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Cost Terminology and Cost Behaviors

This document discusses cost terminology and classifications. It defines costs as monetary measures of resources used to achieve objectives. Costs are classified as either direct or indirect, expired or unexpired, variable, fixed, or mixed. Variable costs fluctuate proportionately with activity levels while fixed costs remain constant despite activity changes. Management must understand cost behavior within the relevant range of normal operations to accurately predict costs and profits.

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Nicole Anne Santiago Sibulo
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262 views2 pages

Cost Terminology and Cost Behaviors

This document discusses cost terminology and classifications. It defines costs as monetary measures of resources used to achieve objectives. Costs are classified as either direct or indirect, expired or unexpired, variable, fixed, or mixed. Variable costs fluctuate proportionately with activity levels while fixed costs remain constant despite activity changes. Management must understand cost behavior within the relevant range of normal operations to accurately predict costs and profits.

Uploaded by

Nicole Anne Santiago Sibulo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 1:

Cost Terminology and Cost Behaviors


Cost Accounting: Foundations and Evolutions
COST TERMINOLOGY  Conveniently and economically traceable to the cost object
Cost Indirect

 The monetary measure of resources to attain an objective such  Cannot be economically traced to the cost object but instead
as making a good or performing service. are allocated to the cost object
 Non conveniently or practically traceable to a cost object
EXPIRED COST UNEXPIRED COST  Treated as overhead
- Portion od an asset’s value - Balance sheet value of an  Allocated
consumed or sacrificed asset
during a period in an REACTIONS TO CHANGES IN ACTIVITY
expense.
Relevant Range

Cost Management System  The assumed range of activity that reflects the company’s
normal operating range.
 Set of formal methods developed for planning and controlling
an organization’s cost-generating activities relative to its Two Extreme Behaviors of Relevant Range
strategy, goals, and objectives.
1. Variable Cost
 Designed to communicate all the value chain functions about
product costs, product, profitability, cost management, - A cost that varies in total proportionately with activity
strategy implementation, and management performance. - It is the constant amount per unit
- Relative to volume of units of output or number of
customers serviced.

Example:
 Costs of material
 Hourly wages
 Sales commission.

- Variable costs are extremely important to a company’s


total profitability because each time a product is
produced or sold, or a service is rendered, a specific
amount of variable is incurred.
- Accountant: Linear; Economists: curvilinear

COST CATEGORIES

 Association with cost object


Cost Object
- anything for which management wants to collect or
accumulate costs.
- Costs related to the making of a product or performance
of a service are appropriately labeled product or services
costs.
- The cost associated with any cost object can be
classified according to their relationship to the cost
object.
2. Fixed Cost
Example: - Remains constant in total within the relevant range of
 Production operations activity
 Product lines
- Incurred to provide a firm’s production capacity
 Reaction to changes in activity
Example:
 Classification on the financial statements
 Salaries (as opposed to hourly wages)
ASSOCIATION WITH A COST OBJECT  Depreciation (computed using the straight-line
method)
Direct  Insurance
- Varies inversely with changes in the level of activity:
the per-unit fixed cost decreases with increase in the
activity level and increase with decrease in the activity
level.

 From period to period, fixed costs may change.


 Whether variable costs are traded for fixed costs or vice versa,
a shift from one type of cost behavior to another type changes
a company’s basic cost structure and can have a significant
impact on profits.

3. Mixed Cost
- Both a variable and a fixed component
- Per unit basis, a mixed cost does not fluctuate
proportionately with changes in activity nor does it
remain constant with changes in activity.

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