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Chapter Two: Cost Terms, Concepts and Classifications
Chapter Two: Cost Terms, Concepts and Classifications
Chapter Two: Cost Terms, Concepts and Classifications
Cost
- Defined as the value foregone or sacrifice of resources for the purpose of achieving some
economic benefit which will promote the profit-making ability of the firm
- Incurred when a resource is used and services that assists in performing operations
A costing system accounts for costs in two basic steps, namely, cost accumulation and cost assignment.
- Cost are also classified differently depending on the type of organization involved, that is,
merchandising, service, or manufacturing
Cost Pools
Cost object
- Is any product, service, or organizational unit to which costs are assigned for some management
purpose
- Products and services are generally cost objects, while manufacturing departments are
considered either cost pools or cost objects, depending on whether management’s main focus is
on the costs of the products or for the production department
Cost Drivers
- Any factor that has the effect of changing the level of total cost
Examples of Cost Driver:
Cost Assignment
- Process of assigning costs to cost pools or from cost pools to cost objects
Cost Allocation
- The assignment of indirect costs to cost pools. Allocation bases are cost drivers used to allocate
costs
Cost Accumulation
- Involved the collection of cost data in some organized way by means of accounting system
CLASSIFICATION OF COSTS
Manufacturing Costs
Direct Materials
- All raw material costs that become an integral part of the finished product and that can be
conveniently and economically assigned to specific units manufactured
- Direct materials are cost that can directly be related to the end product
- It includes invoice price plus other costs paid to the vendor, shipping costs, sales taxes, duty,
cost of delivery containers and pallets and royalty payment based on direct material quantities.
- Trade and cash discounts reduce direct materials cost
- Routine quality assurance samples that are destroyed are classified as material
Direct labors
- All labor costs related to time spent on products that can be conveniently and economically
assigned to specific units manufactured.
Manufacturing Overhead
- Includes all costs of manufacturing except direct materials and direct labor
Indirect Materials
- Include materials and supplies used in the manufacturing operation that do not become part of
the product, such as oil for the machinery and cleaning fluids for the custodian
Indirect Labor
- Direct materials and direct labor are often referred to as PRIME COST
- Direct labor and manufacturing overhead are often called CONVERSION COSTS since they are
the costs of “converting or transforming” raw materials into finished products
- Marketing costs
- General and Administrative costs
Variable Cost
- Costs that remain unchanged for a given time period, regardless of change in activity (volume).
E. Cost classified by Types of Inventory
1. Raw Materials Inventory
- Purchased but not used
2. Work-in-process Inventory
- Partially completed
3. Finished goods inventory
- Completed goods that have not been sold
4. Merchandise inventory
- Purchased merchandise by retailers/ wholesales that have not been sold