This document discusses different types of costs that are relevant for managerial accounting. It defines costs and classifies them based on the type of organization. For manufacturing organizations, the three main components of product cost are direct materials, direct labor, and manufacturing overhead. Costs are also classified as either product costs, which are involved in manufacturing goods, or period costs like selling and administrative expenses. The document outlines how costs flow through financial statements and how they are classified for management control purposes, such as variable vs. fixed or direct vs. indirect costs.

1. Cost Terms, Concepts and
Classification
MANAGERIAL ACCOUNTING

2. COSTS
- are associated with all types of
organizations business, non business,
service, retail and manufacturing.
- also classified depending on the type of
organization involved.

3. Difference of COST between Financial
Accounting and Managerial Accounting
• Financial Accounting – cost is a sacrifice
made in order to obtain some good or
service.
Sacrifice – may be cash expended, property
transferred,service performed, and so on.
• Managerial Accounting – cost is used in
many different ways.
- it is according to the immediate needs
of management.

4. Manufacturing
Costs

5. Difference between Manufacturing and
Merchandising
• Manufacturing – transformation of raw
materials into finished product.
• Merchandising – marketing of products
without changing their basic form or
content.

6. Manufacturing Costs
A manufacturing firm is more complex than
most other types of organizations.
Three Basic Elements:
Direct Materials
Direct Labor
Manufacturing Overhead

7. Manufacturing Costs
• DIRECT MATERIALS – materials that
become an integral part of a company’s
finished product, and which can be traced
into it.
- generally termed raw materials.

8. Manufacturing Costs
• DIRECT LABOR – labor costs which are
directly traceable to the creation of
products.
• MANUFACTURING OVERHEAD –
including all cost of manufacturing except
direct materials and direct labor.

9. Nonmanufacturin
g
Costs

10. Nonmanufacturing costs
Two categories:
• Marketing Cost – to secure customer
orders and to get the finished
product/services into the hands of the
customer.
• Administrative cost – all executive,
organizational, and clerical costs which is
not under marketing.

11. Period Costs

12. • Period Cost – identified with measured time
intervals, rather than with goods delivered or
services provided.
- All Selling and Administrative Costs are
treated as period costs.
- Nonmanufacturing Costs are all
considered Period Costs and will appear on
income statement as expenses on time-
period basis.

13. Product Costs

14. • Product Cost – involved in the
manufacture of goods.
- often called inventoriable costs.
-includes direct materials, direct labor
and manufacturing overhead.

15. COST Classification on
FINANCIAL STATEMENT
• Financial Statement prepared by a
manufacturing firm are more complex than
the statements prepared by a
merchandising firm.
• The production process gives rises to
many costs that does not exist in a
merchandising firm.

16. Income Statement
• Merchandising = cost of goods sold =
purchase cost of goods from a supplier.
• Manufacturing = consist of many different
cost which incurred in the manufacturing
process.

17. Balance Sheet
• Merchandising = one class of inventory =
goods purchased from the supplier
• Manufacturing = three classes of inventory
: manufactured products, work in process,
finished goods

18. Cost Flow
• Operations = work in process (asset),
finished goods (asset), cost of goods sold
(expense)
• Selling and Administrative activities =
expense as period cost

19. Idle Time
• It represents the costs of direct labor
workers who are unable to perform their
assignments due to machine breakdowns,
material shortages, power failures.
• It will be treated as manufacturing
overhead or indirect labor.

20. Overtime Premium
• It is considered to be part of
manufacturing overhead both with direct
and indirect labor.
• It is because production is usually
scheduled on a random basis. If so, then it
would be unfair to charge an overtime
premium against a particular batch simply
because it happened to fall on the tail end
of the daily scheduling unit.

21. Payroll Fringe Benefits
• These are made up of employment-
related costs paid by the employer.as
• Many firms treat this as indirect labor by
adding them in total to manufacturing
overhead.

22. COST and CONTROL
• Cost Classification is different with preparing
a financial statement and a manager
controlling operations and preparing for
future.
Classification of Cost for control purpose:
• Variable and Fixed
• Direct and Indirect
• Controllable and Noncontrollable

23. • Variable Cost – cost which vary, in total, in
direct proportion to changes in the level of
activity.
• Fixed Cost – cost which remain constant.
- not affected by changes in
volume.

24. • Direct Cost – can be obviously and
physically traced to the particular segment
under consideration.
• Indirect Cost – they must be allocated in
order to be assigned to units of products
or other segments of a company.

25. • Controllable Cost and Noncontrollable
Cost
- a cost is controllable at a particular
level of management if that level has a
power to authorize the cost.
- in some situation there is a time
dimension to controllability.

26. OTHER Cost Concepts
• Differential Cost – difference in cost between
one alternative and another.
• Opportunity Cost – potential benefit that is
lost or sacrificed when the choice requires
the giving up of an alternative course of
action.
• Sunk Cost- a cost that has already been
incurred, and which cannot be changed now
or in the future.