Classification of Costs
Costs classified as to relation to a product
Manufacturing costs or product costs
In direct materials, timely purchasing is
important; it should not be too early or too late. Too
early purchasing will result to higher material handling
costs while delay in purchases might result to missed
sales and dissatisfied customers.
Labor costs are different from salaries paid to
salesmen and office employees. This cost represents
those paid to workers in the factory be it directly or
indirectly working on the product (direct labor cost
&indirect labor cost)
Factory overhead are cost that cannot be traced
to the finished product but they are still considered as
product cost. It is composed of costs of different
behavior; some are fixed, others are either variable or
mixed costs.
Non-Manufacturing costs or period costs
These costs (selling and administrative
expenses) are expensed once incurred. They do not
become part of the cost of the finished product.
Manufacturing/ product cost vs Non-
manufacturing or period cost
If we are to compare product from period cost,
product cost are inventoriable or becomes part of the
asset section while period cost are considered as
outright expense.
Product cost will be transferred to cost of
goods sold (expense) once the related inventory was
sold.
 Costs classified as to variability
Variable costs
It is important to know the behavior of per unit and
total cost.
For variable cost (e.g., direct material and direct
labor), total cost increases as production increases.
Meaning, the higher the number of unit produced, the
higher the total variable cost.
It is important to note that only the total variable cost
varies directly with the changes in production. The per
unit variable cost (e.g., P 5/ unit or P 2 per direct labor
hour) is considered constant (does not change) within
the relevant range. Meaning, whether you produced
more or less units, the variable cost per unit remains
unchanged.
Fixed costs
The behavior of fixed cost is the opposite of variable cost.
As to the total fixed cost, it remains unchanged or is
constant within the relevant range. Meaning, whether there
is an increase or decrease in production, total fixed cost is
just the same (e.g., Fixed cost for 100,000 units produced P
100,000 while Fixed cost for 50,000 units produced P
100,000)
On the other hand, fixed cost per unit varies inversely with
the changes in production. Meaning as production
increases, fixed cost per unit decreases and vice-versa (e.g.,
Fixed cost for 100,000 units produced P 1 while Fixed cost
for 50,000 units produced P 2)
 Costs classified as to variability
Mixed costs

Partly variable and partly fixed cost.

As stated in the module, it varies, but not directly with the changes in the level of production. The partly
variable cost was the once that reacts to the changes in the production with the fixed part remaining constant.
As a result, the total mixed cost increases with the changes in the level of production within the relevant range.

Other example of mixed cost is the postpaid plans wherein there is a fixed plan to be paid by the
subscriber but once they deviate from the inclusions of the plan, or exceed the limit stated, there is an
additional cost incurred.
Costs classified as to relation to manufacturing
departments
Direct Departmental Charges Indirect Departmental Charges
From the word itself, it is directly charged to
the department that incurred such cost. Meaning,
there is no need for allocation since it can be
conveniently identified from the department that
benefited from the said cost.
It will be discussed further when we go to
module about Departmentalization of Factory
Overhead.
Examples of this cost are direct materials and
direct labor incurred by Machining Department,
Usually, this account are charged (in total) to
other account and later, with the use of different
techniques and procedures, will be allocated to the
departments that benefited from the cost using
appropriate bases.
Example is depreciation of factory building.
First, it will be recognized in a controlling account
such as Depreciation Expense - Factory Building but
later, through allocation (e.g., square footage), will be
allocated to the departments that are occupying the
building (e.g. share in Depreciation expense of
Machining, Assembly and Painting Department)
 Costs classified to their nature as common or joint
Common Costs
Joint Cost
These costs is incurred when making use of the
same facilities in the processing of different products. These costs, if compared to common cost, is
Example is the salaries of personnel involved. At the indivisible because they cannot be identified to any
time the salaries are incurred, the products are of the products being simultaneously produced.
distinguishable from one another so that cost allocation
can easily be made. Since costs are indivisible, the problem here is
how it should be allocated to arrive at fair estimates
Like indirect departmental cost, these costs are
subject to allocation. While indirect departmental cost of product cost.
are allocated to the departments benefiting from the cost,
common costs are allocated to the products that share in
such cost.
 Costs classified as to relation to an accounting period
Capital Expenditures Revenue Expenditures

Based from our earlier discussion, this cost These costs benefits only the current period
benefits more than one accounting period and is and is immediately recognized as expense in the
recognized as an asset when acquired. period incurred.

Examples of these expenditures are those
related to acquisition of tangible/ fixed assets
(Property, Plant and Equipment), intangible assets
(Patent, copyright, trademark) and wasting assets (oil
well, coal mine).
Examples of such cost are salaries and wages,
utilities expense, repairs and maintenance,
advertising expense, sales commission, etc.,

We recognized the expense related to these

expenditures either through usage or passage of time
(depreciation expense, amortization expense,
depletion expense)
Costs for planning, control and analytical processes
Standard costs
These cost will only be arrived at after carefully
analyzing the past experiences and conducting
researches in relation to specific cost. These cost will
be compared with the actual cost incurred to
determine variances/ differences.
Examples are 5 pieces of raw material to
produced one unit, P 3/ unit, 2 hours per unit, 150%
of direct labor cost. These are the cost that should
have been incurred when producing the actual units.
Opportunity costs
The benefit foregone by choosing the best
alternative. It is relevant when choosing among
alternatives for decision-making.
Example is having a P 500,000 cash to invest
in a profitable business. You are choosing among
leasing spaces or investing in a well-known
company. By choosing to invest in a well-known
company, your opportunity cost is the supposed
income that will be realized had you chosen to lease
the space to tenants.
Costs for planning, control and analytical processes
Differential costs
These are costs that distinguishes one option to
another. These are considered in evaluating
alternatives by considering all the increases or
decreases in costs that are present among
alternatives.
Example is deciding whether to change the form
of advertisement; from newspaper and flyers to radio
and social media marketing. Before arriving at a
decision, the benefits associated with the cost must
be determined in evaluating what option to consider.
Relevant costs
These are future costs that are considered in
decision making, A matter is relevant if there is a change
in cash flow that is caused by the decision. The change in
cash flow can be: additional amounts that must be paid. a
decrease in amounts that must be paid.
If we are to compare differential from relevant,
relevant cost are decision-specific, meaning such cost
may be relevant to one situation but irrelevant to another.
On the other hand, differential cost examines the effects
of alternative courses of action on total costs.
Costs for planning, control and analytical processes
Out-of-pocket cost
In this type of cost, there is an outflow/outlay of
cash/ other assets to settle the transaction.
Sunk cost
This cost has already been spent/paid and cannot be
recovered. These are independent of any event and
should not be considered in making decisions
Controllable cost
When we talk about controllability of cost, it
means that such are under the authorization of a
particular person with authority. If you are a
department head, there are cost within your
department that you can increase or decrease
depending upon your judgment. But there are also
cost to which a department has no control such as
those that are a result of allocation.