The COST Concept in

Managerial Accounting
For Planning, Budgeting, Cost Control, Decision-Making
COSTS BY MANAGEMENT
FUNCTION
Manufacturing vs. Nonmanufacturing
Costs
+ MANUFACTURING COSTS

Nature: these are costs associated with the manufacturing activities of the
company.
Classification:
a. Direct Materials- these become an INTEGRAL PART of the finished product. (
Steel used for cars; wood used for furniture.)
b. Direct Labor- labor involved DIRECTLY in making the finished product.
( Wages of workers on an assembly line; machine tool operators in a machine
shop)
c. Factory / Manufacturing Overhead- ALL costs of manufacturing except direct
materials and direct labor(Depreciation, rent, tax, insurance,etc)
Includes Indirect Materials/Supplies and Indirect Labor (wages of janitors,
supervisory personnel )
COSTS BY MANAGEMENT FUNCTIONS
Continuation…..
NONMANUFACTURING COSTS

Nature: these are the Operating Expenses classified into: a.Selling Expenses –
expenses associated with obtaining sales and delivery of products e.g. advertising
and sales commissions.

b. Administrative Expenses- all other expenses related to performing general and

administrative activities, e.g. Officers’ salaries and legal expenses.
DIRECT COSTS VS. INDIRECT COSTS

Indirect Costs- costs that are

Direct Costs – costs that can
difficult to trace directly to a
be traced directly to the
specific costing object. (e.g.
costing object (e.g. direct
factory overhead items, costs
materials, direct labor,
shared by different
advertising outlays)
departments)
PRODUCT COSTS VS PERIOD COSTS

Product Costs- inventoriable costs

Period Costs-non-inventoriable
which are identified as part of
costs which are charged against
inventory on hand. These are assets
revenue in the period in which
until sold. Once sold, these become
revenue was earned. i.e. Selling,
expenses. i.e. cost of goods sold.
general and administrative
All manufacturing costs are product
expenses.
costs.
 VARIABLE COSTS, FIXED COSTS,
AND SEMIVARIABLE COSTS
Variable Costs- costs that vary in total in direct proportion to changes in activity.
i.e. direct materials, gasoline expenses based on mileage driven.

Fixed Costs- costs that remain constant in total regardless of changes in activity.
i.e. rent, insurance , taxes

Semivariable/ Mixed Costs- costs that contain both variable and fixed components.
i.e. rental of delivery van (gasoline based on mileage and rental fee.
 CONTROLLABLE VS.
NONCONTROLLABLE COSTS

Controllable Costs- when cost

amount is assigned to the head of a
Noncontrollable Costs- when costs
department and level of cost is
are not subject to influence at a
significantly under the manager’s
given level of managerial
influence.i.e. all variable costs are
supervision.
controllable by the concerned
department.
 OTHER COSTS
Standard Costs- production or operating cost that is carefully predetermined. It is a target cost that
should be achieved. It is compared with actual cost.

Incremental/ Differential Costs- the difference in costs between 2 or more alternatives.

Sunk Costs- costs of resources that have already been incurred and will not be affected by any decision
made now or in the future. These are past or historical costs.

Opportunity Costs- the net revenue forgone by rejecting an alternative.

Relevant Costs- are expected future costs that will differ between alternatives.