Value of an expense or an asset (Prepaid Expense, Depreciation of Equipment, Merchandise Inventory : Cost of Sales) An expense, the benefit or the life of which is short-term in nature because they are consumables. Cost should be matched with the revenues (Matching Principle) Cost are classified in various categories.
COST and PROFITS Objective of setting up a business ---> to have profits A specific cost may be categorized into different classifications.
CLASSIFICATION OF COSTS Origin of Cost o Production Department Raw Materials, Direct Labor & Factory Overhead, Cost of Goods Sold (CGS), Freight-in o Sales Department Selling, Advertising, Commission of Salesmen, Freight-out o Other Departments Administrative expenses (Accounting Dept., HRD, etc.)
According to Operations (Income Statement) o Service Operating expenses o Merchandising Operating Expenses, CGS o Manufacturing Operating Expenses, CGS, Cost of Goods Manufactured (CGM)
Product Costs o Direct Materials Prime Cost o Direct Labor Prime Cost o Factory Overhead Other costs (Indirect Materials, Indirect Labor, Other costs charged to Manufacturing/Production department [Rent, Depreciation, Utilities])
Operating Expenses o Selling/Marketing Expenses Costs incurred by Sales department o General/Administrative Expenses Costs incurred by other departments (HRD, Personnel, Accounting, Building Admin)
Capital Expenses v. Revenue Expenses o Capital Expenditures Costs incurred before actual usage of asset or cost that would increase the life of the asset (Freight, Installation, Dry-run & Testing) o Revenue Expenditures Maintenance cost, regular check-up, improvement/replacement
Classification of Income Statement *Function of Expense CGS, Selling, Administrative *Nature of Expense Costs are listed Period Costs v. Product Costs o Period Costs Matched against revenues charhed in the income statement every period; Cannot be associated with the products sold; Selling & Administrative Expenses. o Product Costs Assigned to product produced.
According to Product Significance o Direct Costs Direct Materials, Direct Labor o Indirect Costs Factory Overhead
Based on Planning and Control o Standard Costs Predetermined costs per unit of finished product - Gathered from previous records - Ideal Scenario - For Estimates o Budgeted Costs Estimated to be incurred in undertaking an activity/project - A little higher than standard costs. o Actual Costs
According to Behavior o Fixed Costs Remain unaffected by the volume of production or sales - Inversely proportional to relative range o Variable Cost Directly related to volume or number of units produced or sold o Mixed Cost Mixed costs change, but is not related to change in sales or production - Can be a mix of variable and fixed component. Units Price 0 1,000 (Fixed portion) 10 1,500 45 3,000 o Step Cost Semi-fixed
Opportunity Costs and Differential Costs o Opportunity Costs Forgone/given up from one alternative in favour of another choice/alternative o Differential Costs Positive or negative difference between two alternatives
Cost of riding a TAXI JEEP 120 7.50 1,000 120 <- Difference between -> is the Differential Cost 1,007.50
Incremental Costs and Marginal Costs o Incremental Costs Total increase in cost due to additional production o Marginal Costs Increase in cost per unit
Controllable and Non-controllable Costs o Controllable Costs Can be regulated by the management - Production Manager can control production costs o Non-controllable Costs Cant be regulated - Depreciation, Rental Expense, etc.
Out-of-Pocket (OOP) and Non-Cash Costs o OOP Costs Cash disbursements o Non-cash Costs Does not require cash - Depreciation, Amortization of Intangibles, Bad Debts
Sunk Costs and Future Costs o Sunk Costs Historical or past costs - Constant, not differential and irrelevant (in terms of decision making, can be used for comparison) o Future Costs Cost to be incurred in the coming periods - Relevant and are of value in making decisions - Can affect the future where the manager should plan, organize, direct and control - a.ka. Planned costs, Budgeted costs, Estimated costs.