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Lesson #: Cost Terms, Concepts, and Classifications

This document discusses cost classifications and concepts. It defines key terms like cost, cost pools, cost objects, and cost drivers. It explains how costs are assigned to cost pools and allocated from cost pools to cost objects. Costs are also classified based on their association with cost objects, reaction to changes in activity, and presentation in financial statements. Other classifications discussed include managerial influence, commitment to expenditures, and analytical purposes.

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Claudette Clemente
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42 views

Lesson #: Cost Terms, Concepts, and Classifications

This document discusses cost classifications and concepts. It defines key terms like cost, cost pools, cost objects, and cost drivers. It explains how costs are assigned to cost pools and allocated from cost pools to cost objects. Costs are also classified based on their association with cost objects, reaction to changes in activity, and presentation in financial statements. Other classifications discussed include managerial influence, commitment to expenditures, and analytical purposes.

Uploaded by

Claudette Clemente
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Lesson # : Cost Terms,

Concepts, and
Classifications
PATRICK LOUIE E. REYES,
CTT, MICB, RCA, CPA
Cost, Cost Pool, Cost Objects, and
Cost Drivers
COST: value forgone in exchange for achieving
economic benefits
COST POOLS: costs collected into meaningful groups
(pools), classified by type, source, or
responsibility.
COST OBJECTS: where costs are assigned
COST DRIVER: factor that causes changes in the costs of
an activity
Cost, Cost Pool, Cost Objects, and
Cost Drivers
•Activity: an event, action, transaction, task or unit of
work with a specified purpose.
• Value-adding activities – necessary for production; cannot
be eliminated. Example: assembly of different parts of a
product.
• Non-value-adding activities – do not make the product or
service more valuable to the customer. Example: moving the
materials from the stock room to the production area.
Cost, Cost Pool, Cost Objects, and
Cost Drivers
Cost assignment: process of assigning costs
• to cost pools
• from cost pools to cost objects
Cost allocation: assignment of indirect costs to cost
pools, based on cost drivers
Classifications of Costs
ASSOCIATION WITH COST OBJECT
•Direct costs: conveniently and economically traceable
•Indirect costs: allocated to the cost object
Classifications of Costs
REACTION TO CHANGES IN ACTIVITY
•Variable costs📈: varies (in total) proportionately with
level of activity
• on a per-unit basis: constant
•Fixed costs📌: remains constant (in total) regardless of
level of activity
• on a per-unit basis: inversely proportional with level of activity
•Mixed costs🧪: contain both variable and fixed elements
• in total: if level of activity rises, total costs rise as well
• on a per-unit basis: if level of activity rises, per-unit costs falls
Classifications of Costs
REACTION TO CHANGES IN ACTIVITY
Note: All cost behavior previously mentioned are
observable only with a certain relevant range.
Relevant range: the assumed range of activity that
reflects the company’s normal operating range
For mixed costs, it is important to separate the variable
and fixed elements for further analysis and decision-
making 🤔. This shall be discussed in the next lesson.
Classifications of Costs
CLASSIFICATION IN THE FINANCIAL STATEMENTS
Product cost
• related to making/acquiring the products or providing the
services that directly generate the revenues of an entity
• also called inventoriable cost, manufacturing costs
• seen in the Statement of Financial Position
• composed of direct and indirect manufacturing costs
Classifications of Costs
CLASSIFICATION IN THE FINANCIAL STATEMENTS
Period cost
• related to business functions other than production, such as
selling and administration
• more closely associated with a particular time period than
with making/acquiring a product or performing a service
• also called non-manufacturing costs
• seen in the Income Statement as Cost of Sales or Other
Operating Costs
Classifications of Costs
OTHER CLASSIFICATIONS

Note: These other classifications are made for you to be


familiarized, although lessons related to these costs might
not be under ACCT 1033.
Classifications of Costs
OTHER CLASSIFICATIONS
•Managerial Influence: Controllable and Non-controllable
costs (useful in the topic Responsibility Accounting)
•Commitment to Cost Expenditure: (Fixed Costs)
• Committed fixed costs: long term, cannot be eliminated
without effect on profitability or long-term organizational goals
• Discretionary fixed costs: can be changed by management
from time to time
•Period of Incurrence: Historical and Future costs (useful in
the topic relevant cost)
Classifications of Costs
OTHER CLASSIFICATIONS
•Planning and Control:
• Standard and Budgeted cost – useful in our future topic: Standa
Costing
• Absorption and Variable – there will be a separate topic on this.
Main difference: classification of Fixed Overhead cost
• Information cost – difference in cost when there is information
and when there is none. Useful in Decision Tree Analysis.
• Ordering cost – cost of ordering. Useful in the study of EOQ
• Out-of-pocket costs – with corresponding present cash outlay
Classifications of Costs
OTHER CLASSIFICATIONS
•Other Analytical Purposes
• Relevant cost – future and different
• Sunk cost – already incurred; cannot be changed by any
decision
• Opportunity cost – benefit given up by choosing another
alternative
• Marginal cost – also called differential cost; difference in
cost between any two alternatives. Kinds: Incremental and
Decremental
• Value-added cost

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