Charlene Y.
Sanchez
ABM 12 - A
B. Cost classified according to the timing of
recognition as expense
 Product Cost - cost of sales, only when sold.
All manufacturing costs (direct materials,
direct labor, and factory overhead.)
 Period Cost - selling expenses and
administrative expenses
C. Cost classification on financial Statements
 Raw materials
 Merchandise Inventories
- Raw materials
- Goods and Process
- Finished goods
Example: When a manufacturer decides to
make a product, it must order the basis stock
needed to build the product. This stock could be
bars of steel, sheets of metal, or blanks of
plastic—anything in its raw form. The stock is
classified as raw materials inventory. These raw
materials are machined and put through the
assembly process. This process could take days
or weeks. In the meantime, these goods are
transferred from the raw materials account into
the work in process inventory account. After the
goods have made it through the entire assembly
line and are completely ready for sale, they are
transferred out of the work in process account
to the finished goods inventory account.
D. Cost classification for predicting cost
behavior
 Variable Cost - Examples include direct
materials, direct labor, and sales
commission based on sales.
 Fixed Cost - include rent, insurance, and
depreciation using the straight line method.
 Semi variable Cost – include repairs,
monthly telephone charges, indirect
materials, indirect labor, fuel and power.
Telephone charges, for example, are made
up of a service charge plus extra charges for
extra telephones and long-distance calls.
E. Cost classified by types of inventory
 Raw materials
 Goods and Process
 Finished goods
Example: When a manufacturer decides to
make a product, it must order the basis stock
needed to build the product. This stock could be
bars of steel, sheets of metal, or blanks of
plastic—anything in its raw form. The stock is
classified as raw materials inventory. These raw
materials are machined and put through the
assembly process. This process could take days
or weeks. In the meantime, these goods are
transferred from the raw materials account into
the work in process inventory account. After the
goods have made it through the entire assembly
line and are completely ready for sale, they are
transferred out of the work in process account
to the finished goods inventory account.
F. Cost classification according to traceability to
cost objectives
 Direct Cost - Examples include materials and
direct labor. Some operating expenses can
also be classified as direct costs, such as
advertising cost for a particular product.
- Traceable - a company may incur
the cost of building insurance for its
production facility
- Separable - Examples of separable
costs includes; cost incurred during
manufacturing, transporting and
 distributing the products, and also that the company incurred in that month
marketing of the products was $98,000. Therefore, Higgins
 Indirect Cost – Examples include factory experienced $8,000 of under absorbed
overhead and operating costs that benefit overhead. In February, Higgins produced
more than one product, department, or 60,000 widgets, so it allocated $120,000 of
branch. overhead. The actual amount of
manufacturing overhead that the company
G. Cost Classification according to managerial incurred in that month was $109,000.
influence Therefore, Higgins experienced $11,000 of
 Controllable Cost – advertising, bonuses, over absorbed overhead.
direct materials, donations, dues and  Direct Costing - The costs actually
subscriptions, employee compensation, consumed when you manufacture a
office supplies, training. product; The incremental increase in costs
 Non Controllable Cost - include an when you ramp up production; The costs
employee's rate of pay that they cannot that disappear when you shut down a
change themselves or the rent that a production line; The costs that disappear
landlord charges for use of the company's when you shut down an entire subsidiary
premises.  Information Cost - purchase price of
information, cost of locating information,
H. Cost terminologies used for planning and time and expertise to analyze information,
control costs of physical travel that may be required
to obtain certain types of information
 Standard Cost - as past experiences,
 Ordering Cost - Cost to prepare a purchase
budgeted amounts, industry standards, etc.
requisition, cost to prepare a purchase
 Budgeted cost - For example, management
order, cost of the labor required to inspect
might think that demand might increase 10
goods when they are received
percent next year, so they take the current
 Out of pocket Cost - purchase of gasoline,
sales figure and add 10 percent in the
parking, and tolls while engaged in
budget. Next management must figure out
company business.
what expenses are associated with
producing this amount of product. These
estimated expenses are considered
budgeted costs.
 Absorption Costing - For example, Higgins
Corporation budgets for a monthly
manufacturing overhead cost of $100,000,
which it plans to apply to its planned
monthly production volume of 50,000
widgets at the rate of $2 per widget. In
January, Higgins only produced 45,000
widgets, so it allocated just $90,000. The
actual amount of manufacturing overhead