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Unit I Cost Concepts and Classification: Learning Objectives
Unit I Cost Concepts and Classification: Learning Objectives
Learning objectives:
At the end of the unit, you should be able to:
1. Differentiate the different cost items with their respective classifications.
2. Separate the variable and fixed component of a mixed cost applying the high-low method.
COSTS (object, product, project or service) – represent the cash or cash equivalent of resources used
in acquiring the goods, manufacturing a product and performing a function.
- It also includes the cost of distributing the products or services to the ultimate consumers.
- The cash equivalent is used because non-cash assets can be exchanged for the desired goods
and services.
I. Product Cost
- Manufacturing costs which include the sum of the inputs or resources used in the
production conversion of raw materials into finished product.
- Otherwise referred to as inventoriable cost as the resources enter the Work in Process
account.
- They include costs of materials, labor and overhead.
The accumulated cost of materials, labor and overhead, called product costs, is later
reported in the Income Statement as expense under the classification costs of goods
sold, when the units are sold.
Note: A manufacturing company maintains three inventory accounts.
- Raw materials inventory, work in process and finished goods.
Product costs of completed units – reported in the Finished goods inventory account.
Product of units partially completed – work in process inventory.
Raw materials account – accumulates the cost of direct and indirect materials used in
production.
house for the workers and for construction materials, depreciation of equipment,
rentals and other expenses incurred in the construction site.
A service organization – product costs are classified either as direct or indirect
costs. Their inventory accounts are usually for supplies like office supplies for
accounting firms or law firms and medical supplies for hospitals and medical clinics.
The most significant portion of their costs is labor because the workers utilized
their own efforts in delivering the service.
Elements of Product costs : Manufacturing Company
1. Materials: Include the raw materials and other factory supplies used in the
manufacturing operation.
(b) Indirect materials - not directly included in or not a significant part of the product.
Operating, janitorial and factory supplies used in the factory such as nails,
screws, washers, glue, sand paper, lubricating oil, grease, cleaning materials
and other materials needed to maintain the working area and plant equipment
in a usable and safe condition.
2. Labor – compensation and benefits paid to those who physically work on the conversion of
raw materials into finished product and are easily traceable to specific process, job or job
order.
-represents the compensation and other benefits paid to the workers in the factory.
(a) Direct labor - include basic pay, cost of living allowance, 13th month pay and cash
equivalents of non-cash incentives given on a regular basis.
(b) Indirect labor – wages of personnel other than the direct laborers, which are
necessary to the manufacturing process or service but are not directly related to the
actual conversion of raw materials into finished product.
- Include supervisor’s fee, wages paid to other workers such as janitors,
inventory control clerks, guards, and other personnel in the factory,
employee benefits such as employer’s share in SSS, Philhealth and Pag –ibig,
vacation and holiday pay, health insurance of workers, overtime and night
premium, costs of housing and accommodation for stay-in workers.
a) Factory supplies - oil and other cleaning materials used in the factory.
b) Wages of supervisors, factory maintenance personnel, raw materials
handlers, and security officers stationed in the factory premises.
c) Depreciation of factory plant and equipment.
d) Insurance and property taxes on factory plant and equipment.
e) Maintenance and repairs on factory plant and equipment.
f) Power, light and water.
g) Telephone and mailing costs.
h) Costs of regulatory compliance such as meeting factory safety requirements
and disposal of waste materials.
Conversion costs – direct labor and factory overhead- used to convert raw
materials into finished goods.
II. Period Costs – operating expenses that are associated with time periods, rather than with the
production of goods and services.
- charged directly to the expense accounts on the assumption that their benefit is
recognized entirely in the period when the cost is incurred.
- they are non manufacturing costs and non inventoriable costs.
- include selling and marketing costs; distribution costs, administrative costs.
I. Before each account title, indicate FC for Factory cost; SE for Selling Expense; GE for general expense
or “X “ for other classifications: