BASIC COST STRCOSTMAN

MANAGEMENT CONCEPTS Module 01

 COST

the value forgone or sacrifice of resources for

the purpose of achieving some economic
benefit which will promote the profit-making
ability of the firm.
 COST

A cost is used when a resource is used for

some purpose. It is also an outlay or
expenditure of money to acquire goods and
services that assist in performing operations.
 COST POOLS

costs collected into meaningful groups. Cost

pools may be classified:

(1) by type of cost

(2) by source

(3) by responsibility
 COST OBJECT

any product, service or organizational unit to

which cost are assigned for some management
purpose. Products and services are generally
cost objectives. Any item to which cost can be
traced and that has a key role in management
strategy can be considered as cost object.
 COST DRIVER

any factor that has the effect of changing the

level of total cost. The management of key cost
drivers is essential for a firm that competes on
the basis of cost leadership.
COST ASSIGNMENT

Cost assignment

• is the process of assigning cost to cost pools or from cost

pools to cost objectives

Cost allocation

• is the assignment of indirect cost to cost pools.

Allocation bases

• are cost drivers used to allocate cost.

 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
 COST CLASSIFICATION
Nature or
Management
Functions
Manufacturing Costs Non-Manufacturing Costs

• are all costs associated • include costs related to

with production of goods. selling and other activities
not related to the
production of goods.
 COST CLASSIFICATION
Nature or
Management
Functions
Manufacturing Costs

Direct Materials Indirect Materials

• are all raw materials that become an integral part of
the finished product and that can be conveniently • include materials and
and economically assigned to specific units supplies used in the
manufactured. manufacturing
operation that do not
Direct Labor become part of the
• are all labor costs related to time spent on products product.
that can be conveniently and economically assigned
to specific units manufactured. Indirect Labor
Manufacturing Overhead • also cannot be
• is the third element of manufacturing cost, includes identified or traced to
all costs of manufacturing except direct materials specific units
and direct labor. manufactured.
 COST CLASSIFICATION
Nature or
Management
Functions
Manufacturing Costs Non-Manufacturing Costs
 COST CLASSIFICATION
Nature or
Management
Functions
Non-Manufacturing Costs

Marketing Costs

• are all costs associated with the marketing or selling of a

product or all costs incurred by the marketing division from the
time the manufacturing process is completed until the product
is delivered to the customer or all costs necessary to secure
customer orders and get the finished product or service into the
hands of the customer.

General and Administrative Costs

• include all executive, organizational and clerical costs

associated with the general management of the organization
rather than with the manufacturing, marketing or selling.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION
Timing of
Recognition as
Expense

Product Costs

• include all costs that are involved in acquiring or

making a product.

Period Costs

• are costs that are identified with accounting

periods and not included in product costs.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION
Financial
Statements

Statement of Financial Position

• Presented as part of Inventories (further divided

depending on whether a manufacturing or
merchandising business)

Statement of Income

• Presented as part of the Cost of Goods Sold or

Operating Expenses
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
 COST CLASSIFICATION
Cost Behavior Predicting Cost
Behavior
• refers to how a cost will react or respond to changes
in the business activity.

Variable Costs

• costs that change directly in proportion to changes in activity (volume).

Fixed Costs

• costs that remain unchanged for a given time period regardless of change
in activity (volume).

Semi-variable Costs

• costs that contain both fixed and variable elements.

 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION
Types of Inventory

Raw Materials Inventory

• the cost of all raw material and production supplies that have been
purchased but not used at the end of the period.

Work-in-process Inventory

• the cost associated with goods partially completed at the end of the
period.

Finished Goods Inventory

• the cost of completed goods that have not been sold at the end of
the period.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION
Traceability to Cost
Objective

Direct Costs (traceable; separable)

• are costs that can be economically traced to

a single cost object.

Indirect Costs

• are costs that are not directly traceable to

the cost object.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION

Managerial
Influence

Controllable Costs

• costs that are subject to significant influence by a particular

manager within the time period under consideration.

Non-controllable Costs

• costs over which a given manager does not have a significant

influence.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
 COST CLASSIFICATION

Direct Costing
Used for Planning
and Control • is a type of product costing where fixed
costs are charged against revenue as
incurred and are not assigned to specific
Standard Cost units of a product manufactured.
• is a predetermined cost estimate that
Information Costs
should be attained; usually expressed in
terms of cost per unit. • are costs of obtaining information.

Budgeted Cost
Ordering Costs
• is used to represent the
• are costs that increase with the number of
expected/planned cost for a given period.
orders placed for inventory.

Absorption Costing
Out-of-pocket Costs
• is a method that includes all
• are costs that must be met with a current
manufacturing costs in the cost of a unit
expenditure or cash outlay.
of product.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION

Time-frame
Perspective

Committed Costs

• are costs that are inevitable consequence of incurrence of a

previous commitment.

Discretionary Costs (Programmed; Managed

Costs)
• are costs for which the size or the time of incurrence is a matter
of choice.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
COST CLASSIFICATION

Time Period

Historical Costs (Past Costs)

• are costs that were incurred in a past period.

Future Costs

• are budgeted costs that are expected to be incurred in a

future period.
 COST CLASSIFICATION
Nature or Timing of
Financial Predicting Cost Traceability to Cost
Management Recognition as Types of Inventory
Statements Behavior Objective
Functions Expense

Managerial Used for Planning Time-frame

Time Period Analytical Purposes
Influence and Control Perspective
 COST CLASSIFICATION
Relevant Costs
• are future costs that are
different under one decision
alternative than under
another decision alternative.
Incremental Cost
• is the difference between two
or more alternatives.
Sunk Costs
• are past costs that have been
incurred and are irrelevant to
a future decision.
Opportunity Cost
• is the value of the best
alternative forgone as the result Analytical Purposes
of selecting a different use of
resource or by choosing a
particular strategy.
Marginal Cost
• is the costs associated with the
next unit or the next project or
incremental cost associated
with an additional project as
opposed to the discrete unit.
Value Added Costs
• are costs that add value to the
product.
 End

of

Chapter