Cost Accounting Journal

Submitted to

Hedda Dale T. Gutierrez, MBA PH

Daniel T. Saracin, B-School Dean
Hilario G. Tan, CPA, MBA, Accountancy Dean

------------------------------------------------------------------

In partial fulfillment of the requirements in

Master of Business Administration
(ACC 190-C)

By

SEMBLANTE, MARY ROSE A.

On

September 17, 2021

 In today’s session, I learned the different cost classifications and how they are useful for making
decisions. Classifications may vary according to the needs of management. It may enable management
to predict future costs, to compare actual costs to budgeted costs, to assign costs to segments of the
business and to properly contrast the costs associated with competing alternatives.

These costs include: direct and indirect cost (assigning costs to cost object); manufacturing costs
(direct materials, direct labor, manufacturing overhead); non-manufacturing costs (selling costs,
administrative costs); product and period cost (in preparing financial statements); variable cost, fixed
cost and mixed cost (in predicting cost behavior); differential cost, sunk cost, opportunity cost (in making
decisions).

In assigning costs to cost object, costs are classified as direct or indirect. Direct cost is a cost
which can be easily traced to a specific product or cost object. Indirect cost is a cost that cannot be
readily assignable to a cost object.

In manufacturing companies, cost is classified as direct materials, direct labor and

manufacturing overhead. Direct materials refer to raw materials that become an integral part of the
finished product and whose costs can be easily traced to the finished product. Direct labor are factory
labor costs which can be easily traced to an individual unit of product. Manufacturing overhead includes
all manufacturing costs except direct materials and direct labor.

Nonmanufacturing costs includes selling cost and administrative cost. Selling costs includes all
costs associated with securing customer orders, such as advertising, packaging, shipping, commissions,
etc. Administrative costs include all cost associated with the overall management of a business or
organization.

In preparing financial statements for external reporting, costs are classified as product or period
cost. Product cost is a cost incurred in creating a product. These costs include direct material, direct
labor and factory overhead. Period cost are costs not included in the product cost. This includes
depreciation, indirect labor, etc. They are expensed as incurred.

In predicting cost behavior and how cost will react to changes in activity, cost is classified as
variable cost, fixed cost and mixed cost. Variable cost is a cost which changes in accordance to sales and
product volume. They rise as production increases and fall as production decreases. Fixed cost is
constant regardless of the level of activity, whether the company produces or sell more or less, this cost
classification remains constant. Mixed cost is a combination of variable and fixed cost.

For purposes of making decisions, cost is classified as differential cost, sunk cost and opportunity
cost. Differential cost are costs which differ between alternatives. Sunk cost are always irrelevant cost
which are not useful in making decisions, therefore they are ignored. Opportunity cost is the benefit
forgone when one alternative is selected over the other.

There are different cost classifications for different purposes, but what is important in here is we
should be able to correctly classify them so that we can apply them accordingly and come up with a
sound decision and provide them to management.