Cost concepts, classifications, and cost behavior Nonmanufacturing Cost – cost that is incurred in the
entity’s operations on making the product known,
Cost – Reflects the amount of resources sacrificed in
selling them, and other administrative expenses.
order for the company to achieve a certain objective
such as creation of goods or rendering of services in Operating expeneses like marketing and
order to earn revenues. advertising, admisnistative, selling
What can we do to eliminate other operating
Cost on a managerial emphasis
expenses that does not add value to the
Cost information from cost accounting is a vital tool in company
order for managers to plan and control operations Are there other edxpenese we need tro
effectively. This stressed the need for timely and consider that could help in our operations
relevant cost information Our office rent increased this month as
compared to last month, what is the reason.
Cost analysis and management should come
after making cost information available Costs based on timing of matching with revenues
Techniques like budgeting and forecasting helps
Product cost vs Period Cost
the entity plan the future and subsequently
control operations through performance Product Cost – Costs assigned to products until they are
evaluation and variance analysis when actual sold
data becomes available.
Goods not yet completed – WIP inventory
Generally, a manager would have to think of
Goods Completed – FG inventory
ways in order to reduce costs and other
Goods Sold – Cost of Goods sold
expenses from the standpoint of increasing
What are the costs that we include as product
profits. Strategically, however, increases or
costs that in turn becomes inventoriable cost,
decreases in costs should support the strategic
and becomes cost of goods sold when sold to
position set by the entity – basically referring on
customers
how to achieve competitive advantage
On a strategic management standpoint, Period Cost – costs incurred and recognized based on
management functions, cost management, time period
planning and decision-making should be in line
with the entity’/s vision, mission. Goals, and Operating expenses like rent, salaries, and other
objectives administrative and general expenses
Cost management and control is a highly Is there proper segregation of payroll as to
important factor in achieving, maintaining, and laborers and payroll as to office staf
growing the entity’s profitability Is there a proper segregation of factory favility
When an entity is continuously profitable, value rent and office rent
continuously increases, which goes back to the What costs shall be reviewed that should be
importance of the alignment of cost control included as product costs rather than as period
with the entity’s vision and mission. A manager costs and vice-versa
should always put cost management in mind on
a strategic standpoint.
Cost based on functional areas
Manufacturing Cost vs Nonmanufacturing Cost
Manufacturing Cost – cost that is incurred in the entity’s
operations and producitng products and services
Direct materials
Direct Labor
Manufacturing Overhead
Questions important
How can we lower down our costs of
production
What is the standard labor hours in the
production of product A
How many units of Material X shall we purchase
next period to avoid production Delays
Cost Traceability
Direct Cost VS indirect Cost Opportunity Cost – These are benefits forgone in
choosing one alternative over the other course of action
Direct Cost – costs that are traceable to a particular
product line, segment, department, division or branch Spenindg for a cheeseburger for P50 per day for
the next ten years would have accumulated to
Assuming an entity reviews all costs incurred in
182,500 worth of saving if you choose to save
a specific department, all material and labor
An entity has chosen to rent a facility. The
costs identified in that department are direct
payment for the rent could have been spent on
costs. Salaries of supervisors in that department
other aspects of the operations of the business
is still a direct cost in that certain department
(because its traceable there) Differential Cost – Differences of cost under alternative
actions or decisions
Indirect Cost – Costs that are not directly traceable to a
particular product line, segment, department, division, Incremental or decremental costs or
or branch. profits(losses) in deciding whether to make or
buy, shut down or continue, Sell as is or process
If all product lines has only one production
further, and drop a product line or not.
head, the salary of the production head will be
allocated to the different production lines, Relevant Cost – Cost incurred in one alternative that will
which makes it indirect. However, the salry of not be encountered in the other alternative
the production head is still a direct cost if we
Choosing procution cycle A involves P56/unit of
will be talking about the whole production
materials. Production cycle B involves P60/unit of
department
materials. However. Whatever production cycle, fixed
Cost Controllability cost will amount to P40,000
Controllable Cost VS Uncontrollable Cost A has relevant cost of P56
B has relevant Cost of P60
Controllable Cost – Costs that can be influenced by the
The 40,000 is irrelevant since both alternatives
manager on how it will be incurred and can be altered
will incur the same fixed cost.
in the short run
Marginal Cost – extra cost incurred when one additional
Power or authority to incur costrs
unit is produced. It determines the quantity most
Manager has freedom to set levels and decide
efficient to produce
for price, quality, and quantity and event the
supplier of materials and other inputs Marginal cost of production is an important
Direct Materials and direct labor concept in managerial accounting, as it can help
Donations and other contributions an organization optimization their production
Training Costs Fixed cost are constant regardless of production
Bonuses levels, so higher production leads to a lower
fixed cost per unit as the total is allocated over
more units
Non Controllable Cost – Costs that cannot be influenced Variable costs change based on production
by the manger on how it will be incuyrred. It can be levels, so production more units will ad more
altered in the long run variable costs
Allocated ot the department under his Marginal Cost = Change in Cost / Change in quantity
leadership
Average cost per unit – total cost to produce divided by
Cost Incurred traceable to the specific
the total number of units manufactured
department but is incurred because it is decided
by the higher authority or management Cost per unit = (total fixed cost + total variable cost)
Depreciation Total number of the units produced
Insurance
Allocated Overhead
Allocated Rent
Costs as to decision making
Sunk Cost – costs that have been already incurred that
wil not affect future costs since they are already paid for
or incuirred and cannot be changed by any future action
A company spends 10,000 training its
employees to use a new EPR system. The
software turns out to be heavily confusing and
unreliable. The senior management team wants
to discontinue the use of the new ERP systeme.
The 10,00 spent to train employees is a sunk
cost and should not be considered in the
decision of discontinuing the new ERP system
Out-of-pockjet Cost – Costs or expense that require a
cash payment in the payment in the current period or
during a project
The wages of the person setting up a machine
for a new production run are an out-of-pocket
cost. However the cost of the lost opportunity
to be producing profitable output during the
setup time is not an out-of-poclket cost
Payment of rent, wages, or interest
Cost Behavior – how a cost will respond according to
changes in the production process or level of activity
