COST ACCOUNTING & Cost Terms,

Concepts &
CONTROL Classification
 COST TERMS, CONCEPTS &
CLASSIFICATION

Definition: Cost Classification

•Cost •Nature or Management Functions
•Cost Pools •Timing of Recognition
•Cost Object •Financial Statement
•Cost Drivers •Cost Behaviors
•Cost Accumulation •Types of Inventories
•Cost Assignment •Traceability to Cost Objective
•Managerial Influence
•Used for Planning & Control
•Time Frame Perspective
•Time Period
•Decision-making
 DEFINITION

Cost
Foregone or sacrifice
of resources

Cost
Cost Pools
Accumulation
Collection of cost Collection of Cost data
object along with its by means of
cost driver accounting System

Cost Object Cost Drivers Cost Cost

Product, service or
organizational unit
which cost are
assigned
Assignment Allocation
Factor that affects Assignment of indirect
Assigning cost to cost cost based on cost
level of total costs pool or object
drivers
 COST OBJECTS

Cost Examp
Object le
s Program Athletic Program of a university

Department Department in DENR tat studies air emissions

Activity Test to determine the quality level of television set

Brand
All soft drinks sold by Pepsi-cola w/ Pepsi in their name
Category

Customer All products purchased by the grocery from Purefoods inc.

Project Special sports car sold by Toyota Motors

Service Airline flight from NAIA to Hong Kong

Product Motorcycle
 COST DRIVERS

Business Function Cost Driver

Research & Development Number of research projects
Manpower hours on a project
Technical Difficulties of Projects
Product Design Number of products in design
Number of parts per product
Number of engineering hours
Production Number of units produced
Direct manufacturing labor costs
Number of setups
Number of engineering change orders
Marketing Number of advertisements run
Number of sales personnel
Peso sales
Distribution Number of items distributed
Number of customers Customer service
Weight of items distributed
Customer Service Number of service calls
Number of products serviced
Hours spent servicing products
COST ACCUMULATION, ASSIGNMENT,
ALLOCATION
Cost Accumulation Methods

•Job Order System

•Process Costing System
•Hybrid Costing System

Cost Assignment

•Cost driver rate x volume of cost driver consumed

Cost Allocation

•Direct method
•Step-down approach
•Reciprocal method
CLASSIFICATION OF
COSTS
BY NATURE OR MANAGEMENT FUNCTIONS

Manufacturing costs – all cost

associated with production of gods
Direct Direct Labor Manufacturing Indirect Indirect labor Other
Materials •Labor cost Overhead Materials •Labor that cannot Manufacturing
•Raw materials assigned to units •All cost of •Materials that do be identified or Overhead
manufactured manufacturing not become part traced to specific
•Includes invoice •Includes overtime
except dm & dl of the product, or units
price plus other premiums and
not traceable to manufactured
cost attributable •Includes indirect cost of idle time
to delivery of materials & product
products labor, property
•Less the refunds taxes, insurance,
and trade supervisor’s
discounts salaries,
depreciation of
factory building
and equipment,
& power
BY NATURE OR MANAGEMENT FUNCTIONS

Non manufacturing costs – activities

not related to the production of goods
Marketing Cost General &
•Includes all cost associatedAdministrative costs
with selling the product •Includes executive
•Examples: advertising, functions, organizational
shipping, sales, and and costs associated with
storage costs the general management
 MANUFACTURING COSTS IN SERVICE
INDUSTRY

Service industries: hotel, schools,

repair shops, accounting firms
Direct Direct labor: Overhead
materials: •Wages paid to costs:
•materials used to the service crew •Depreciation of
complete certain equipment and
services availed other tools used,
and rental
expenses
BY TIMING OF RECOGNITION AS EXPENSE

Product Cost Period Cost

•Consists of all cost involved in
making a product
•Inventoriable cost attached to
product until goods are sold, or
expensed with
•All costs identified with accounting
periods and not recorded as product
cost
•These are expensed in the income
statement in the period they are
incurred
 BY COST BEHAVIOR

Variable • Cost change in proportion to change in activity volume

Cost • i.e. Direct labor, direct materials

• Change for time period regardless to change in activity

Fixed volume
Cost • i.e. Manufacturing over head, rentals, depreciation

Mixed • Contain both fixed and variable elements.

Cost • i.e. social taxes, materials handing, power
BY T YPES OF INVENTORY

Merchandise Raw Materials

Inventory Inventory
•Purchased
•Materials
merchandise by
purchased but not
retailers not yet
yet used
sold

Finished Good Work-in-process

Inventory Inventory
•Goods partially
•Completed goods
completed at end
that have not been
of accounting
sold
period
BY TRACEABILIT Y TO COST OBJECT

Direct costs Indirect costs

•Can be •Not easily traceable
economically traced to cost object
to single cost object
ACCORDING TO MANAGERIAL INFLUENCE

Controllable Non-controllable
• Subject to • Cost over which a
significant given manager
influence by a does not have
particular significant
management influence
 USED FOR PLANNING & CONTROL
Standard costs
•Predetermined cost that
should be attained
•Usually expressed in cost
per unit
Direct costing
•Costing where fixed costs
are charged against
revenue and not assigned
to specific unit of product
•Variable costing
Budgeted costs
•Represent the expected
cost for a given period
•Total of standard cost and
budgeted volume
Information costs
•Cost to obtain information
Out-of-pocket costs
•Costs that must be met
with current expenditure
Absorption costing
•Costing method that
includes all manufacturing
costs in the unit cost of
product
•Full cost method
Ordering costs
•Cost that increase with
number of orders placed
for inventory
 ACCORDING TO TIMEFRAME
PERSPECTIVE

Discretionary
• Inevitable cost
consequence • Incurrence is
of previous a matter of
commitment choice
Committed
cost
ACCORDING TO TIME PERIOD FOR WHICH
COST IS INCURRED

Historical cost
• Incurred in past Future cost
period • Expected to be
incurred
DECISION MAKING & OTHER ANALY TICAL
PROCEDURES

Relevant costs Incremental cost Sunk costs

•Future costs that are •Difference in cost •Past costs that have
difference based on between alternatives been incurred and
alternative decisions irrelevant to decision
making

Opportunity costs Marginal costs Value-added costs

•Value of best •Incremental cost •Cost that add value to
alternative foregone as associated with an the product
result of choosing a additional project
particular strategy
 CLASSIFICATION ON FINANCIAL
STATEMENT

Statement of
Statement of
financial
financial position
performance
•Merchandise •Cost of good sold
inventory
•Raw materials
•Work in process
•Finished goods
 COST OF GOODS SOLD

Merchandising company Manufacturing company

Amount Amount
Beginning merchandise XX Beginning finished goods XX
inventory inventory
Add: Purchases XX Add: cost of goods XX
Total goods available for sale XX manufactured

Less: Ending merchandise (XX) Total goods available for sale XX

inventory Less: Ending finished goods (XX)
Cost of goods sold XX inventory
Cost of goods sold XX
 COST OF GOODS MANUFACTURED

Direct materials
Beginning Balance XX
Add: Purchases XX
Total dm available XX
Less: Ending balance (XX)
Direct materials issued XX
Direct Labor XX
Manufacturing overhead XX
Total Manufacturing cost XX
Add: Beginning balance work in process XX
Less: Ending balance work in process (XX)
Cost of goods manufactured XX
STATEMENTS IN MERCHANDISING
COMPANY
STATEMENTS IN MERCHANDISING
COMPANY
STATEMENTS IN MANUFACTURING
COMPANY
STATEMENTS IN MANUFACTURING
COMPANY
STATEMENTS IN MANUFACTURING
COMPANY
STATEMENTS OF A SERVICE COMPANY