COST CONCEPTS AND BEHAVIOR

Cost – cash and cash equivalents sacrificed for goods and services because of future benefits
Expense – expired cost
Losses – the expired cost or expense > revenue

Cost Classifications
a. As to FS Presentation
1. Product Costs/Manufacturing Costs/Inventoriable Costs – costs incurred to produce the product
i. Direct Materials – raw materials that become part of the product; traceable physically and economically
ii. Direct Labor – salaries expense (labor costs); salary of a worker who produces the product
iii. Factory Overhead – all manufacturing/production costs other than direct materials and direct labor;
indirect materials and indirect labor and overhead
Direct Materials + Direct Labor = Prime Cost
Direct Labor + Factory Overhead = Conversion Cost
Direct Materials + Direct Labor + Factory Overhead = Total Manufacturing Cost
2. Period Costs/Non-manufacturing Costs – costs not related to producing the product
i. Selling expense/Marketing expense – costs incurred to market and distribute products
ii. Administrative expense – costs that are related to ensuring that the activities of the company are
properly integrated with maximizing the overall profit of the company
b. As to Behavior
1. Variable costs – costs that vary proportionally and directly to related activity (cost driver)
*Per unit = constant/fixed; total variable cost = varies
2. Fixed costs – costs that do not change
*Per unit = varies; total fixed cost = constant/fixed
3. Mixed costs – a mix of variable and fixed costs
*Rules are applicable only within the relevant range and within a specific period.
COST ESTIMATION (refer to handouts)
y = a + bx
i. Account analysis – estimations of employees/experts based on experience
ii. Scatter graph
iii. High-low method
iv. Method of least square
c. As to Nature
1. Common costs – costs incurred for the benefit of two or more accounting periods, departments, commodities,
services, operations
2. Joint costs – costs incurred by two or more products that are simultaneously produced
d. As to Importance in Decision-Making Process
1. Differential costs – difference of costs between two alternatives
2. Opportunity costs – benefit given up when an alternative is chosen over another
3. Sunk costs – costs that have already been incurred
4. Out of pocket costs – future outlay of cash that is associated with the particular decision
5. Shutdown costs – costs which are to be incurred if a process or department will be closed
6. Relevant costs – future costs that differ between alternatives