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.