Chapter 3 Costs Concepts, Classification and Segregation 50

. en
4.1 An intelligent way to understand costs .is to classify them according to
their usefulness and one's perspectives. ·
4.2 In relation to one's perspectives. our classification will be according to 3:
accountant's perspective, manager's perspective, entrepreneur's!:!:!
perspective, and economist's perspective. (ii
a::
4.3 Accountant's perspective

Product costs vs. Product costs are those incurred in Direct mat eri~ls, direct labor,
Period costs the production plant to variable overhead, and fixed
manufacture a product. overhead
----· - -··- - - - - - -
· Period costs are those incurred in Administra tive expenses,
all segments of an organization marketing expenses, and
. except those incurred in the. . distributio n expenses
production plant.
Direct product Direct product costs are those that · Direct mat erials and direct labor
costs vs. Indirect .can' be .directly traceable to a
product costs product either in its physical
existence or in the process in which
it is being made.
Indirect product costs are those Factory overhead, both variable .
incurred in the production process overhead and fixed overhead
however cannot be directly traced
to the product being-:produced, ,
either in its physical existence or in
th~·process in which it is being
made.
~----· /
·· - ····-·--·--- - - - - - '

· 4 .4 . - Manaoer's oersoective (ie,': short-term decisions) ·----- -- •- -·•- ·•·---------. <i

Direct Direct departmental costs are Personnel sala rie~, supplies, .
departmental those that are directly traceable in depreciation, rent,
.
in•erest, and
f
a particular department. other direct e xpenses. ___ _ _ _- t
costs vs. Indirect
departmental Indirect department costs are Allocated cost s from other
costs those that are not directly departments, salary of a plant .
traceable in a particular executive with respect to different
-department. departments in the plant,
electricity cost s where there Is n~
.,. identified ele c:1:ric meter per
department, etc.
Common costs Common costs are those expenses Salaries, depreciation~ supplies,
vs. Joint costs which are incurred in practically all and electricity.

- -
departments in an enterprise. ·- ·--··-- ·-· -- ·-·--···-· -·-·- - - - - '
 51 Costs Concepts, Classification and Segregation Chapter 3

rn Joint costs {or joint produ~t costs) Materials, labor, and overhead
....
w are those incurred in processing that are incurred in a joint
0 two or more products and cannot . manufacturing process.
z be directly traced to the units
w being produced, and therefore .
should be allocated among the
0: units produced.
Controllable costs Controllable costs.are those which Say in the point of view of a
vs. incuFrence or non-incurrence department manager, controllable
Noncontrollable depends. on the decision, influence costs include salaries of
costs or control of a specific manager. supervisors, supplies, electricity,
and similar costs that are
controllable by the said
department manager.
Noncontrollable co,sts are those Examples are those directly
which incurrence or non- incurred in the department ·
incurrence is not based on without the control of the
decisions, influence or control of a manager a'nd also those allocated
..
specific manager. costs received from other
depcirtments.
Note; The controllability of a cost
depends·•
'
on
.. ' the powers or
.

authority assigned to.a manager.

Avoidable costs Avoidable costs are ~hose which . Say, in a decision to either rent or
vs. Unavoidable , incurrence can be dispensed of if construct a buiiding and the
costs another alternative is chosen. manager decides to construct the
building, the avoidable cost is the
rental expense. If the manager
decided to ren.t the building~ the
. avoidable cost would be the cost
. of the money used in the
construction (ie, interest expense,
ass~ming-the construction money
•. ,is borrowed) . -
Unavoidable costs are those that Say, .in a decision to either rent or
· are still to be incurred regardless ~onstruct,a building and the
of the decision to be made. manager decides to .construct the •
"' building, the personnel salary,
.. · which would stlll be paid
regardless of renting or
I
i constructing its own building,
would be an unavoidable cost.
-
Chapter 3 ·Costs Concepts, Classification and Seg~egation 52

\
·----··------,---------------.------- •---- -- ....·•··----··- - - · -
Many unavoidable costs are v,
-
allocated costs. ~ ·
1---------+----~-------.,___;-+------··-·--·
Budgeted costs
..... - ·-. ·. ·····--·
· Budgeted costs.-are those that -,a-re · Say, the budgeted c~pacity is
- z 0
vs. Standard costs estimated ba~e·c1 oh planned 20,000 units and the·standard unit · 3,:
·capacity. _ , - · . cost is· P40, th~ budgeted costs, W
,.....__ _ _ _ _ _ _ _ ·· --~-+-_w_o...;.u_ld_b_e_,P_8.00,000.____________
· · Standard costs are those that are ·_ Say, the budgeted capacity is 0::
estimated based on actual . 20,opq unit( the standard unit .
capacity. Standard costs are also , cost is P40, and the actual c'apacity
known as flexible budgets. is 21,000; The staridar:d .costs ·
_y.,ould be P8~0,000 (ie, 21_;000 x
- Relevant
·- ------i----------...;._--+---'------·-------·--~--1
costs vs. Relevant costs are those that _
are
P40).
In the decision to ref"!tOr construct
Irrelevant co.~ts _used in making a decision. ..
a building, the rental expense is
relevant be.cause it varies from
Relevant-costs have two both alternatives, ie, rent or
attri_
butes; namely, differential ·· · construct and it is a future cost.
costs-anq future costs. ,. Howev.er, the salary of the
. manager which is expected to
.remain the ·sanie regarpless o·f the
alternative chosen would be
irrelevant in this decision
situation.
l--------------,------'--1-------:--·-··---·--··---1
lrrelevi[!nt costs are those that a're Unavoidable costs, aUocated costs, ·
.. not used.in making a decisio.n. and past costs or sunk costs ·are
examples.of irrelevant costs.
A cost may be relevant in one
decision ,but may be i"elevantin
(
uno~her decision
l - - - - - . ; _ __ _4--=::..:...;...:....:..:....:;::__.;...;,_;_ situation.
_ _...___ _ _ _ _- t - - - - : - - - - - - - · - - - - t
· Planned costs vs. · , . Planned costs are thos~ that.are· Budgeted costs, standard costs,
Actual costs · estimated to be incurred in.the projected costs, and estimated
future g·iven a particular level of costs. ·
,
.Actual .costs are those incurred in Salaries·, depreciation, utilities, and
a given period of activity. other costs i.ncurred in
undertaking an activity
1-S_u_n_k_co_s_ts_v_s_
. _ _,__S_u_n_k_c-os_t_s_a_re.:..p....,.a-s-t,-h-ist-
- -o-ri-ca-1,-.--+....:0::..:.e.;..:p.;..:r__
ec-i-at-io-=n'""e-K-pe-n-se-
_,:....a~ll'o_ca_t_e-=-d-7 \.

Future cpst$ incurred, a.nd irrelevant costs. costs, joint costs

Future cos.ts are estimated, predicted, Any cost that relates to a future
planned, budgeted, or applied costs. transaction or happening.
Future costs are not always relevant.
:.:;;...;.;...:;_i_.:....,;_;:=.::.;.;:~_,_---'--....--.---------.....J
 53 Costs Concepts, Classification and Segregation Lnapter J

(/)
~4.5 Proprietor's perspective
0
z Out-of-pocket Out-of-pocket costs are those paid ' Salaries, rent, insurance,
electricity, water,
7
costs vs. Non-=---- in cash.
>
w
cash costs
Noncash costs are those not paid
communications, and supplies
Depreciation, bad debts expense, -
0:::
in cash. loss on obsolete inventory, and
impairment loss

4.o Economist's perspective

'
Opportunity costs Opportul"!ity costs are benefits Say, a company i~ evaluating
. vs. Imputed ~osts . sacrificed in favor of the whether to sell product A and earn
alternative chosen ,O pportunity Pl00,000 or sell product B and
costs are theoretical costs. earn P120,000.

In all decisions made, there is If the company decides to sell

..
always an opportunity cost.
Imputed .costs are those that have
been .avoided because the
company had chosen a different
alternative. This cost Is also
theoretical, not incurred, and is
implied as a cost of the decision
made.
lncrel'llental incremental costs are those that
tosts, · increase In total from one activity
decremental level to another.
costs, and
'
m~rginal costs Oecre,mental costs are those that
· decrease In total from one activity
product A, its opportunity cost is
P120,000 because it is the
potential profit that have been
lost or sacrificed for not selling
product B instead. And if the
compa!ly decides to sell product B,
its opportunity tost is Pl00,000.
Say, a company is contemplating
to construct a building worth PlOO
million. If it finances the
construction from borrowings, it
would pay a cost of 10% or,PlO
million. The company decided to
use its savings in constructing the
building and had avoided the. ·
interest cost in the process.
However, such interest cost is
imputed o~ lm'plied in the cost of
constructing the building.
. Direct materials, direct labor,
varia_ble overhead, variable
marketing expenses, variable
administrative expenses, and fixed
costs and expenses' that change,
either ii:,creas_e P! ~~~_!'_e~
Chapter 3 Costs Concepts, Class_ification and Segregation 54

~-------"""-T-----------------,----'--------------,
level to another.
Marginal costs refer to the
increase in cost per unit from one
activity level to another.
Variable costs vs. Variable costs are thosG that
Fixed_costs ch~nge in total in direct -
proportion to the change in the
quantity levelL but remain
constant per un_it.
. _marketing expenses (eg, packaging
These c9sts do not change in
relation to changes in unit sales
price.
Fixed costs are those that do not
cnange in total, budget-wise,
regardless of the change in the ·
quantity level, but inversely
·change .per unit with_·respect t~
the change in theleve_ l. of quantity.
Fixed costs may, be grouped as
committed fixed.c.osts :or .-
discretlonary;fixed _costs.
Committed fixe9 cpsts are those:
which incurrence d~pends on
contract, agreement, laws or
dec_rees, past-actions, _and
'business necessity . . Discretionary
fixed costs c1re those which
incurrence has been budgeted. but .
the actual incurrence may ' ·
·influenced by th,e di_ scretion of a
particular manager.
.one .activity level to another; f3
Unit direct materials, unit clirect ._
labor, and other Ul]it variable costs
and.expenses 3:
Direct materials, direct labor, W
variable overhead (eg, indirect
materials, indirect"labor,: facto·ry
supplies~repairs, set-up costs~ and
change order costs),_variable
supplies, salesmen's commissions,
and delivery expenses), and
variable administrative expenses
(eg, general supplies, overtime
costs and communications·
expenses)
Examples of committed fixed costs
are rent, in'su~ance, executive - ·
salaries, depreciation, and real
I
property taxes. ·
. Examples of discretionary fixed .
costs are advertising, research and
development, and executive
training.

The fixed costs referred to in this

review are the ·committed fixed ·
costs, unless specified otherwise.