3. Period Cost/
Non-manufacturing Costs
Non-manufacturing costs refer to those incurred
outside the factory or production department. These
are costs are not needed in transforming materials into
finished goods.
Non-manufacturing costs includes selling expenses
and general expenses. Selling Expenses - also called
Selling and Distribution Expenses.
4.
5. 2-10
Period Cost / Non-Manufacturing
Costs
Administrative
Costs
All executive, organizational,
and clerical costs.
Administrative costs can be
either direct or indirect costs.
7. 2-12
Cost Classifications for Preparing Financial
Statements
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Period costs include all
selling costs and
administrative costs.
Expense
Income
Statement
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sale
9. 2-17
Cost Classifications for
Predicting Cost Behavior
Cost behavior refers
to how a cost will react
to changes in the level
of activity. The most
common
classifications are:
Fixed costs.
Variable costs.
Semi-variable costs.
10. FIXED COST
The cost which does not vary but remains constant
within a given period and range of activity in spite
of the fluctuations in production, is known as
fixed cost. Example: rent, insurance of factory
buildings etc. remain the same for different levels
of production.
11. VARIABLE COST
These costs tend to vary with the volume of output.
Any increase in the volume of production results in an
increase in the variable cost and vice versa.
Example: cost of material, cost of labour etc.
12. SEMI-VARIABLE COST
The cost which does not vary proportionately but
simultaneously cannot remain stationery at all times is
known as semi variable cost. It can also be called as
semi-fixed cost.
Example: Depreciation, repairs etc.
14. CONTROLLABLE COSTS
These are the costs which can be influenced by the
action of a specified member of an undertaking. A
business organization is usually divided into a number
of responsibility centres and each centre is headed by
an executive. The executive can thus control the costs
incurred in that particular responsibility centre.
15. UNCONTROLLABLE COSTS
Costs which cannot be influenced by the action of a
specified member of an undertaking.
Example: Expenditure incurred by the tool room is
controllable by the foreman in charge of that section
but the share of the tool room expenditure which is
apportioned to a machine shop is not to be controlled
by the machine shop foreman.
16. 2-20
The Activity Base (Cost Driver)
A measure of what
causes the
incurrence of a
variable cost
Units
produced
Miles
driven
Machine
hours
Labor
hours
17. REFERENCES
Books:
Managerial Accounting by Garrison, Noreen and Brewer, 15th e
Links:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/direct-
labor/
https://www.accountingtools.com/articles/what-is-direct-material-cost.html
https://www.investopedia.com/ask/answers/050715/what-difference-between-
prime-cost-and-conversion-cost.asp#:
https://www.accountingtools.com/articles/controllable-costs.html
https://www.accountingtools.com/articles/2017/5/14/uncontrollable-cost
We use the term "nonmanufacturing overhead costs" or "nonmanufacturing costs" to mean the Selling, General & Administrative (SG&A) expenses and Interest Expense. Under generally accepted accounting principles (GAAP), these expenses are not product costs. (Product costs only include direct material, direct labor, and manufacturing overhead.) Nonmanufacturing costs are reported on a company's income statement as expenses in the accounting period in which they are incurred. Expressed another way, nonmanufacturing costs are not allocated to products via overhead rates since they are not included in the amounts reported as inventory on the balance sheet or in the cost of goods sold that is reported on the income statement.
Even though nonmanufacturing overhead costs are not product costs according to GAAP, these expenses (along with product costs and profit) must be covered by the selling prices of a company's products. In other words, selling prices must be large enough to cover SG&A expenses, interest expense, manufacturing overhead, direct labor, direct materials, and profit.
Some of the costs that would typically be included in nonmanufacturing costs include:
Salaries and fringe benefits of selling, general and administrative personnel. This would include the company president, vice presidents, managers, and other employees in the nonmanufacturing functions of the company.
Rent, property taxes, utilities for the space used by the nonmanufacturing functions of the company.
Insurance for areas outside of the factory.
Interest on business loans.
Marketing and advertising.
Depreciation and maintenance of equipment and buildings outside of manufacturing.
Supplies for the offices.
Definition:
A selling expense is a cost incurred to promote and market products to customers. These costs can include anything from advertising campaigns and store displays to delivering goods to customers. Any expense that is associated with selling a good or making a sale is considered a selling expense.
Administrative expenses are expenses an organization incurs that are not directly tied to a specific function such as manufacturing, production or sales. These expenses are related to the organization as a whole, as opposed to individual departments or business units. Administrative expenses include salaries of senior executives and costs associated with general services, for example, accounting and information technology. They tend to be unrelated to gross margins.
A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Examples of fixed costs include straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising. Unlike variable costs, fixed costs are not affected by changes in activity. Consequently, as the activity level rises and falls, total fixed costs remain constant unless influenced by some outside force, such as a landlord increasing your monthly rental expense. To continue the Nooksack Expeditions example, assume the company rents a building for $500 per month to store its equipment. The total amount of rent paid is the same regardless of the number of guests the company takes on its expeditions during any given month.
Common examples of variable costs include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs.
For a cost to be variable, it must be variable with respect to something. That “something” is its activity base. An activity base is a measure of whatever causes the incurrence
of a variable cost. An activity base is sometimes referred to as a cost driver. Some of the most common activity bases are direct labor-hours, machine-hours, units produced, and units sold. Other examples of activity bases (cost drivers) include the number of miles driven by salespersons, the number of pounds of laundry cleaned by a hotel, the number of calls handled by technical support staff at a software company, and the number of beds occupied in a hospital. While there are many activity bases within organizations, throughout this textbook, unless stated otherwise, you should assume that the activity base under consideration is the total volume of goods and services provided by the organization. We will specify the activity base only when it is something other than total output
A mixed cost contains both variable and fixed cost elements. Mixed costs are also known as semivariable costs. To continue the Nooksack Expeditions example, the company incurs a mixed cost called fees paid to the state. It includes a license fee of $25,000 per year plus $3 per rafting party paid to the state’s Department of Natural Resources. If the company runs 1,000 rafting parties this year, then the total fees paid to the state would be $28,000, made up of $25,000 in fixed cost plus $3,000 in variable cost. Exhibit 2–5 depicts the behavior of this mixed cost.
Controllable costs are those costs that can be altered in the short term. More specifically, a cost is considered to be controllable if the decision to incur it resides with one person. If the decision instead involves a number of individuals, then a cost is not controllable from the perspective of any one individual. Also, if a cost is imposed on an organization by a third party (such as taxes), this cost is not considered to be controllable. Examples of controllable costs are:
Advertising
Bonuses
Direct materials
Donations
Dues and subscriptions
Employee compensation
Office supplies
Training
The reverse of a controllable cost is a fixed cost, which can only be altered over a long period of time. Examples of fixed costs are rent and insurance.
An uncontrollable cost is an expense over which a person has no direct control. The concept most commonly applies to the manager of a department, whose departmental expenses include several line items which he has no ability to alter. Uncontrollable costs can be a concern when a manager is being judged based on departmental expenses. For example, there is a scheduled increase in the rent payment to the landlord, and a portion of this expense is allocated to a department that occupies a portion of the rented property. The manager of that department appears to be managing his expenses poorly because of the rent expense increase, even though he was not responsible for the rent agreement.
Examples of Uncontrollable Costs
Examples of uncontrollable costs are:
Rent expense
Corporate overhead allocation
Administrative overhead allocation
Depreciation expense
