MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

CHAPTER 2 COST CONCEPTS AND CLASSIFICATION

What I Need to Know?

1. Distinguish between cost, expenses, and losses
2. Distinguish between direct and indirect cost
3. Define variable, fixed, and mixed costs and discuss the effect of changes in
volume on these costs

Costs are associated with all types of organizations – business, non-business, service,
retail and manufacturing. Generally, the kinds of costs that are incurred and the way
these costs are classified will depend on the type of organization involved.

I. Cost classified as to relation to a product

A. Manufacturing Costs

1. Direct Materials – materials that become part of a finished product and can be
conveniently and economically traced to specific product units.

2. Direct Labor – all labor costs for specific work performed on products that can be
conveniently and economically traced to end products.

3. Factory Overhead – a catchall for manufacturing costs that cannot be classified as

direct materials or direct labor costs. It includes indirect material and indirect labor.

B. Non-manufacturing costs

1. Marketing or selling expense – all costs necessary to secure customer orders and get
the finished product or service in to the hands of the customer.
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

2. Administrative expense – all executive, organizational, and clerical expenses that

cannot logically be included under either production or marketing.

II. Cost classified as to variability

A. Variable cost – items of cost which vary directly in relation to volume of

production.

B. Fixed cost – items of cost which remain constant in total irrespective of the
volume of production.

C. Mixed cost – items of cost with fixed and variable component.

III. Cost classified as to relation to manufacturing departments

A. Direct department charges - costs charged to the particular manufacturing

department that incurred the costs since the costs can be conveniently identified
or associated with the departments that benefited from said costs.

B. Indirect department charges – cost charged to some other manufacturing

departments or accounts but are later allocated or transferred to another
departments that indirectly benefited from said costs.

IV. Cost classified to their nature as common or joint

A. Common costs – costs of facilities or services employed in two or more

accounting periods, operations, commodities or services.

B. Joint costs – costs of materials, labor, and overhead incurred in the manufacture
of two or more products at the same time.
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

V. Cost classified as to relation to an accounting period

A. Capital expenditures – expenditure intended to benefit more than one accounting

periods and is recorded as an asset.

B. Revenue expenditures – expenditure that will benefit current period only and is
recorded as an expense.

VI. Cost classified as to relation to an accounting period

A. Standard costs – predetermined costs for direct materials, direct labor and factory
overhead.

B. Opportunity costs – the benefit given up when one alternative is chosen over
another.

C. Differential costs – cost that is present under one alternative but is absent in
whole or in part under another alternative.

D. Relevant costs – a future cost that change across the alternatives.

E. Out-of-pocket costs – cost that requires the payment of money as a result of their
incurrence.

F. Sunk costs – a cost for which an outlay has already been made and it cannot be
changed by present of future decision.
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Cost Flow – Manufacturing Firms

Sample Problem
1. Shown below are a number of costs incurred last year at Mecca Publishing Co., a
manufacturer of elementary school textbooks:

Solvents and cleaners used by the custodians to

clean the textbook printing presses ........................ $500
Depreciation on the automobiles used by sales $4,20
representatives ..................................................... 0
$2,00
Fire insurance on factory building ........................... 0
$3,70
Shipping costs on textbooks sold............................ 0

4
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

What is the total of the manufacturing overhead costs above?

A) $500
B) $2,500
C) $6,200
D) $6,700

Solution:
Solvents and cleaners used by the custodians to clean the
textbook printing presses ...............................
Fire insurance on factory building........................
Total ....................................................................

2. Mammoser Manufacturing Corporation rents a building for $8,000 per month and
uses it for a number of different purposes. The building space is utilized by the various
activities as follows:

Receiving and storing raw materials .... 5%

70
Production operations.......................... %
15
Sales offices ........................................ %
10
Administrative offices........................... %

5
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

How much of the $8,000 monthly rent cost should be classified as manufacturing
overhead?
A) $5,600
B) $6,000
C) $6,800
D) $7,200

Solution:
Receiving and storing raw materials (5% × $8,000) $ 400
Production operations (70% × $8,000) ................... 5,600
$6,000
3.Consider the following costs:

$33,00
Direct materials ................................... 0
$12,00
Depreciation on factory equipment ...... 0
$23,00
Factory janitor’s salary......................... 0
$28,00
Direct labor .......................................... 0
Utilities for factory ................................ $9,000
$16,00
Selling expenses ................................. 0
$34,00
Production supervisor’s salary ........ 0
$21,00
Administrative expenses...................... 0

6
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

What is the total amount of manufacturing overhead included above?

A) $78,000
B) $139,000
C) $44,000
D) $37,000

Solution:
$12,00
Depreciation on factory equipment ...... 0
Factory janitor’s salary......................... 23,000
Utilities for factory ................................ 9,000
34,00
Production supervisor’s salary............. 0
$78,00
Total .................................................... 0

4.The information below relates to Derby Manufacturing Company's operations for a

recent month. (Assume that all raw materials are direct materials.):

Purchases of raw materials ................. $91,000

$122,00
Direct labor cost .................................. 0
Selling costs (total) .............................. $42,000
Administrative costs (total) .................. $56,000
$340,00
Manufacturing overhead costs (total) .. 0
Raw materials inventory, beginning ..... $22,000
Work in process inventory, beginning .. $27,000
Finished goods inventory, beginning ... $42,000
Raw materials inventory, ending ......... $7,000

7
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Work in process inventory, ending ...... $35,000

Finished goods inventory, ending ........ $15,000

What was Derby's cost of goods manufactured for the month?

A) $545,000
B) $560,000
C) $568,000
D) $587,000

Solution:
Derby Manufacturing Company
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory ........... $
22,000
Add: Purchases of raw materials ............. 91,00
0
Raw materials available for use ............... 113,000
Deduct: Ending raw materials inventory .. 7,00
0
Raw materials used in production ............ $106,000
Direct labor.................................................. 122,000
Manufacturing overhead ............................. 340,000
Total manufacturing costs ........................... 568,000
Add: Beginning work in process inventory .. 27,000
595,000
Deduct: Ending work in process inventory .. 35,000
Cost of goods manufactured ....................... $560,000

8
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

5. Consider the following costs incurred in a recent period:

$33,00
Direct materials ................................... 0
$12,00
Depreciation on factory equipment ..... 0
$23,00
Factory janitor’s salary ........................ 0
$28,00
Direct labor ......................................... 0
Utilities for factory ............................... $9,000
$16,00
Selling expenses................................. 0
$34,00
Production supervisor’s salary ............ 0
$21,00
Administrative expenses ..................... 0

What was the total amount of the period costs listed above for the period?
A) $78,000
B) $71,000
C) $46,000
D) $37,000

Solution:
$16,00
Selling expenses ................................. 0

Administrative expenses...................... 21,000

$37,00
Total .................................................... 0

9
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Reference:
Compilation of Lecture Notes of Guia Mae B. Abaja, CPA, Part-time Professor

For further discussion please refer to the link provided:

CHAPTER 2-Cost Concept and Classification- https://www.youtube.com/watch?v=lztzRuVRWxE
CHAPTER 2-Cost Concepts- https://www.youtube.com/watch?v=VpHvz7DT3-I
CHAPTER 2-Cost Flow- https://www.youtube.com/watch?v=26mMm9tuvAQ

10