Purpose of Cost classification ➢ Unit cost remains constant

❖ Fixed cost (constant in total)

1. Assigning costs to cost objects ❖ Mixed cost (has variable and fixed
2. Cost in manufacturing companies elements)
❖ Differential cost (differs between
3. Preparing financial statements alternatives)
4. Predicting cost behavior in response to ➢
❖ Sunk cost (should be ignored)
changes in activity ❖ Opportunity cost (foregone benefit)
5. Making decisions
Assigning Costs to Cost Objects
Cost Classifications Cost objects
● Direct cost - anything for which cost data are desired
○ Cost that can be easily and including products, customers, jobs,
organizational subunits
conveniently traced to a specific 1. Direct costs - costs that can be easily and
cost object conveniently traced to a specified cost
object
○ Ex: 2. Indirect costs - costs that cannot be easily
● Indirect cost and conveniently
○ Cost that cannot be easily and
Common costs
conveniently traced to specified cost - Indirect costs incurred to support a number
object of cost objects. These costs cannot be
traced to any individual cost object
○ Ex:
Prime cost and Conversion Cost
Prime cost- direct materials cost plus direct labor
Manufacturing costs cost
● Direct materials Conversion cost- direct labor cost plus
○ Materials that go into the final manufacturing overhead costs

product (raw materials) Fixed cost

● Direct labor
● Manufacturing overhead
Nonmanufacturing Costs
● Selling costs
● Administrative costs
● Product costs (inventoriable)
○ cost refers to the costs incurred to
create a product
● Period Costs (expensed)
○ costs not included in product costs.
❖ Variable cost (proportional to activity)
- A cost that remains constant, in total,
regardless of changed in the level of activity
Committed fixed cost
- Represent organizational investments with a
multi-year horizon that cant be significantly
reduced even for a short period of time
without making fundamental changes
Discretionary fixed costs
- Also known as managed fixed costs
- Usually arise from annual decisions by
management to spend on certain fixed cost
items
—--------------------------------------------------------
COST-VOLUME-PROFIT

Units to be accounted for

Work in process beginning