Chapter 2:Cost Terms, Concepts, and Classifications

General Discussion General Cost Classification Product Costs Vs. Period Costs Cost Classifications on Financial Statements Cost Classifications for Predicting Cost Behavior Cost Classifications for Assigning Costs to Cost Objects Cost Classifications for Decision Making

General Discussion
Management focuses on planning and control. To carry out this responsibility management needs info. These info. Often relates to the COSTS of the organization. In management accounting;
The term cost is used in many different ways There are many types of costs These costs are classified differently

General Cost Classification

Costs

Manufacturing Costs/Product costs

Non-manufacturing Costs/Period Costs

Direct Direct Material Labor

Manufacturing Overhead

Marketing or Selling Costs

Administrative Costs

Prime Cost Conversion Cost

Product Costs Vs. Period Costs

Product Costs:
Product Costs are costs that are involved in acquiring or making a product. Hence all manufacturing costs are product costs.

Period Costs:
Costs which are not included into product costs. Hence all non-manufacturing costs i.e. selling and administrative costs are period costs.

Cost Classifications on Financial Statements

The Balance Sheet
Inventory (Ending)

The Income Statement

Cost of Goods Sold

Cost Classifications for Predicting Cost Behavior

Variable Costs:
VC is the cost that varies, in total, in direct proportion to changes in the level of activity.

Fixed Costs:
FC is the cost that remains constant, in total, regardless of changes in the level of activity to a relevant range.

Examples of activity/cost driver

Units produced, units sold, miles driven, beds occupied, hours worked

Examples
Machine rental, factory insurance,

Cost Classifications for Assigning Costs to Cost Objects

Direct Costs:
A direct cost is a cost that can be easily and conveniently traced to the particular cost object.

Indirect Costs:
An indirect cost is a cost that can not be easily and conveniently traced to the particular cost object.

Cost Classifications for Decision Making

Differential Cost: A difference in costs between
any two alternatives is known as differential cost.

Opportunity Cost: Opportunity cost is the

potential benefit that is given up when one alternative is selected over another.

Sunk Cost: A sunk cost is a cost that has already

been incurred and that can not be changed by any decision made now or in future.