COST CONCEPTS, USES AND CLASSIFICATIION
General Theme. Costs can be classified in a number of ways—depending on
the purpos...
VARIABLE COSTS, FIXED COSTS, AND SEMIVARIABLE COSTS
From a planning and control standpoint, perhaps the most important way...
STANDARD COSTS
The standard cost is a production or operating cost that is carefully predetermined.
It is a target cost th...
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Cost Concepts- CMA

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All about different accounting cost concepts

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Cost Concepts- CMA

  1. 1. COST CONCEPTS, USES AND CLASSIFICATIION General Theme. Costs can be classified in a number of ways—depending on the purpose of the classification. For example, classification of costs for purposes of determining inventory valuations and cost of goods sold for external reports differs from the classification of costs that would be carried out to aid decision- making. That is, a particular cost may be classified in many different ways— depending on the purpose of the classification. Manufacturing cost. These costs are incurred to make a product. Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. a. Direct materials b. Direct Labor. c. Manufacturing Overhead. d. Prime versus Conversion Costs Non-manufacturing costs. A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes most of these other costs are typically classified as selling (marketing) costs and administrative costs. Marketing and administrative costs are incurred in both manufacturing and merchandising firms. a. Marketing Costs. These costs include the costs of making sales, taking customer orders, and delivering the product to customers. These costs are also referred to as order getting and order-filling costs. b. Administrative Costs. These costs include all executive, organizational, and clerical costs that are not classified as production or marketing costs. Period vs. product costs. Costs can also be classified as period or product costs. Period Costs. Period costs are expensed in the time period in which they are incurred. All selling and administrative costs are typically considered to be period costs. Product Costs Productcostsare added to units of product(i.e., “inventoried”) as they are incurred and are not treated as expenses until the units are sold.
  2. 2. VARIABLE COSTS, FIXED COSTS, AND SEMIVARIABLE COSTS From a planning and control standpoint, perhaps the most important way to classify costs is by how they behave in accordance with changes in volume or some measure of activity. By behavior, costs can be classified into three basic categories. Variable costs are costs that vary in total in direct proportion to changes in activity. Examples are direct materials and gasoline expense based on mileage driven. Variable Factory Overhead Supplies Receiving costs Fuel and power Overtime premium Spoilage and defective work Fixed costs are costs that remain constant in total regardless of changes in activity. Examples are rent, insurance, and taxes. Fixed Factory Overhead Salaries of production supervisors Rent of warehouse and factory building -Depreciation Salaries of indirect labor Property taxes Property insurance Patent amortization Semi variable (or mixed) costs are costs that vary with changes in volume but, unlike variable costs, do not vary in direct proportion. In other words, these costs contain both a variable component and a fixed component. Examples are the rental of a delivery truck, for which a fixed rental fee plus a variable charge based on mileage is made; and power costs, for which the expense consists of a fixed amount plus a variable charge based on consumption. The breakdown of costs into variable and fixed components is very important in many areas of management accounting, such as flexible budgeting, break-even analysis, and short-term decision making. . Semi variable Factory Overhead Supervision Maintenance and repairs Inspection Compensation insurance Service department costs Employer’s payroll taxes Rental of delivery truck Utilities Fringe benefits
  3. 3. STANDARD COSTS The standard cost is a production or operating cost that is carefully predetermined. It is a target cost that should be achieved. The standard cost is compared with the actual cost in order to measure the performance of a given costing department. Cost Classifications for Decision-Making. Every decision involves choosing from among at least two alternatives. Only those costs and benefits that differ between alternatives are relevant in making the selection. This concept is explored in greater detail in the chapter on relevant costs. 1. Differential Costs. A differential cost is a cost that differs between alternatives. The cost may exist in only one of the alternatives or the total amount of the cost may differ between the alternatives. Differential costs are also called incremental costs. Differential costs and opportunity costs should be the focus of decision making. They are the only relevant costs and all others should be ignored. 2. Opportunity Costs. An opportunity cost is the potential benefit that is given up by selecting one alternative over another. The concept of an opportunity cost is rather difficult for students to understand because it is not an actual expenditure and it is rarely (if ever) shown on the accounting books of an organization. It is, however, a cost that must be considered in decisions. 3. Sunk Cost. A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Since sunk costs cannot be changed and therefore cannot be differential costs, they should be ignored in decision making.

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