II.

Cost [concepts and classification]

Cost
- It is the cash or cash equivalent sacrificed for goods and services expected to bring a current or future benefit to the
organization.
Expenses
- Expired cost.

Classification of cost
I. Cost classified according to relation of product
A. Manufacturing cost
1. Direct Materials
- Materials that can be traced to the finished product.
2. Direct Labor
- Amount paid to as wages to those working directly on the product.
3. Factory overhead
- Cannot be classified as direct materials or direct labor cost.

Prime Cost = DM + DL
Conversion Cost = DL + FOH
Total Manufacturing Cost = DM + DL + FOH

B. Non- manufacturing Cost

1. Marketing or selling expense
- All cost necessary to secure customers’ orders and get the finished product or service into the hands of the customer.
2. Administrative expense
- All executive, organizational, and clerical expense that cannot logically be included under either production or
marketing.

II. Cost according to variability [see table strat]

1. Fixed Cost
- Remains constant in total, irrespective of the volume of the production.
a. Committed fixed cost- represent long term commitments.
Ex: depreciation on equipment
b. Managed fixed cost- incurred on short term basis.
Ex: advertising, R and D
2. Variable Cost
- Cost per unit remains constant even though there is a change in activity.
Ex: DM, DL, royalties, and commission of salesmen
3. Mixed Cost
- Involves component of fixed and variable.

Semi- variable cost

- The fixed portion usually represents a minimum fee for making a particular item or service available. The variable
portion is the cost charged for actually using the service.
Ex: cost of electricity: minimum charge is fixed while specified cost per kilowatt hour is variable
Step Cost
- Fixed part of step cost changes abruptly at various activity levels because these costs are required in indivisible
portions.
Ex: supervisor salary, addt’l supervisor might be needed if there are more workers as supervisors usually are assigned to
a fixed amount of workers.

Methods used in separating mixed cost

1. Scatted graph method
2. High-low point
(Highest cost – lowest cost) /(Highest activity – Lowest activity) = variable cost per unit
(Highest/Lowest cost) – (Variable cost per unit x highest/lowest activity) = fixed cost
Variable cost per unit x total output= total variable cost
3. Method of lease square
Σy = na + bΣx
Σxy = Σxa +bΣx’2

Y= a+bx

Common vs joint cost

Common cost
- Cost of facilities or services employed in two or more accounting periods.
Joint cost
- Cost of material, labor, and overhead incurred in the manufacture of two or more products at the same time.

Capital expenditure vs. Revenue expenditure

Capital expenditure
- Expenses intended to benefit more than one accounting period and recorded as an asset.
Revenue expenditure
- Expenses that will benefit in the current period only and are recorded as expense.

Direct vs. Indirect departmental changes

Direct departmental changes
- Immediately charge to a particular manufacturing department.
Indirect departmental changes
- Originally charged to manufacturing department but later allocated or transferred to other department.

Standard Cost
- Predetermined cost for DM, DL, and FOH.
Opportunity Cost
- Benefit given up when one alternative is chosen over another.
Differential Cost
- Cost that present under one alternative but is absent in whole or in part under another alternative.
- Increase in one alternative is called incremental cost, while decrease is called decremental cost.
- Can either be fixed or variable cost.

Relevant cost
- Future cost that changes across alternatives.
Out–of-pocket cost
- Cost that require payment of money
Sunk Cost
- Cost which an outlay has already been made and it cannot be changed by present of future decision.
Controllable Cost
- Management has the power to authorize the cost.
Non-controllable cost
- Management has no the power to authorize the cost.