COST – CONCEPTS AND

CLASSIFICATIONS
Cost – cash or cash equivalent value sacrificed
for goods and services that are expected to
bring a current or future benefit to the
organization.

Expenses – expired portion of cost.

Loss – cost that expires without producing any

revenue benefit.
CLASSIFICATIONS OF COST
I. Cost classified as to a relation to a product
A. Manufacturing costs/product
cost/inventoriable cost
1. Direct materials (DM)
2. Direct labor (DL)
3. Factory overhead (FOH)
B. Non-manufacturing costs/period cost
1. Marketing or selling expense
2. General or administrative expense
II. Cost classified as to variability
A. Variable costs
B. Fixed costs
C. Mixed costs
III. Cost classified as to a relation to
manufacturing departments
A. Direct departmental charges
B. Indirect departmental charges
IV. Cost classified to their nature as common
or joint
A. Common costs
B. Joint cost
V. Cost classified as to relation to an accounting
period
A. Capital expenditures
B. Revenue expenditures
VI. Costs for planning, control and analytical
process
A. Standard costs
B. Opportunity costs
C. Differential cost
D. Relevant cost
E. Out of pocket cost
F. Sunk cost
H. Controllable cost
DIRECT MATERIALS
- are the basic ingredients that are
transformed into finished products through
the use of labor and factory overhead in the
production process. Direct materials are
those that can be traced to the finished
product and they form part of the product.
Example, iron ore for steel, sheet steel for
automobiles, flour for bread, wood for
wooden table and chair.
DIRECT LABOR
- Represent the amount paid as wages to those
working directly on the product. Labor
services are, in essence, purchased from
employees working in the factory. In
addition, other types of labor are purchased
from people and organizations outside the
company.
 Prime Cost

Factory
Direct Materials Direct Labor
Overhead

Conversion Cost
FACTORY OVERHEAD
- Catchcall for manufacturing costs that cannot
be classified as direct materials or direct
labor costs. Factory overhead costs are a
varied collection of production-related costs
that cannot be practically or conveniently
traced directly to the end products.
NON-MANUFACTURING COST
Marketing or selling expenses – include all costs
necessary to secure customer orders and get
the finished product or service into the hands
of the customer. Examples, advertising,
shipping, sales travel, sales commissions,
sales salaries, and expenses associated with
finished goods warehouse.
Administrative or general expenses includes all
executive, organizational and clerical
expenses that cannot logically be included
under either production or marketing.
Example, executive compensation, general
accounting, secretarial, public relations, and
similar expenses having to do with the
overall, general administration of the
organization as a whole.
COST CLASSIFIED AS TO
VARIABILITY
 Fixedcost - items of expenses which remain
constant in total, irrespective of the volume
of production.

Fixed cost are classified into two categories:

 Committed fixed costs – costs that represent
relatively long term commitments on the
part of management as a result of a past
decision. Example – depreciation expense.
 Managed fixed costs – costs incurred on a
short-term basis and can be more easily
modified in response to changes in
management objectives. Examples –
advertising, research and development and
cost of training of employees.

 Variable costs – items of cost which vary

directly, in total, in relation to volume of
production

 Mixed costs – items of cost with fixed and

variable components
 Common cost –cost of facilities or services
employed in two or more accounting periods,
operations, commodities or services. Just
like indirect costs, these costs are subject to
allocation.
 Joint cost – cost of materials, labor and
overhead incurred in the manufacture of two
or more products at the same time. These
cost are also subject to allocations.
CAPITAL EXPENDITURE VS.
REVENUE EXPENDITURE
 Capital expenditure – expenditure intended
to benefit more than one accounting periods
and is recorded as an asset.
 Revenue expenditure – expenditure that will
benefit current period only and is recorded
as an expense.
DIRECT VS. INDIRECT
DEPARTMENTAL CHARGES
 Direct departmental charges – cost that are
immediately charged to the particular
manufacturing department/s that incurred
the cost since the costs can be conveniently
identified or associated with the
department/s that benefited from said costs
 Indirect departmental charges – cost that are
originally charged to some other
manufacturing department/s or account/s but
are later allocated or transferred to another
department/s indirectly benefited from said
costs
COSTS FOR PLANNING, CONTROL
AND ANALYTICAL PROCESSES
 Standard costs – predetermined costs for
direct materials, direct labor, and factory
overhead. They are established by using
information accumulated from past
experience and data secured from research
studies. In essence, a standard cost is a
budget for the production of one unit of
product or service. It is the cost chosen by
the managerial accountant to serve as the
benchmark in the budgetary control system.
 Opportunity cost – the benefit given up when
one alternative is chosen over another.
Opportunity costs are not usually recorded in
the accounting system.
 Differential cost – cost that is present under
one alternative but is absent in whole or in
part under another alternative.
 Relevant cost – a future cost that changes
across alternatives.
 Out of pocket cost – cost that requires the
payment of money (or other assets) as a
result of their incurrence
 Sunk cost – cost that has been spent and
cannot be recovered.
 Controllable cost – cost is considered to be a
controllable cost at a particular level of
management if that level has power to
authorized the cost.