PART I

INDEX

A. COST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. COST CLASSIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B.1. Costs by Management Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B.2. Direct Costs And Indirect Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 B.3. Product Costs And Period Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 B.4. Variable Costs, Fixed Costs, And Semivariable Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 B.5. Costs For Planning, Control, And Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 C. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 D. REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

A. COST Cost has different meanings in financial accounting and managarial accounting. In financial accounting, it is defined as a measurement of the amount of resources used. In managarial accounting, it is described in many ways since there are different types of costs for different purposes. B. COST CLASSIFICATIONS Costs can be classified according to their 1. Management Function 1.1. Manufacturing costs 1.2. Nonmanufacturing costs 2. Ease of traceability 2.1. Direct costs 2.2. Indirect costs 3. Timing of charges against sales revenue 3.1. Product costs 3.2. Period costs 4. Behaviour in accordance with changes in activity 4.1. Variable costs 4.2. Fixed costs 4.3. Semivariable costs 5. Relevance to control and decision making 5.1. Controllable and noncontrollable costs 5.2. Standard costs 5.3. Incremental costs 5.4. Sunk costs 5.5. Opportunity cost 5.6. Relevant costs (Shim, Siegel, 1998) B.1. Costs by Management Function In a manufacturing firm, costs are divided into two in according to their functions, manufacturing costs and nonmanufacturing costs. Manufacturing costs are the costs that are related to manufactuing, which are direct materials, direct labor, and factory overhead. All materials that form the final product are called direct materials. Minor items used during the production are called indirect materials. Direct labour is the labour that directly 2

contributed to the production. Labour which does not involve directly in production is called indirect labour, such as security guards, accountants, supervisors. Lastly, factory overhead is defined as all costs except direct materials and direct labour. As examples depreciation, rent, taxes, insurance and cost of idle time can be given. Nonmanufacturing costs are divided into selling expenses and general and administrative expenses. Selling expenses are all expenses related to obtaining sales and delivery of the product. Shipping charges, advertising, sales commision can be given as examples. General and administrative expenses can be described as money spent in operating business that is not directly related to production, such as rent, salaries, legal expenses. B.2. Direct Costs And Indirect Costs Costs can be categorized in accordance with their traceability. Direct costs are the costs that can be traced directly to a costing object. Direct materials, direct labour are the examples of direct costs. Indirect cost is an expense incurred in joint usage and that is why it is difficult to assign to a specific cost object. For example, expenses of advertising, maintenance, security and supervision are called indirect costs. B.3. Product Costs And Period Costs Costs can be categorized due to being inventoriable. Product costs are inventoriable costs, therefore until they are sold they are assests. When they are sold, they are accepted as cost of goods sold. All manufacturing costs are product costs. Period costs are not inventoriable. Period costs are selling and general administrative expenses identified with the accounting period in which they are incurred. Selling and general and administrative expenses are period costs. B.4. Variable Costs, Fixed Costs, And Semivariable Costs These costs are classified by their behaviour. Costs that change according to change in volume are called variable costs, such as cost of direct labour and direct material. Fixed costs are the costs that does not vary depending on changes in activity, such as rent, insurance and taxes. Semi variable costs are composed of fixed and variable costs. Costs are fixed until a level of production or consumption but after exceeding that level, it becomes variable. Labour costs are semi-variable because the fixed protion is the wage paid to workers for regular working hours and variable portion is the overtime payment.

B.5. Costs For Planning, Control, And Decision Making Controllable And Noncontrollable Costs: If the amount of the cost is assigned to a member of undertaking and the level of the cost is mostly under this members influence, this cost is called controllable. Costs that are not subject to influence of managerial supervision are called noncontrollable. Standard Costs: Startard costs are the estimated production or operating costs. It is a target cost and it is used to measure performance by comparing with actual cost. Incremental Costs: It is the difference in costs between two or more alternatives. Sunk Costs: Money already spend and lost is called sunk cost. They are irretrievable and that is why they are irrelevant to future decion making. Opportunity Cost: Net value forgone by rejecting an alternative is called opportunity cost. Relevant Cost: Expected future costs that will differ between alternatives are called relevant costs. C. Conclusion Knowing all these classifications helps us to know terminology and facilitates using costing methods. That is why cost classifications form the basis of costing methods. To illusrate, lets take a look at ABC method. Increase in the automation of manufacturing led to change in nature of composition of total product cost because while significance of direct labor cost has decreased, significance of overhead costs has increased. Since overhead application rates based on direct labour and any other volume-based cost driver would not provide accurate overhead charges any more, activity based costing is used in order to get around this problem. In this method, costs are assigned to pools based on the activities not volumes and the costs in the activity cost pools are allocated to products using a variety of cost drivers. (Edmonds et al., 2011, p.207) As it can be understood, without knowing the meaning of direct labour and overhead cost, it is difficult to use this method.

REFERENCE Shim, J.K., Siegel, J.G. 1998. Managerial Accounting 2nd ed. S.l.: McGraw-Hill Edmonds, T. P., Tsay, B. and Olds, R.R. 2011. Fundamental Managerial Accounting Concepts 6th ed. S.l.: Vertovec, T.