Management

Accounting:

Classification of Costs
Part 1: Cruz, Eduard S

Nature of Cost
In managerial accounting, the
term cost may be used in
different ways because there
are many types of costs that
may be classified differently
according to the immediate
needs of management.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
Manufacturing costs
Direct materials
Direct labor
Factory overhead
Indirect materials
Indirect labor
Prime costs
Conversion costs
Nonmanufacturing costs
Marketing costs
General administrative costs
Common costs

Cost can be classified

into various categories
as
follows:
B. Costs Classified by Variability
Variable costs
Fixed costs
Semivariable costs
C. Cost Classified by Types of
Inventory
Raw materials inventory
Work in progress inventory
Finished good inventory

Cost can be classified

into various categories
as
follows:
D. Cost classification according to
Traceability to Cost Objective
Direct costs
Indirect costs
E. Costs classification according to
Managerial influence
Controllable costs
Noncontrollable costs

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
Manufacturing costs are
frequently classified as direct
materials, direct labor, and
factory overhead.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
1.1 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.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
1.2 Direct labor All labor costs
related to time spent on products
that can be conveniently and
economically assigned to specific
units manufactured.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
1.3 Factory Overhead Indirect
materials, indirect labor, property
taxes, insurance, supervisors
salaries, depreciation of factory
building and factory equipment and
power are examples of factory
overhead.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
1.3 Factory Overhead
1.3.1 Indirect Materials 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

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
1.3 Factory Overhead
1.3.2 Indirect labor Labor
cost that cannot be identified
or traced to specific units
manufactured.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
1. Manufacturing Cost
1.4 Prime costs Total direct
materials and direct labor costs.
1. 5 Conversion costs Total
direct labor and factory overhead
costs incurred to convert the direct
materials into the finished product.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
2. Nonmanufacturing costs
Include costs related to
selling and other activities
not related to the production
of goods.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
2. Nonmanufacturing costs
2.1 Marketing costs All
costs associated with
marketing or selling a product
or all costs incurred by the
marketing division

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
2. Nonmanufacturing costs
2.2 General Administrative
cost All organizational and
clerical costs associated with
the general management of
the organization.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
3. Common cost - Costs that benefit
two or more operations, products,
or services. The costs associated
with a group of products produced
simultaneously are common costs,
but they are generally referred to
as joint product costs.

Cost can be classified

into various categories
as follows:
A. Costs Classified by Nature
3. Common cost - Costs that benefit
two or more operations, products,
or services. The costs associated
with a group of products produced
simultaneously are common costs,
but they are generally referred to
as joint product costs.

Cost can be classified

into various categories
as follows:
B. Costs Classified by
Variability
1. Variable Costs Costs that
change directly in proportion
to changes in activity
(volume).

Cost can be classified

into various categories
as follows:
B. Costs Classified by
Variability
2. Fixed Costs Costs that
remain unchanged for a given
time period regardless of
change in activity (volume).

Cost can be classified

into various categories
as follows:
B. Costs Classified by
Variability
3. Semi variable Costs Costs
that contain both fixed and
variable elements. These cost
elements must be divided into
their proper elements.

Cost can be classified

into various categories
as follows:
C. Cost Classified by Types of
Inventory
1. Raw Material Inventory
The costs of all raw material and
production supplies that have
been purchased but not used at
the end of the period.

Cost can be classified

into various categories
as follows:
C. Cost Classified by Types
of Inventory
2. Work-in-process Inventory
The cost associated with
goods partially completed at
the end of the period.

Cost can be classified

into various categories
as follows:
C. Cost Classified by Types
of Inventory
3. Finished Goods Inventory
Cost of completed goods that
have not been sold at the end
of the period.

Cost can be classified

into various categories
as follows:
D. Cost classification
according to Traceability to
Cost Objective
1. Direct costs (traceable,
separable) Costs that can be
economically traced to a single
cost object

Cost can be classified

into various categories
as follows:
D. Cost classification
according to Traceability to
Cost Objective
2. Indirect costs Costs that
are not directly traceable to
the cost object

Cost can be classified

into various categories
as follows:
E. Costs classification
according to Managerial
influence
1. Controllable cost Cost that is
subject to significant influence by
a particular manager within the
time period under consideration.

Cost can be classified

into various categories
as follows:
E. Costs classification
according to Managerial
influence
2. Noncontrollable cost Cost
over which a given manager
does not have a significant
influence.

PART 2:
Manzano, Jade
F. Cost Classified According to Generally
Accounting Treatment
1. Product Costs
2. Period Costs
G. Cost Terminologies Used for Planning
and Control
1. Standard Costs
2. Budget Costs
3. Absorption Costing
4. Direct Costing
5. Information Costing
6. Ordering Costs
7. Out-of-pocket Costs

H. Cost classification according to a Time-frame

Perspective
1. Commited Costs
2. Discretionary Costs
I. Costs Classified according to Time Period for which
the Cost is incurred
1. Historical Costs
2. Future Costs

J. Costs Classification for other Analytical

Purposes
1.
2.
3.
4.
5.
6.

Relevant Costs
Incremental Costs
Sunk Costs
Opportunity Costs
Marginal Costs
Value-added costs

Cost can be classified

into various
categories as follows:

F. Cost Classified According

to Generally Accounting
Treatment
1. Product cost All costs that
attach or cling to the units
that are produced and are
reported as assets until the
goods are sold.

Cost can be classified

into various
categories as follows:

F. Cost Classified According to

Generally Accounting Treatment
2. Period Costs A cost that must be
charged against income in the period
incurred and cannot be inventoried.
Examples of period costs include
selling and administrative expenses.
Under direct costing, fixed factory
overhead is a period cost.

Cost can be classified

into various
categories as follows:

G. Cost Terminologies Used

for Planning and Control
1. Standard Costs A
predetermined cost estimate
that should be attained;
usually expressed in terms
costs per unit.

Cost can be classified

into various
categories as follows:

G. Cost Terminologies Used for

Planning and Control
2. Budgeted Cost Used to
represent the expected/planned cost
for a given period.
For example, a company plans to
manufacture 1,000 units of product
X, which has a standard cost per unit
of 4, would have budgeted cost for
the period of 4,000 for product X.

Cost can be classified

into various
categories as follows:

G. Cost Terminologies Used for

Planning and Control
3. Absorption Costing A costing
method that includes al
manufacturing costs direct
materials, direct labor, and both
variable and fixed manufacturing
overhead in the cost of a unit of
product. It is also referred to as
the full cost method.

Cost can be classified

into various
categories as follows:

G. Cost Terminologies Used

for Planning and Control
4. Direct Costing A type of
product costing where fixed
costs are charged against
revenue as incurred and are not
assigned to specific units of
product manufactured. Also
referred to as variable costing.

Cost can be classified

into various
categories as follows:

G. Cost Terminologies Used

for Planning and Control
5. Information Costs Costs
of obtaining information.
6. Ordering Costs Costs that
increase with the number of
orders placed for inventory.

Cost can be classified

into various
categories as follows:

G. Cost Terminologies Used

for Planning and Control
7. Out-of-pocket costs
Costs that must be met with a
current expenditure or cash
outlay.

Cost can be classified

into various
categories as follows:

H. Cost classification according

to a Time-frame Perspective
1. Committed cost Cost that is
inevitable consequence of a
previous commitment.
2. Discretionary cost
(programmed; manage cost)
Cost for which the size or the time
of incurrence is a matter of
choice.

Cost can be classified

into various
categories as follows:

I. Costs Classified according

to Time Period for which
the Cost is incurred
1. Historical Costs (past cost)
Costs that were incurred in a
past period.
2. Future costs Budgeted
costs that are expected to be
incurred in a future period.

Cost can be classified

into various
categories as follows:

J. Costs Classification for

other Analytical Purposes
1. Relevant costs - Future
costs that are different under
one decision alternative than
under another decision
alternative.

Cost can be classified

into various
categories as follows:

J. Costs Classification for other

Analytical Purposes
2. Incremental costs - The
difference in cost between two or
more alternatives. In evaluating
a given alternative, incremental
cost is the additional revenue to
determine the feasibility of this
particular alternative.

Cost can be classified

into various
categories as follows:

J. Costs Classification for other

Analytical Purposes
3. Sunk Cost Past cost that have
been incurred and are irrelevant to
a future decision.
4. Opportunity Cost The value
of the best alternative foregone as
the result of selecting a different
use of resource or by choosing a
particular strategy.

Cost can be classified

into various
categories as follows:

J. Costs Classification for

other Analytical Purposes
5. Marginal Costs Cost
associated with the next unit
or the next project or
incremental cost associated
with an additional project as
opposed to the next discrete
unit.

Cost can be classified

into various
categories as follows:

J. Costs Classification for other

Analytical Purposes
6. Value Added Costs Costs that
add value to the product. These costs
result from activities that are
necessary to satisfy the requirements
of the consumer. Effort should be
made to eliminate those costs that
do not add value to the product, such
as storage and materials handling.

Cost-VolumeProfit Analysis
Asi, Aiza

INTRODUCTION
The Cost Volume Profit Analysis or the breakeven
analysis is used to determine how much sales
volume your business needs to start making a profit.
The breakeven analysis is especially useful when
you're developing a pricing strategy, either as part
of a marketing plan or a business plan.
Ineconomics &business, specificallycost
accounting, thebreak-even point(BEP) is the
point at which cost or expenses and revenue are
equal: there is no net loss or gain.

Uses of Breakeven
Analysis
C-V-P analysis is an important tool in
terms of short-term planning and
decision making
It looks at the relationship between
costs, revenue, output levels and profit
Short run decisions where C-V-P is used
include choice of sales mix, pricing
policy etc.

Cost Volume Profit Analysis

In short:
A breakeven analysis is
used to determine how
much sales volume your
business needs to start
making a profit.

D
Decision making and Breakeven Analysis: Examples

How many units must be sold to breakeven?

How many units must be sold to achieve a
target profit?
Should a special order be accepted?
How will profits be affected if we introduce a
new product or service?

Key Terminology: Breakeven

Analysis

Break even point-the point at which a

company makes neither a profit or a loss.
Contribution per unit-the sales price
minus the variable cost per unit. It
measures the contribution made by each
item of output to the fixed costs and profit
of the organization.

Key Terminology

Margin of safety-a measure in which the

budgeted volume of sales is compared
with the volume of sales required to break
even
Marginal Cost cost of producing one
extra unit of output

Breakeven Formula

BEP
=

Fixed Costs
*Contribution
per unit

*Contribution per unit = Selling Price per unit Variable Cost per
unit

Breakeven Chart

SAFETY

MARGIN OF

Margin of safety represents the strength of the

business. It enables a business to know what is
the exact amount it has gained or lost and
whether they are over or below the break even
point.
Shows the amount by which sales can drop before
a loss will be incurred
margin of safety = (current output - breakeven
output) OR
Margin of safety = actual sales BEP sales
margin of safety % = (current output - breakeven

Break-Even Analysis
Costs/Revenue

TR (p = Php 3)

TR (p = Php 2)

TC
VC

Margin
80
0

Q3
(BEP2 @
Php3)

Q1
(BEP1 @

Q2
(Current
Output)

Margin of
safety shows
how far sales
can fall
before loss
would occur.
If Q1 = 1000
and Q2 =
1800, sales
could fall by
800 units
before a loss
would be
A higher
made

price
would
of Safety lower the
FC break
even point
and the
margin of
Output/Salessafety
would
widen

Example 1
Using the following data, calculate
the
breakeven point and margin of
safety in units:
Selling Price = $50
Variable Cost = $40
Fixed Cost = $70,000
Budgeted Sales = 7,500 units

Example 1: Solution
Selling Price = $50
Variable Cost = $40
Fixed Cost = $70,000
Actual Sales = 7,500 units

BEP (unit)
=

Fixed Costs
Contribution per unit

Contribution Margin = Selling Price per Unit- Variable

Cost per Unit

margin of safety = (current output - breakeven

output)
Contribution = $50 - $40 = $10 per unit
Breakeven point = $70,000/$10 = 7,000
units
Margin of safety = 7500 7000 = 500 units

Target Profits
What if a firm doesnt just want to
breakeven it requires a target profit
Contribution per unit will need to
cover profit as well as fixed costs
Required profit is treated as an
addition to Fixed Costs

Example 2
Using the following data, calculate
the level of
sales required to generate a profit
of $10,000:
Selling Price = $35
Variable Cost = $20
Fixed Costs = $50,000

Example 2: Solution
Contribution = $35 $20 = $15
Level of sales required to generate
profit of $10,000:
$50,000 + $10,000
$15
4000 units
Selling Price = $35
Variable Cost = $20
Fixed Costs = $50,000

LIMITATIONS
Break-even analysis is only a supply side
(costs only) analysis, as it tells you nothing
about what sales are actually likely to be for
the product at these various prices.
It assumes that fixed costs (FC) are constant
It assumes average variable costs are
constant per unit of output, at least in the
range of likely quantities of sales.

LIMITATIONS

It assumes that the quantity of goods

produced is equal to the quantity of
goods sold (i.e., there is no change in
the quantity of goods held in inventory
at the beginning of the period and the
quantity of goods held in inventory at
the end of the period.
In multi-product companies, it assumes
that the relative proportions of each
product sold and produced are
constant.

CONCLUSION
A company should determine its break even point
before selling its products.

In order to know how toprice your product, you

first have to know how to calculate breakeven
point.

Break-even analysis is a supply side analysis; that

is, it only analyzes the costs of the sales.
It does not analyze how demand may be affected
at different price levels.

Thank You!!!