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    Lesson #: Cost Terms, Concepts, and Classifications

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    Claudette Clemente
    This document discusses cost classifications and concepts. It defines key terms like cost, cost pools, cost objects, and cost drivers. It explains how costs are assigned to cost pools and allocated from cost pools to cost objects. Costs are also classified based on their association with cost objects, reaction to changes in activity, and presentation in financial statements. Other classifications discussed include managerial influence, commitment to expenditures, and analytical purposes.

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    Lesson #: Cost Terms, Concepts, and Classifications

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    Claudette Clemente
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    This document discusses cost classifications and concepts. It defines key terms like cost, cost pools, cost objects, and cost drivers. It explains how costs are assigned to cost pools and allocated from cost pools to cost objects. Costs are also classified based on their association with cost objects, reaction to changes in activity, and presentation in financial statements. Other classifications discussed include managerial influence, commitment to expenditures, and analytical purposes.

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    This document discusses cost classifications and concepts. It defines key terms like cost, cost pools, cost objects, and cost drivers. It explains how costs are assigned to cost pools and allocated from cost pools to cost objects. Costs are also classified based on their association with cost objects, reaction to changes in activity, and presentation in financial statements. Other classifications discussed include managerial influence, commitment to expenditures, and analytical purposes.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    24 views13 pages

    Lesson #: Cost Terms, Concepts, and Classifications

    Uploaded by

    Claudette Clemente
    This document discusses cost classifications and concepts. It defines key terms like cost, cost pools, cost objects, and cost drivers. It explains how costs are assigned to cost pools and allocated from cost pools to cost objects. Costs are also classified based on their association with cost objects, reaction to changes in activity, and presentation in financial statements. Other classifications discussed include managerial influence, commitment to expenditures, and analytical purposes.

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    of 13

    Lesson # : Cost Terms,

    Concepts, and
    Classifications
    PATRICK LOUIE E. REYES,
    CTT, MICB, RCA, CPA
    Cost, Cost Pool, Cost Objects, and
    Cost Drivers
    COST: value forgone in exchange for achieving
    economic benefits
    COST POOLS: costs collected into meaningful groups
    (pools), classified by type, source, or
    responsibility.
    COST OBJECTS: where costs are assigned
    COST DRIVER: factor that causes changes in the costs of
    an activity
    Cost, Cost Pool, Cost Objects, and
    Cost Drivers
    •Activity: an event, action, transaction, task or unit of
    work with a specified purpose.
    • Value-adding activities – necessary for production; cannot
    be eliminated. Example: assembly of different parts of a
    product.
    • Non-value-adding activities – do not make the product or
    service more valuable to the customer. Example: moving the
    materials from the stock room to the production area.
    Cost, Cost Pool, Cost Objects, and
    Cost Drivers
    Cost assignment: process of assigning costs
    • to cost pools
    • from cost pools to cost objects
    Cost allocation: assignment of indirect costs to cost
    pools, based on cost drivers
    Classifications of Costs
    ASSOCIATION WITH COST OBJECT
    •Direct costs: conveniently and economically traceable
    •Indirect costs: allocated to the cost object
    Classifications of Costs
    REACTION TO CHANGES IN ACTIVITY
    •Variable costs📈: varies (in total) proportionately with
    level of activity
    • on a per-unit basis: constant
    •Fixed costs📌: remains constant (in total) regardless of
    level of activity
    • on a per-unit basis: inversely proportional with level of activity
    •Mixed costs🧪: contain both variable and fixed elements
    • in total: if level of activity rises, total costs rise as well
    • on a per-unit basis: if level of activity rises, per-unit costs falls
    Classifications of Costs
    REACTION TO CHANGES IN ACTIVITY
    Note: All cost behavior previously mentioned are
    observable only with a certain relevant range.
    Relevant range: the assumed range of activity that
    reflects the company’s normal operating range
    For mixed costs, it is important to separate the variable
    and fixed elements for further analysis and decision-
    making 🤔. This shall be discussed in the next lesson.
    Classifications of Costs
    CLASSIFICATION IN THE FINANCIAL STATEMENTS
    Product cost
    • related to making/acquiring the products or providing the
    services that directly generate the revenues of an entity
    • also called inventoriable cost, manufacturing costs
    • seen in the Statement of Financial Position
    • composed of direct and indirect manufacturing costs
    Classifications of Costs
    CLASSIFICATION IN THE FINANCIAL STATEMENTS
    Period cost
    • related to business functions other than production, such as
    selling and administration
    • more closely associated with a particular time period than
    with making/acquiring a product or performing a service
    • also called non-manufacturing costs
    • seen in the Income Statement as Cost of Sales or Other
    Operating Costs
    Classifications of Costs
    OTHER CLASSIFICATIONS

    Note: These other classifications are made for you to be


    familiarized, although lessons related to these costs might
    not be under ACCT 1033.
    Classifications of Costs
    OTHER CLASSIFICATIONS
    •Managerial Influence: Controllable and Non-controllable
    costs (useful in the topic Responsibility Accounting)
    •Commitment to Cost Expenditure: (Fixed Costs)
    • Committed fixed costs: long term, cannot be eliminated
    without effect on profitability or long-term organizational goals
    • Discretionary fixed costs: can be changed by management
    from time to time
    •Period of Incurrence: Historical and Future costs (useful in
    the topic relevant cost)
    Classifications of Costs
    OTHER CLASSIFICATIONS
    •Planning and Control:
    • Standard and Budgeted cost – useful in our future topic: Standa
    Costing
    • Absorption and Variable – there will be a separate topic on this.
    Main difference: classification of Fixed Overhead cost
    • Information cost – difference in cost when there is information
    and when there is none. Useful in Decision Tree Analysis.
    • Ordering cost – cost of ordering. Useful in the study of EOQ
    • Out-of-pocket costs – with corresponding present cash outlay
    Classifications of Costs
    OTHER CLASSIFICATIONS
    •Other Analytical Purposes
    • Relevant cost – future and different
    • Sunk cost – already incurred; cannot be changed by any
    decision
    • Opportunity cost – benefit given up by choosing another
    alternative
    • Marginal cost – also called differential cost; difference in
    cost between any two alternatives. Kinds: Incremental and
    Decremental
    • Value-added cost

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