Ch02_CostClassifications_LECTURE .pdf
- 1. Fundamentals of COST & MANAGEMENT ACCOUNTING Chapter 2 Cost Concepts and Classifications © 2025 M.Musov Designed by rawpixel.com / Freepik
- 2. Overview 1. Cost versus Expense 2. Key Cost Concepts 3. Cost Classification for Cost Assignment 4. Cost Classifications by Business Functions 5. Cost Classification for Inventory Valuation and Profit Measurement 6. Cost Classification for Planning 7. Cost Classification for Decision Making 8. Cost Classification for Management Control
- 3. 1. Cost versus Expense
- 5. 2. Key Cost Concepts
- 6. Key Cost Concepts Cost center (or, cost pool) is a collection of individual cost items to be assigned to the cost objects. ● Examples of cost centers include departmental costs, order-processing costs, etc. Cost object is anything for which a separate cost measurement is desired. ● Examples of cost objects are products/services, activities, processes, projects, departments, customers, etc. Cost accumulation – the first stage collects cost data and accumulates it in cost pools. Cost assignment – the second stage assigns accumulated costs in the cost pool to the desired cost objects. Cost assignment encompasses both: — cost tracing (direct costs are traced directly to cost objects) and — cost allocation (indirect costs are allocated to cost objects).
- 7. 3. Cost Classification for Cost Assignment
- 8. Cost Classification for Cost Assignment Direct costs of a cost object relate to a particular cost object and can be traced directly and in full to it in a cost-effective way. Indirect costs of a cost object (overhead costs) cannot be traced directly and in full to a particular cost object in a cost-effective way but has to be allocated to it.
- 9. 4. Cost Classifications by Business Functions
- 10. Cost Classification by Business Functions Manufacturing costs Direct materials (direct material costs) are the costs of purchase of all raw materials that can be traced to a particular cost object in a cost- effective way. Direct labor (direct manufacturing labor costs) are the labor costs that can be traced directly to a particular cost object in a cost-effective way. Manufacturing overhead (indirect manufacturing costs, overhead) are all manufacturing costs other than direct materials and direct labor. Manufacturing overheads include: indirect materials indirect labor, other manufacturing costs incurred to keep the production processes in a factory
- 11. Cost Classification by Business Functions Nonmanufacturing costs Selling costs include all costs incurred in promoting and fulfilling customer orders (until the product/service is received by the customer). Administrative costs – all costs required to manage and control the organization as a whole.
- 12. Cost Classification by Business Functions Prime costs and conversion costs
- 13. 5. Cost Classification for Inventory Valuation and Profit Measurement
- 14. Cost Classification for Inventory Valuation and Profit Measurement Product costs (also known as inventoriable costs) are those costs assigned to goods manufactured or to goods acquired for resale and recognized as expenses when these goods are sold. Period costs are all costs other than product costs. These costs are expensed on the income statement of the period in which they are incurred – they are deducted from revenue without being considered as part of the value of inventory.
- 15. Cost Classification for Inventory Valuation and Profit Measurement
- 20. Summary of Cost Classifications
- 21. 6. Cost Classification for Planning
- 22. Cost Classification for Planning
- 23. Cost Classification for Planning A variable cost is a cost that varies in direct proportion to changes in the activity level (within the relevant range) if expressed on a total basis, and that remains constant if expressed on a per unit basis.
- 24. Cost Classification for Planning A fixed cost is a cost that remains constant with changes in the activity level (within the relevant range) if expressed on a total basis. Since total fixed costs are constant, the average fixed cost per unit reacts inversely with changes in the level of activity – it becomes progressively smaller as the activity level increases, and vice versa.
- 25. Cost Classification for Planning A mixed cost (known as a semivariable cost) contains both variable and fixed portions. Therefore, a mixed cost varies with changes in the activity level (within the relevant range) if expressed on a total basis but not in direct proportion.
- 26. The Problem with Unit Costs All average unit costs appear as though they have a variable-cost behavior pattern, but they have not. Unit fixed costs and unit mixed costs are different from unit variable costs (because they are not constant). The easiest way to escape this unit-cost fallacy is to think in terms of total costs. The rule: first calculate total costs, then compute the average unit cost.
- 27. The Problem with Unit Costs
- 28. The Problem with Unit Costs
- 29. The Problem with Unit Costs
- 30. Relationships Between Cost Classifications
- 31. 7. Cost Classification for Decision Making
- 32. Cost Classification for Decision Making Relevant costs are future costs that differ in total between the various alternatives. These costs could be avoided (in whole or in part) by choosing one alternative over another – they are avoidable. Sunk costs are costs incurred in the past that cannot be altered regardless of the decision made. They are always irrelevant and therefore ignored when making decisions. Opportunity costs arise when the resource capacity is scarce and has an alternative use (or could be sold). Opportunity costs are measured by the forgone potential contribution to income from the next-best alternative use of the scarce resources. Opportunity costs are relevant costs, because they are different under different alternatives, although not measured by the accounting system.
- 33. 8. Cost Classification for Management Control
- 34. Cost Classification for Management Control A controllable cost is any cost that can be influenced to a significant extent by a particular manager of a responsibility center within a given time horizon. Three factors affect the controllability of costs: the hierarchical level in the organization chart; the nature of the responsibility center and the time horizon A noncontrollable cost is a cost that cannot be influenced to a significant extent by a particular manager of a responsibility center within a given time horizon.