Cost concept

Objectives:

At the end of the lesson, the students should be able to:

1. Differentiate product cost from period costs.

2. Enumerate and explain the components of product costs.
3. Differentiate direct cost and indirect costs.
4. Explain the different kinds of cost according to their behavior
5. Define other cost terminologies.

Slide 1

As to classification in the FS:

 Product Cost
- Material
- Labor
- Overhead
 Period Cost

Slide 2

As to behavior:

 Variable Cost
 Fixed Cost
 Mixed Cost
 Step Cost

Slide 3

Other terminologies:

 Opportunity cost
 Sunk cost
 Committed cost
 Discretionary cost
 Controllable cost
 Non-Controllable cost
 Slide 1

Cost – reflects the amount of resources sacrificed for the company to achieve a certain objective
such as creation of goods or rendering of services to earn revenues.

Slide 2

Product Cost – are costs identified and incurred by an entity to manufacture a product. It includes all
raw materials used, labor cost incurred, and all other indirect costs.

Side 3

o Materials – all raw materials and other supplies used in the manufacturing process.
 Direct Materials: Cost of glass in lightbulb manufacturing
 Indirect Materials: Cost of glue, lubricating oils, nails, screws, and the like.

Slide 4

o Labor – salaries and other benefits provided to all workers.

 Direct Labor: Cost of salaries paid to laborers of furniture associated directly in
the process.
 Indirect Labor: Salaries paid to all other factory personnel necessary to the
manufacturing process but is not directly related in the conversion process.

Slide 5

o Overhead – all indirect costs necessary for product conversion that are not direct
materials and direct labor.
 Indirect materials
 Indirect Labor
 Depreciation of equipment in the factory
 Insurance of factory plant
 Maintenance and repairs of equipment
 Factory utilities
 Slide 6

Direct Materials and Direct Labor = Prime Cost

Direct Labor and Overhead = Conversion Cost

Prime
cost

Direct Direct Factory

materials Labor overhead

Conversion
cost

AYUSIN MO NALANG TO ULIT BEH

Slide 7

Direct Materials

+ Direct Labor

+ Manufacturing Overhead

Total Manufacturing Cost

Slide 8

Period Costs – the entity’s operating expenses. They are called as such since they are much associated
with time periods rather than the manufacturing process. They are all other expenses not related to
manufacturing.

SDAM mnemonic to!

Slide 9

 Marketing and Advertising – expenses incurred in promoting the entity’s products and services
With pictures

Slide 10
  Selling and distribution – They include salaries of sales personnel, and delivery expenses
With pictures

Slide 10

 Administrative Expenses – They include office utilities, depreciation of office PPE, repairs and
maintenance of office PPE, and all other expenses in the office.
Examples gunting

Slide 11

Variable Cost – they are costs that change as the quantity of the goods produced changes. Total amount
of variable costs is dependent to the level of production.

Examples: Cost of Materials, Cost of Direct Labor computed per piece

Fixed Costs – at whatever level of production within the relevant range, this cost does not change. It is
independent of the level of production.

Examples: Rent of Facilities, Depreciation of Equipment

Slide 12
Slide 13

Slide 14