COST – TERMS, CONCEPTS AND

CLASSIFICATIONS
BY: MR. PATRICK LOUIE REYES AND MR. JOHN ANTHONY LIQUIGAN
 MEANING OF COST
GOODS Current Benefit
Cash or cash equivalent sacrificed
SERVICES Future Benefit

GOODS
Future Benefit Revenue Manufacturing Entity
SERVICES
Manufacturing
process Conversion of raw materials with
incurrence of labor and other factory Activities
expenses
Any event/action that
incurs cost
Cost driver

Cost Pool
Financial Accounting GOODS
Cost Object
Management Accounting SERVICES
To record acquisition of 5,000 raw materials for 5 pesos each To record completion of product
Raw Materials Inventory 25,000 Finished Goods Inventory 130,000
Cash 25,000 Work In process 130,000

To record issuance of 3,000 raw materials for manufacturing

Work In process 15,000
Raw Materials Inventory 15,000 Cost Driver - # of materials

To record incurrence of 1,000 labor hours for 100 per hour for
the services by the labor force
Work In process 100,000 Cost Driver - # of labor hours
Salaries Payable 100,000
Direct
Materials
To record consumption of supplies for 5,000 and to record
Direct Labor
depreciation of factory equipment amounting to 10,000
Supplies Work In process
Factory Overhead Control 15,000
Supplies 5,000 Overhead
Accumulated Depreciation 10,000 Depreciation
Finished Goods
Work in process 15,000
Factory Overhead Control 15,000
 COST VS EXPENSES VS LOSSES
Current benefit
Expenses
Future benefit -
expired Cost of Goods Sold, Depreciation Expense, Supplies
Expense, Amortization expense, Expiration of Pre payments

Losses Incurred cost with no return/benefit

 COST CLASSIFICATIONS
Relation to Financial Statements GAAP
Product Cost
By Function
Period Cost

Direct Materials Relation to the end product

Product Cost Direct Labor Indirect Materials
Factory
Overhead Indirect Labor
Other Indirect
Prime Cost Conversion Cost
Factory Expenses

Direct Factory
Administrative Direct Labor
Materials Overhead
Period Cost Expenses

Selling Expenses
FACTORS IN IDENTIFYING WHETHER IS DIRECT OR
INDIRECT
Specifically Identified/traceable to the end product and
Direct
Price can be conveniently/economically determinable/measured

Not Specifically Identifiable/traceable to the end product or

Indirect

Specifically identifiable/traceable to the end product but the price of is not

conveniently/economically determinable/measured
 COST CLASSIFICATION
Per Unit: constant
By behavior
Variable Cost
In total: Directly related to change in cost driver/Level of Activity

Not GAAP Per Unit: Indirectly related to change in cost driver/Level of Activity
Fixed Cost
In total: constant
Internal
Per Unit: Indirectly related to change in cost driver/Level of Activity
Mixed Cost
In total: Directly related to change in cost driver/Level of Activity
Semi -Variable Cost Semi -Fixed Cost

High – Low Method

Scatter -Graph Method

Regression
 EXAMPLES
Variable Cost Fixed Cost

Direct Materials Depreciation

To record issuance of 3,000 raw materials for manufacturing
costing 5 each Fixed Cost
Work In process 15,000
Raw Materials Inventory 15,000

Direct Labor
To record incurrence of 1,000 labor hours for 100 per hour for
the services by the labor force
Work In process 100,000
Salaries Payable 100,000

Commission
Expense

The entity is to pay 10% commission of every sales of an agent

 COST CLASSIFICATION
Direct Departmental Charges
Relation to Manufacturing Departments
Indirect Departmental Charges

Direct Departmental Charges

Materials Department Direct Labor Department

Servicing Department
Repairs and Maintenance Department
Inspection Department Subject for allocation
 COST CLASSIFICATION

Common/Joint

Common Cost Indirect Departmental Charges

Joint Cost

Joint Process Main products

Same material
By Product
Same process
Scrap
Split - off
 COST CLASSIFICATION

Revenue Expenditure Income Statement Item

Accounting Period
Capital Expenditure Balance Sheet Item
 COST CLASSIFICATION

Planning, Control, Analytical Process

Standard Cost

Opportunity Cost

Differential Cost

Relevant Cost

Out of Pocket Cost

Sunk Cost
 STANDARD COST

is a predetermined cost which is calculated from management’s standards of efficient operation

and the relevant necessary expenditure

Budget Cost of Direct Materials and Direct Labor in producing 1,000 products

Direct Materials 2 materials

2*5*1,000= 10,000
5/ material

1 hour
Direct Labor 1*50*1,000=50,000
250/hour
 OPPORTUNITY COST

Is the amount foregone in choosing 1 alternative over the other

Assessment

Do it today Do it tomorrow

Regular 1 year delay

 DIFFERENTIAL COST

Difference of cost of 1alternative from another.

Assessment

Do it today Do it tomorrow

Regular 1 year delay

 RELEVANT COST

It is a cost which is both future and differential.

Equipment will still be used even buying alternative will be chosen, same as to General factory
overhead
 OUT OF POCKET AND SUNK COST