STRATEGIC COST MANAGEMENT

S PRELIMS
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Mr.Gerry Carabbacan, CPA

M 02

COST CONCEPTS ➢ In relation to quality management

✓ Prevention Costs
OUTLINE: ✓ Appraisal Costs
✓ Internal and external failure
● Cost Determination and Reporting
cost
Methods

➢ Actual Costing Cost Determination and Reporting

➢ Normal Costing Methods
➢ Standard Costing
➢ Variable Costing (Direct) ➢ ACTUAL COSTING - a valuation method that
➢ Absorption (Full) Costing uses actual direct materials, direct labor, and
overhead charges in determining product cost.
• Cost Classification ➢ NORMAL COSTING – a valuation method that
➢ In relation to the product uses actual cost of direct materials and direct
✓ Manufacturing Costs labor in conjunction with a pre – determined
1. Direct Materials overhead rate(s) in determining product cost.
2. Direct Labor ➢ STANDARD COSTING – a valuation method
3. Manufacturing that uses pre – determined norms for direct
overhead materials, direct labor and overhead to assign
4. Prime Cost costs to the various inventory accounts and
5. Conversion Cost cost of goods sold.
✓ Non-manufacturing Cost
1. Selling or Marketing ➢ VARIABLE COSTING (DIRECT) – a cost
Costs accumulation and reporting method that
2. Administrative Costs includes only variable production cost (direct
➢ For external reporting purposes materials, direct labor and variable overhead)
✓ Period Cost as inventoriable or product cost; is not
✓ Product Cost acceptable for external reporting purposes.
➢ In relation to Cost Objects
➢ ABSORPTION (FULL) COSTING – a cost
✓ Direct Cost
accumulation and reporting method that treats
✓ Period Cost
the cost of all manufacturing components
➢ In relation to volume or level of activity
(direct materials, direct labor and variable and
✓ Fixed Cost
fixed overhead) as inventoriable or product
✓ Variable Cost
cost; is the traditional approach to product
✓ Mixed Cost
costing; must be used for external reporting
✓ Stepped Cost
purposes.
➢ In relation to decisions made by
managers
✓ Differential cost Cost Classification
✓ Sunk cost
• IN RELATION TO THE PRODUCT
✓ Avoidable cost
✓ Out-of-pocket cost ➢ MANUFACTURING COSTS – are costs
✓ Opportunity cost involved in making a product.
✓ Imputed cost Manufacturing costs can be subdivided into
✓ Historical cost three basic elements: direct materials,
✓ Future cost direct labor, and manufacturing overhead.
✓ Postponable cost

BSA2B: Leah Marie Galiza Balgos

 PRELIMS: L02 COST CONCEPT AND CLASSIFICATIONS
1. Direct materials – include those
materials that become an integral
part of a finished product, and can
be conveniently traced into it.
2. Direct labor – consists of those
labor costs that can be easily traced
to the creation of products.
3. Manufacturing overhead – consists
of all manufacturing costs except
direct materials and direct labor.
Other terms used interchangeably
with manufacturing overhead are
factory overhead, factory burden,
and indirect manufacturing costs.
Oftentimes, the terms prime cost
and conversion cost are used to
describe a combination of some of
the elements of manufacturing cost.
4. Prime cost – refers to the sum of
direct materials and direct labor
costs.
5. Conversion cost – is the sum of
direct labor and manufacturing
overhead.
➢ NON - MANUFACTURING COSTS – are
those costs involved with selling and
administrative activities.
1. Selling or marketing costs – include
all costs associated with marketing
finished products, including
commissions, depreciation of
delivery equipment, depreciation of
finished goods warehouses, and
advertising.
2. Administrative costs – include all
costs associated with the general
administration of an organization,
including secretarial salaries,
depreciation of general
administrative facilities and
equipment, and executive
compensation.
• FOR EXTERNAL REPORTING
PURPOSES
➢ Period costs – are costs matched with
revenues once incurred. These are
normally referred to as expenses.
BSA2B: Leah Marie Galiza Balgos
➢ Product costs – are costs that are assigned
to the products. They are charged to
expense when sold. Until that time, product
costs are considered to be assets and are
recognized on the balance sheet as
inventory.
• IN RELATION TO COST OBJECTS
➢ Direct costs – are costs that can be
conveniently traced to the cost object
under consideration.
➢ Period costs – are costs that cannot be
conveniently traced to the cost object.
• IN RELATION TO VOLUME OR LEVEL
OF ACTIVITY
➢ Fixed costs – are costs that remain
constant in total within the relevant
range but varies inversely, on a per unit
basis, with the volume of activity.
➢ Variable costs – are costs that varies in
total in relation to the volume of activity
but remain constant on a per unit basis
within a relevant range.
➢ Mixed costs – are costs which have a
fixed component and a variable
component. These components are
separated by using appropriate
methods.
➢ Stepped costs – are costs which are
fixed over relatively short ranges of
production level. This cost has both
variable and fixed components and is
also known as semi – fixed cost.
• IN RELATION TO DECISIONS MADE BY
MANAGERS
➢ Differential costs – are the increases or
decreases in total cost, or the changes
in specific elements of cost that result
from selecting one alternative instead
of another.
➢ Sunk costs – have been defined in two
ways:
(a) Sunk costs are any cost that will not
change if one alternative is chosen
instead of another.
(b) Sunk costs are historical costs
which are irrecoverable in a given
situation. They are costs for which the
STRATEGIC COST MANAGEMENT
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Mr.Gerry Carabbacan, CPA

M 02
expenditure of cash or the incurring of
a liability has already taken place.
➢ ▪ Avoidable costs – are costs that will not
be incurred if a certain decision is made.
➢ ▪ Out – of – pocket costs – are costs which
will require the expenditure of cash or the
incurring of
➢ a liability as a consequence of a
management decision.
➢ ▪ Opportunity costs – represent the
measurable advantage foregone or
sacrificed as a result of the
➢ rejection of alternative uses of material,
labor, or facilities.
➢ ▪ Imputed costs – are costs that do not
involve at any time actual cash outlay and
which do not, as
➢ a consequence appear in the financial
records; nevertheless, such costs involve a
foregoing on
➢ the part of the persons whose costs are
being calculated.
➢ ▪ Historical costs – are costs measured by
actual cash payments or their equivalent at
the time of
➢ outlay.
➢ ▪ Future costs – are costs expected to be
incurred at a later date.
➢ ▪ Postponable costs – are those costs
which may be shifted to the future with little
or no effect on
➢ efficiency of current operations.
➢ • In relation to quality management
➢ ▪ Prevention costs – are costs incurred in
designing programs and activities geared
toward
➢ preventing quality problems.
➢ ▪ Appraisal costs – are those costs incurred
to identify quality problems.
➢ ▪ Internal & external failure costs – are
those incurred to correct identified quality
problems that
➢ are discovered before goods leave the
company and those not detected.

BSA2B: Leah Marie Galiza Balgos

 PRELIMS: L02 COST CONCEPT AND CLASSIFICATIONS

situation. They are costs for which the • IN RELATION TO QUALITY

expenditure of cash or the incurring of MANAGEMENT
a liability has already taken place.
➢ Prevention costs – are costs incurred in
➢ Avoidable costs – are costs that will not designing programs and activities geared
be incurred if a certain decision is toward preventing quality problems.
made.
➢ Appraisal costs – are those costs incurred
➢ Out – of – pocket costs – are costs to identify quality problems.
which will require the expenditure of
cash or the incurring of a liability as a ➢ Internal & external failure costs – are those
consequence of a management incurred to correct identified quality
decision. problems that are discovered before goods
leave the company and those not detected.
➢ Opportunity costs – represent the
measurable advantage foregone or
sacrificed as a result of the rejection of
alternative uses of material, labor, or
facilities.

➢ Imputed costs – are costs that do not

involve at any time actual cash outlay
and which do not, as a consequence
appear in the financial records;
nevertheless, such costs involve a
foregoing on the part of the persons
whose costs are being calculated.

➢ Historical costs – are costs measured

by actual cash payments or their
equivalent at the time of outlay.

➢ Future costs – are costs expected to be

incurred at a later date.

➢ Postponable costs – are those costs

which may be shifted to the future with
little or no effect on efficiency of current
operations.

BSA2B: Leah Marie Galiza Balgos