSTS / INVENTORIABLE COSTS

 Direct Materials – are materials that become part of a finished product and can be conveniently and
economically traced to specific product units (e.g. iron ore for steel, sheet steel for automobiles, or flour for
bread).
In some cases, however, even though a material becomes part of finished product, the expense of
actually tracing the cost of a specific material is too great. Some examples of this include nails in furniture, bolts
in automobiles, and rivets in airplanes. These minor materials and other production supplies that cannot be
conveniently or economically traced to specific products are accounted for as indirect materials. Indirect
materials are part of factory overhead.

 Direct Labor – include all labor costs for specific work performed on products that can be conveniently and
economically traced to end products (e.g. the wages of machine operators and other workers involved in actually
shaping the product).
Labor costs for production related activities that cannot be conveniently and economically traced to end
products are called indirect labor costs. These costs include the wages and salaries of such workers as
machine helpers, supervisors, and other support personnel. Like indirect materials, indirect labor costs are
accounted for as factory overhead costs. Payroll related costs, such as payroll taxes, group insurance, sick pay,
vacation and holiday pay, and other fringe benefits can be considered part of direct labor costs but are usually
included as factory overhead.
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  Factory Overhead – is a catchall for manufacturing costs that cannot be classified as direct materials and or
direct labor costs. Factory overhead costs are a varied collection of production-related costs that cannot be
practically or conveniently traced directly to end products. This collection of costs is also called manufacturing
overhead, factory burden, and indirect manufacturing costs. Examples of the major classification of
factory overhead costs are:
o Indirect materials and supplies: nails, rivets, lubricants, and small tools
o Indirect labor costs: lift-truck driver’s wages, maintenance and inspection labor, engineering labor, machine
helpers, and supervisors
o Other indirect factory costs: building maintenance, machinery and tool maintenance, property taxes,
property insurance, pension costs, depreciation on plant and equipment, rent expense, and utility expense.

Prime Costs

Direct Direct Factory

Materials Labor Overhead

Conversion Cost

 NON-MANUFACURING COSTS / PERIOD COSTS

 Marketing or Selling Expenses – include all costs necessary to secure customer orders and get the finished
product or service into the hands of the customer. Since marketing expenses relate to contacting customers and
providing for their needs, these expenses are often referred to as order-getting and order-filling costs. Example
of these expenses include advertising, shipping, sales travel, sales commissions, sales salaries, and expenses
associated with finished goods warehouses.

 Administrative or General Expenses – include all executive, organizational, and clerical expenses that
cannot be logically be included either under production or marketing. Examples of such expenses include
executive compensation, general accounting, secretarial, public relations, and similar expenses having to do
with the overall, general administration of the organization as a whole.

Exercise 1. Presented below is a list of costs and expenses usually incurred by Ram Corporation, a manufacturer of
furniture, in its factory. Classify the items into (a) direct materials, (b) direct labor, and (c) manufacturing overhead.
1. Metal used in manufacturing tables 6. Salaries of factory supervisors
2. Insurance on factory machines 7. Wood used in manufacturing furniture
3. Leather used in manufacturing furniture 8. Sandpaper, bolts and nails
4. Wages paid to machine operators 9. Property taxes on factory building
5. Depreciation of factory machinery 10. Rent of factory building

Exercise 2. Classify the following as either Manufacturing (M), Selling (S), or Administrative (A)
1. Metal for the manufacture of gold clubs 6. Cost of machine breakdown
2. Wages of drivers delivering goods to customers 7. Power to operate factory equipment
3. Rent on factory building 8. Advertising
4. Freight in of materials purchased 9. Commission paid to sales personnel
5. President’s salary 10. Travel expenses of salesmen

Exercise 3. The financial statements of Mother Goose Company included these items:
Marketing Costs P 160,000 Direct Materials Used 285,000
Direct Labor Costs 245,000 Fixed Factory Overhead Costs 175,000
Administrative Costs 145,000 Variable Factory Overhead Costs 155,000

Compute the:
1. Prime Cost
2. Conversion Cost
3. Total Inventoriable/product cost
4. Total Period Cost

Exercise 4. Rocco Delivery Services reports the following costs and expenses in June of the current year
Direct Materials P 220,000 Depreciation – Factory Equipment 20,000
Factory Rent 50,000 Sales Commission 57,000
Direct Labor 180,000 Advertising 47,000
Factory Utilities 8,500 Depreciation – Office Equipment 10,000
Supervisor’s Salary in the Factory 60,000 Salary of the President 250,000

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Required:
1. Classify each of the costs using the format given below.
Cost Direct Direct Factory Selling Administrative
Expense
Materials Labor Overhead Expense
Direct Materials P 220,000
Factory Rent
Direct Labor
Factory Utilities
Supervisor’s Salary in the Factory
Depreciation – Factory Equipment
Sales Commission
Advertising
Depreciation – Office Equipment
Salary of the President
TOTAL

2. Total Product Cost

3. Total Period Cost
4. Cost per unit if the company was able to manufacture 40,000 units

 COSTS CLASSIFIED AS TO VARIABILITY

One of the most important classifications involves the way cost changes in relation to changes in the activity of the
organization. Activity refers to a measure of the organization’s output of products or services.

 Fixed Cost – Items of cost which remain constant in total, irrespective of the volume of production. Fixed costs
are not related to activity within the relevant range. If activity increases or decreases by 20%, total fixed costs
remains the same. Cost per unit decreased as volume increases, and increases as volume decreases.
Fixed costs may be classified into two categories, depending on the ability of the management to influence the
level of these costs in the short-term
o Committed Fixed Costs – costs that represent relatively long-term commitments on the part of
management as a result of a past decision (e.g. depreciation on equipment).
o Managed Fixed Costs (also known as discretionary, programmed or planned fixed costs) – costs that
are incurred on a short-term basis and can be more easily modified in response to changes in
management objectives (e.g. advertising, research and development, and cost of employee training
programs)
Activity Total Fixed Cost Fixed Cost Per Unit
1 P 1,500
2 1,500
5 1,500
10 1,500
20 1,500
30 1,500

 Variable Costs – Items of cost which vary directly, in total, in relation to volume of production. If activity
increases by 20%, total variable cost increases by 20% also. Cost per unit remains constant as volume changes
within the relevant range (e.g. direct materials, direct labor, royalties, and commissions of salesmen.)
Activity Total Variable Cost Variable Cost Per Unit
1 P 100
10 1,000
20 2,000
30 3,000

 Mixed Costs – Items of cost with fixed and variable components. Mixed costs vary with the level of production,
though not in direct relation to it, probably because part of the cost is fixed while the rest is variable. Two types
of mixed cost exist:
o Semi-variable cost – The fixed portion usually represents a minimum fee for making a particular item
or service available. The variable portion is the cost charged for actually using the service (e.g. cost of
electricity, cell phone under a plan)
Example: Assume that a company rents a delivery truck at a flat rate of P20,000 per month plus
P1.50/km drive.
Kilometers(km) Driven Fixed Cost Variable Cost Total Cost
5,000
10,000
15,000
20,000

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 o Step Costs – the fixed part of step costs changes abruptly at various activity levels because these costs
are acquired in indivisible portions.
Example: Assume that one supervisor with a salary of P30,000 is needed for every 10 workers.
No. of Workers No. of Supervisors Total Cost
10
15
18
22
30

Exercise 5. Classify each of the following costs of Bug Company in two ways: as Variable (V) of Fixed (F) costs;
Inventoriable (I) or Period (P) costs:
V or F I or P
Example: Direct Labor V I
1. Wood used in bookcases
2. Machine depreciation based on machine hours
3. Fire insurance on factory equipment
4. Wiring used in radios
5. Indirect materials
6. Sales commissions
7. Bottles used to package liquid
8. Gasoline for delivery truck
9. Straight-line depreciation of trucks
10. Machine operator’s hourly wages

Exercise 6. Mighty Muffler, Inc. operates an automobile service facility, which specializes in replacing mufflers on cars.
The following table shows the costs incurred:
Number of Replacements
400 500 800
Total Costs:
Fixed Costs ? P 50,000 ?
Variable Costs ____?____ _ 60,000 ____?____
Total Costs ? P110,000 ?
Cost per muffler replacement:
Fixed cost ? ? ?
Variable cost ____?____ ____?____ ____?____
Total Cost per replacement ? ? ?

Exercise 7. Blanche Corporations estimated its unit costs of producing and selling 12,000 units per month as follows:
Direct Materials Used P 32.00 Variable Marketing Cost 3.00
Direct Labor 20.00 Fixed Marketing Cost 4.00
Variable Manufacturing Overhead 15.00 Estimated Unit Cost P 80.00
Fixed Manufacturing Overhead 6.00
Compute:
1. Total Variable costs per month 3. Total manufacturing cost
2. Variable cost per unit produced 4. Manufacturing cost per unit

Exercise 8. Given the following facts, complete the requirements below:

Sales Price P200 per unit
Fixed Costs:
Manufacturing Overhead P30,000 per period
Marketing and Administrative P24,000 per period
Variable Cots:
Direct Materials P60 per unit
Direct Labor P30 per unit
Manufacturing Overhead P9 per unit
Marketing and Administrative P6 per unit
Units produced and sold 1,200 per period
Compute for the following:
1. Variable manufacturing cost per unit
2. Variable cost per unit
3. Full manufacturing cost per unit
4. Full cost to make and sell per unit

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