This document discusses cost accounting concepts and classifications. It defines key cost terms like fixed costs, variable costs, prime costs, overhead costs, and work in progress costs. Fixed costs remain constant regardless of production levels, while variable costs change with activity. Prime costs include raw materials, direct labor, and direct expenses. Overhead costs cannot be directly associated with production but are necessary to operate the business. Work in progress costs capture the costs of unfinished production at the end of an accounting period. Proper costing allows businesses to control expenses, set selling prices, and ensure adequate profits.

1. Chapter 2
Cost Terms,Concept, and Classification

2. Introduction
 All firms which involve in production product and
services must prepare a ‘Pruduction Account’ other
than the Trade Account and Profit and Loss Account.
 The firms involved in the prodution have to evaluate
all type of cost which needed in their production and
services activity. This activity is known as ‘Costing’.
 Costing is being used by all the firms involve in
production area such as in industrial, agricultural
areas, construction and services.

3.  Costing activity consist of collecting and analyst the
cost in a systematical manner. The component of
production cost include the raw material cost, prime
cost, and overhead cost.
 By doing the costing activity, an entrepreneur can
control the cost in order to fix the selling price and
guaranteed the marginal profit to the firm.

4. The concepts of cost
 Production Account is prepare to find the production
cost.
 The production cost can be divided into two
component, which are fixed cost and Variable
Cost/Current Cost

5.  Fixed Cost
 Fixed cost is the unchangeable cost even though the
production cost changed. The cost is always linear for
the time being.
Fixed cost graph

6.  Fixed cost consist of the unchangeable expenses like
firm’s rental, land tax, depreciation, firm’s insurance and
also the manager salary.
 The fixed cost also can be changed if the firm’s
production increased to its maximize and there was a
need in adding up some new equipments/machines and
also a new place in order to meets its additional
production.

7.  Variable cost
 Variable costs are expenses that change in proportion
to the activity of a business.
 Variable cost is the sum of marginal costs over all units
produced. It can also be considered normal costs.

8. Elements of production cost
 In production, the production cost can be divided into:
 Raw material cost
 Direct labor cost
 Overhead cost
 Work in progress/on going cost

9.  Raw material cost
 The cost needed to buy the raw materials which needed
in production.
 example; the raw material needed to make a cake was
flour, sugar, butter, milk and flavor.

10.  Direct labor cost
 Direct labor cost is a part of wage-bill or payroll that
can be specifically and consistently assigned to or
associated with the manufacture of a product, a
particular work order, or provision of a service also, we
can say also it is the cost of the work done by those
workers who actually make the product on
the production line.

11.  Determination of the direct labor cost:
 Planning the work to be performed.
 Describing the job content of the work, by indicating
the skill, knowledge, etc.
 Matching the jobs with the employees.

12.  Prime Cost
 Prime cost is the total cost of the production inputs
needed to create a given output.
 The prime cost consist of 3 components which are:
 The raw material cost
 Direct labor cost
 Direct expenses (direct expenses are such as the royalty
payment and trade brand which pay up by the firm which
used others pattern and copyright)

13.  Overhead cost
 overhead cost refers to an ongoing expense of
operating a business;
 it is also known as an "operating expense".
 Examples include rent, gas, electricity, and wages.
 The term overhead is usually used when grouping
expenses that are necessary to the continued
functioning of the business but cannot be immediately
associated with the products or services being offered
(i.e., do not directly generate profits)

14.  Work in progress/ on going cost
 The work in progress / on going cost is to be determine
when there are some undone work is still carry on.
 In the end of the accounting cycle, the work in progress
cost must be determine by:
 The raw material cost
 Labor cost
 Direct cost
 Other expenses
 Overhead cost