COST CONCEPTS, USES AND CLASSIFICATION

Costs can be classified in various ways depending on their purpose, such as determining inventory
valuations or to help decision-making.
Manufacturing costs are grouped into the following.

• Direct materials
• Direct labor
• Manufacturing overhead
• Prime versus Conversion Costs
Non-manufacturing costs include the following.

• Selling (marketing) costs

• Administrative costs
Marketing and administrative costs are incurred in both manufacturing and merchandising firms.

Period vs. Product costs:

• Periods costs are expensed in the time period in which they are incurred.
• Product costs are added to units of product as they are incurred and not treated as expenses until
the units are sold.
Costs can be classified into three basic categories:

• Variable costs
• Fixed costs
• Semi-variable costs
Variable Costs vary in total in direct proportion to changes in activity, such as direct materials and gasoline
expense.
Fixed Costs remain constant in total regardless of changes in activity, such as rent, insurance, and taxes.
Semi-variable Costs vary with changes in volume but do not vary in direct proportion.
Standard Costs:
They are predetermined production or operating costs that are compared with actual costs to measure the
performance of a costing department.
Cost classifications for Decision-Making:
It includes differential costs, opportunity costs, and sunk costs.
Differential Costs differ between alternatives. The cost may exist in only one of the alternatives or the
total amount of the cost may differ between the alternatives.
Opportunity costs are the potential benefit given up by selecting one alternative over another.
Sunk costs are incurred and cannot be changed by any decision made now or in the future.