COST

Anything of value foregone to attain an objective

Value of an expense or an asset (Prepaid Expense, Depreciation of Equipment,
Merchandise Inventory : Cost of Sales)
An expense, the benefit or the life of which is short-term in nature because
they are consumables.
Cost should be matched with the revenues (Matching Principle)
Cost are classified in various categories.

COST and PROFITS
Objective of setting up a business ---> to have profits
A specific cost may be categorized into different classifications.


CLASSIFICATION OF COSTS
Origin of Cost
o Production Department Raw Materials, Direct Labor & Factory
Overhead, Cost of Goods Sold (CGS), Freight-in
o Sales Department Selling, Advertising, Commission of Salesmen,
Freight-out
o Other Departments Administrative expenses (Accounting Dept.,
HRD, etc.)

According to Operations (Income Statement)
o Service Operating expenses
o Merchandising Operating Expenses, CGS
o Manufacturing Operating Expenses, CGS, Cost of Goods
Manufactured (CGM)

Product Costs
o Direct Materials Prime Cost
o Direct Labor Prime Cost
o Factory Overhead Other costs (Indirect Materials, Indirect
Labor, Other costs charged to Manufacturing/Production department
[Rent, Depreciation, Utilities])

Operating Expenses
o Selling/Marketing Expenses
Costs incurred by Sales department
o General/Administrative Expenses
Costs incurred by other departments
(HRD, Personnel, Accounting, Building
Admin)

Capital Expenses v. Revenue Expenses
o Capital Expenditures Costs incurred before actual usage of asset
or cost that would increase the life of the asset (Freight, Installation,
Dry-run & Testing)
o Revenue Expenditures Maintenance cost, regular check-up,
improvement/replacement

Classification of Income
Statement
*Function of Expense CGS,
Selling, Administrative
*Nature of Expense Costs
are listed
Period Costs v. Product Costs
o Period Costs Matched against
revenues charhed in the income statement
every period; Cannot be associated with
the products sold; Selling &
Administrative Expenses.
o Product Costs Assigned to product
produced.

According to Product Significance
o Direct Costs Direct Materials, Direct Labor
o Indirect Costs Factory Overhead

Based on Planning and Control
o Standard Costs Predetermined costs per unit of finished product
- Gathered from previous records
- Ideal Scenario
- For Estimates
o Budgeted Costs Estimated to be incurred in undertaking an
activity/project
- A little higher than standard costs.
o Actual Costs

According to Behavior
o Fixed Costs Remain unaffected by the volume of production or
sales
- Inversely proportional to relative range
o Variable Cost Directly related to volume or number of units
produced or sold
o Mixed Cost Mixed costs change, but is not related to change in
sales or production
- Can be a mix of variable and fixed component.
Units Price
0 1,000 (Fixed portion)
10 1,500
45 3,000
o Step Cost Semi-fixed

Opportunity Costs and Differential Costs
o Opportunity Costs Forgone/given up from one alternative in
favour of another choice/alternative
o Differential Costs Positive or negative difference between two
alternatives

Cost of riding a
TAXI JEEP
120 7.50
1,000
120 <- Difference between ->
is the Differential Cost
1,007.50

Incremental Costs and Marginal Costs
o Incremental Costs Total increase in cost due to additional
production
o Marginal Costs Increase in cost per unit

5 Units 10 Units
5 (D.M.) 10
5 (D.L.) 10
10 (F.O.H.) 10
20 +10 Incremental Cost 30
5 10
4 -1 Marginal Cost 3

Controllable and Non-controllable Costs
o Controllable Costs Can be regulated by the management
- Production Manager can control production costs
o Non-controllable Costs Cant be regulated
- Depreciation, Rental Expense, etc.

Out-of-Pocket (OOP) and Non-Cash Costs
o OOP Costs Cash disbursements
o Non-cash Costs Does not require cash
- Depreciation, Amortization of Intangibles, Bad Debts

Sunk Costs and Future Costs
o Sunk Costs Historical or past costs
- Constant, not differential and irrelevant (in terms of decision
making, can be used for comparison)
o Future Costs Cost to be incurred in the coming periods
- Relevant and are of value in making decisions
- Can affect the future where the manager should plan, organize,
direct and control
- a.ka. Planned costs, Budgeted costs, Estimated costs.