ACT121 - Topic 2

ALFONSO T.
YUCHENGCO COLLEGE OF BUSINESS
MODULE 1
Topic 2: COST CONCEPTS & CLASSIFICATIONS
2.1 Nature of cost, cost pools, cost objects, and cost drivers
Cost refers to value foregone or value of resources sacrificed to achieve a specific

objective.
Cost pool or center is a grouping of individual cost items; an account in which a variety
of similar costs are accumulated. Examples: work in process, factory overhead.
Cost object is a term closely aligned with what is traditionally referred to as division of
purpose. It can be termed as cost bearer. Examples: customer, order.
Cost driver is any variable, such as level of activity or volume that usually affects costs
over a period of time. Example: production, sales, number of hours.
2.2 Classification of Costs
1. Based on function or group activities involved:
a. Manufacturing or production cost – refers to cost of direct materials, direct

labor and manufacturing overhead.
b. Operating expenses – are classified as: selling expenses (incurred in selling the
products), and general and administrative expenses (incurred in general
direction, control and administration of the business).
2. Based on traceability to products:
a. Direct product costs – refer to costs directly charged to the cost of a product in
the costing process, and are classified as: direct materials (costs of raw materials
that form an integral part of the finished product), and direct labor cost (cost of
labor incurred directly on goods being processed into finished product).
b. Indirect product costs – refer to manufacturing costs incurred in production and
not classifiable as direct materials nor as direct labor.
3. Based on traceability to departments (or responsibility centers):
a. Direct departmental costs – refer to costs directly identifiable with a

department.
b. Indirect departmental costs – refer to costs not directly identifiable with a
department and need to be allocated among a number of departments.
4. Based on behavior (or variability):
a. Variable costs – refer to costs that vary in direct proportion to the changes in
volume of production within a relevant range.
b. Fixed costs – refer to costs not affected by changes in volume within a relevant
range.
ALFONSO T. YUCHENGCO COLLEGE OF BUSINESS
c. Mixed costs – refer to costs that vary in amount but not in direct proportion to
changes in volume of production. They are partly variable and fixed.
5. Based on accounting period:
a. Capital expenditures – refer to outlays that benefit future periods and are
classified as asset.
b. Revenue expenditures – refer to costs that benefit the current period only and
are classified as expenses.
6. Based on planning and control:
a. Budgeted costs – refer to costs estimated to be incurred in undertaking an

activity or in the completion of a project.
b. Standard costs – refer to costs per unit of finished product for materials, labor
and factory overhead which are predetermined based on an intensive research
on the product and the manufacturing processes involved in its manufacture.
7. Based on generally accepted accounting treatment:
a. Product costs – refer to cost items incurred in making goods available for sale so
that they are considered inventoriable costs and allocated between the sold and
the unsold or are treated as part of inventory until the latter is sold.
b. Period costs – refer to those charged as expenses in the period during which
they are incurred.
8. Based on economics involved in making managerial decisions:
a. Opportunity costs – refer to benefits or advantages foregone in rejecting an

alternative.
b. Imputed costs – refer to peso amount assigned to an item but which has not
been the subject of a transaction so that no liability is incurred nor is there a
need for cash outlay.
c. Controllable costs – are costs which can be regulated depending on the level of
management one is in.
d. Marginal costs – refer to the increase in total cost brought about by the
production/ sale of an additional unit.
e. Sunk costs – refer to historical costs and is therefore irrelevant in the decision-
making process.
f. Out-of-pocket costs – refer to costs requiring disbursements.
g. Discretionary costs – are costs incurred depending on the discretion of a
manager.
h. Relevant costs – are costs that differ in two or more alternatives or are to be
affected by decisions to be made.
i. Committed costs – are costs that must be incurred because of past decisions,
contractual agreement, and government regulations.
j. Avoidable costs – refer to costs that are not expected to be incurred if a
particular activity were discontinued.
k. Replacement costs – refers to current market price.
l. Standby costs – refers to fixed costs that have to be incurred during a plant
shutdown.

ACT121 - Topic 2

Uploaded by

Copyright:

Available Formats

ACT121 - Topic 2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACT121 - Topic 2

Uploaded by

Copyright:

Available Formats

ALFONSO T.

YUCHENGCO COLLEGE OF BUSINESS

Cost refers to value foregone or value of resources sacrificed to achieve a specific

2.2 Classification of Costs

1. Based on function or group activities involved:

a. Manufacturing or production cost – refers to cost of direct materials, direct

2. Based on traceability to products:

3. Based on traceability to departments (or responsibility centers):

a. Direct departmental costs – refer to costs directly identifiable with a

4. Based on behavior (or variability):

5. Based on accounting period:

6. Based on planning and control:

a. Budgeted costs – refer to costs estimated to be incurred in undertaking an

7. Based on generally accepted accounting treatment:

8. Based on economics involved in making managerial decisions:

a. Opportunity costs – refer to benefits or advantages foregone in rejecting an

You might also like