II. COST TERMS, CONCEPTS AND CLASSIFICATION Cost – value foregone or sacrifice of resources to achieve benefit which will promote profitmaking ability of the firm. Incurred when resource is used for some purpose. Outlay/Expenditure of money to acquire goods/services. Cost Pools – cost collected into meaningful groups. 1. Types of Cost (Labor cost in one pool, materials costs in another) 2. Source (Dept. 1, Dept. 2 and so on) 3. Responsibility (Manager 1, 2 and so on) Cost Object – any product, service or organizational unit which cost are assigned for some management purpose. any item where cost can be traced. Cost Drivers – any factors that has the effect of changing the level of the total cost. Cost Assignment – assigning costs to costs pools or from cost pools to costs objects. Cost Allocation – assignment of indirect cost to cost pools. A. COST CLASSIFIED BY NATURE MANAGEMENT FUNCTION NOTE: Direct labor and overhead are called CONVERSION COSTS. Manufacturing Costs - all cost associated with production of goods. Direct Materials – Raw Materials Costs, an integral part of the finished product. - invoice price + other cost paid - trade and cash discounts should reduce materials costs. Direct Labor – labor costs related to time on products that can be conveniently and economically assigned to specific units manufactured. Manufacturing Overhead – third element of manufacturing costs. - all manufacturing costs except Direct Materials and Labor. Indirect Materials – materials and supplies used in the manufacturing operation. - DO NOT BECOME part of the product. Indirect Labor – labor cost not identified or traced to specific units manufactured. Other Manufacturing Overhead - include overtime premiums (extra compensation paid for overtime) and cost of idle time. Nonmanufacturing Costs - cost related to selling and other activities not related to production. Marketing Cost – all costs associated with marketing/selling product or all costs incurred by marketing division. - advertising, shipping, sales commissions and storage costs. General Administrative Cost – all executive, organizational and clerical costs associated with general management. B. COSTS CLASSIFIED ACCORDING TO THE TIMING OF RECOGNITION EXPENSE Product Cost – costs involved in acquiring or making product. - also called as INVENTORIABLE COSTS (cost attached to the units produced and reported as assets until goods are sold) Period Cost – costs that are identified with accounting periods, not included in product costs. - not included as part of cost of either purchased/manufactured goods. - selling & administrative expenses (sales commissions, office rent and transportation expense) C. COSTS CLASSIFIED ON FINANCIAL STATEMENT Statement of Financial Position – presents three classes of inventories; Raw Materials – used to make product. Work in Process – units of products produced and partially completed. Finished Goods – units of products that been completed by not yet sold. Income Statement – the same with merchandise but has different caption. D. COSTS CLASSIFICATION FOR PREDICTING COST BEHAVIOR Cost Behavior – how cost will react/respond to changes in the business activity. Variable Costs – change directly in proportion to changes in activity (volume), examples are direct labor and materials. Fixed Costs – remain unchanged to given time period regardless with the change of activity (volume), examples are rent, insurance, maintenance, repairs and depreciation of factory. Semivariable Costs or Mixed Costs – contains both fixed and variable elements. Examples are SS taxes, materials handling, personnel services, heat, light and power. E. COSTS CLASSIFIED BY TYPES OF INVENTORY Raw Materials Inventory – cost of raw materials and production supplies that have been purchased but not used at the end of accounting period. Work-in-Process Inventory – cost of goods partially completed at the end of the accounting period. Finished Goods Inventory – cost of goods that have not been sold at the end of the accounting period. Merchandise Inventory - cost of purchased merchandise by retailers/wholesalers, not sold at the end of the accounting period. E. COSTS CLASSIFICATION ACCORDING TO TRACEABILITY OF COST OBJECTIVE Direct Costs (traceable; separable) – can be economically traced to a single costs object. Indirect Costs – not directly or easily traceable to the costs object. G. COSTS CLASSIFICATION ACCORDING TO MANAGERIAL INFLUENCE Controllable Cost – subject to significant influence by a particular manager within the time period. Noncontrollable Cost – cost oven w/c a given manager does not have significant influence. H. COSTS TERMINOLOGIES USED FOR PLANNING AND CONTROL Standard Costs – predetermined cost estimate that should be attained. Expressed in terms cost per unit. Budgeted Costs – represents expected/planned cost for the given period. Absorption Costing – includes all manufacturing costs (direct materials and labor & variable and fixed manufacturing overhead. - referred as Full Cost Method. Direct Costing – fixed cost are charged against revenue incurred not assigned to specific units of products manufactured. - referred as Variable Costing. Information Costs Ordering Costs – cost that increase with the number of orders placed in inventory. Out-of-Pocket Costs – must met with a current expenditure or cash outlay. I. COST CLASSIFICATION ACCORDING TO A TIME-FRAME PERSPECTIVE Committed Cost - is the inevitable consequence from a previous commitment. Discretionary Cost (programmed; managed cost) – size or time of incurrence is a matter of choice. J. COSTS CLASSIFIED ACCORDING TO TIME PERIOD FOR WHICH THE COST IS INCURRED Historical Costs (past costs) Future Costs – budgeted costs, expected to be incurred in a future period. K. COSTS CLASSIFICATION FOR DECISION-MAKING AND OTHER ANALYTICAL PURPOSES Relevant Costs – future costs, different under one decision alternative than the other. Incremental Costs – difference between two or more alternatives. - is an additional cost to determine the feasibility of the particular alternative. - must be future costs and be different under various alternatives. Sunk Costs - past costs incurred and irrelevant to future decision. Opportunity Costs – value of best alternative forgone as the result of selecting a different strategy. Marginal Costs - associated with the next unit/project/incremental cost, associated with additional project as opposed to the next discrete unit. Value-Added Costs – costs that add value to the product from activities that is needed to satisfy the needs of the consumer.