COST AND

COST CONCEPT
ELEMENTS OF COST

1. Material
2. Labor
3. Overhead
MATERIAL

• Substance from which the finished product is made

• Direct Material – one which can be easily or directly identified in the
product
• Indirect Material – one which cannot be easily identified in a product
LABOR

• Human effort required to convert materials into finished

product
• Direct Labor – one which can be conveniently identified or wholly to
a particular job, product or process
• Indirect Labor - one which cannot be conveniently identified or wholly
to a particular job, product or process
OVERHEAD

• Those expenses other than material and labor

COST CLASSIFICATION

• Prime Cost = Direct Material + Direct Labor

• Conversion Cost = Labor + Overhead
TERMINOLOGIES

• Cost Object
• Anything for which cost is computed

• Cost Driver
• any variable that usually affects costs over a period of time

• Cost Pool
• A grouping of individual cost items
• An account in which a variety of similar costs are accumulated

• Activity
• An event, action, transaction, task, or unit of work with a specified purpose
TYPE OF ACTIVITY LEVELS

• Line level – activity that must be done for each unit of production
• Batch level – performed for each batch of product produced, rather than
each unit
• Product level – activities that are needed to support the entire product
line regardless of the number of units and batches produced
• Facility level – performed in order for the entire production process to
occur
CLASSIFICATION

As to Type
1. Product Costs – incurred to manufacture the product
2. Period Costs – non-manufacturing costs

As to Traceability
1. Direct costs
2. Indirect costs
CLASSIFICATION

As to Function
1. Manufacturing costs – incurred to convert raw materials into finished goods
1. Direct manufacturing costs
2. Indirect manufacturing costs

2. Non-manufacturing costs – not incurred in transforming materials to finished goods

1. Research and Development
2. Marketing costs
3. Distribution costs
4. Selling costs
5. After-sales costs
6. General and administrative costs
CLASSIFICATION

For decision-making
1. Relevant costs – future costs that will differ under alternate courses of action
2. Differential costs – difference in costs between any two alternative courses of action
1. Incremental costs
2. Decremental costs

3. Opportunity costs – benefit given up when one alternative is selected over the other
4. Sunk/Past/Historical costs – already incurred and cannot be changed by any decision
made now or to be made in the future
CLASSIFICATION

As to Behavior
1. Variable cost – within the relevant range and time period under consideration, the total
amount varies directly to the change in activity level or cost driver, and the per unit amount
is constant
2. Fixed cost - within the relevant range and time period under consideration, the total
amount remains unchanged, and the per-unit amount varies inversely or indirectly with the
change in the cost driver
1. Committed fixed cost
2. Discretionary or managed fixed cost
3. Mixed cost – has both variable and fixed component
4. Step cost – when activity changes, a step cost shifts upward or downward by a certain
interval or step
SEPARATION OF THE FIXED AND VARIABLE
COMPONENTS OF MIXED COSTS

• High-Low Method
• Scattergraph Method
• Least Squares Regression Method
COST ACCOUNTING PROCESSES

1. Cost accumulation
2. Cost allocation or assignment
COST ACCOUNTING SYSTEMS

• Job-order costing
• Process costing
• Hybrid product-costing system
• Standard costing
• Backflush costing
• Activity-based costing system