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Understanding Cost Classifications: Direct, Indirect, Product, Period, Variable, Fixed, Study notes of Engineering

Triangle Tech Engineering

An overview of different cost classifications used in business and manufacturing contexts. It covers direct and indirect costs, product and period costs, variable, fixed, and mixed costs. examples and learning objectives to help understand each concept.

Typology: Study notes

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Cost is the key in managerial accounting

There are many types of costs, and these

costs are classified differently according to

the immediate needs of management.

For example, managers may want cost data to

prepare external financial reports (historial

cost), to prepare planning budgets, or to

make decisions (future cost).

Each different use of cost data demands a

different classification and definition of costs.

Partial preview of the text

Download Understanding Cost Classifications: Direct, Indirect, Product, Period, Variable, Fixed and more Study notes Engineering in PDF only on Docsity!

Cost is the key in managerial accounting

 There are many types of costs, and these

costs are classified differently according to

the immediate needs of management.

 For example, managers may want cost data to

prepare external financial reports (historial

cost), to prepare planning budgets, or to

make decisions (future cost).

 Each different use of cost data demands a

different classification and definition of costs.

Summary of the Types of Cost Classifications

Assigning Costs

to Cost Objects

Predicting Cost

Behavior

Financial

Reporting

Making Business

Decisions

The Product

Direct Materials Direct Labor Manufacturing Overhead Classifications of Manufacturing Costs

Direct Materials

Raw materials that become an integral

part of the product and that can be

conveniently traced directly to it.

Example: A radio installed in an automobile

Manufacturing Overhead

Manufacturing costs that cannot be easily

traced directly to specific units

produced.

Examples: Indirect materials and indirect labor Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, janitors, and security guards. Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Prime Costs and Conversion Costs

Manufacturing costs are often

classified as follows:

Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost

Learning Objective 1- 1

Understand cost classifications used for assigning costs to cost objects: direct costs and indirect costs.

A cost object is anything for which cost

data are desired—including products,

customers, jobs, and organizational

subunits.

Assigning Costs to Cost Objects

Direct costs

Costs that can be easily and conveniently traced to a unit of product or other cost object.
Examples:

Indirect costs

Costs that cannot be easily and conveniently traced to a unit of product or other cost object.
Example:

Common costs

Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

Cost Classifications for Preparing Financial Statements Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement

Quick Check 

Which of the following costs would be

considered a period rather than a product

cost in a manufacturing company?

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the production

facility.

E. Sales commissions.

Cost Classifications for Predicting Cost Behavior

Cost behavior refers

to how a cost will

react to changes in

the level of activity.

The most common

classifications are:

▫ Variable costs.

▫ Fixed costs.

▫ Mixed costs.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity.Your total texting bill may be based on how many texts you send. Number of Texts Sent Total Texting Bill

The Activity Base (Cost Driver)

A measure of what

causes the

incurrence of a

variable cost

Labor

hours

Miles

driven

Units

produced

Machine

hours

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of the activity.Your monthly contract fee for your cell phone may be fixed for the number of monthly minutes in your contract. Number of Minutes Used Within Monthly Plan Monthly Cell Phone Contract Fee

Understanding Cost Classifications: Direct, Indirect, Product, Period, Variable, Fixed, Study notes of Engineering

Related documents

Partial preview of the text

Download Understanding Cost Classifications: Direct, Indirect, Product, Period, Variable, Fixed and more Study notes Engineering in PDF only on Docsity!

Cost is the key in managerial accounting

 There are many types of costs, and these

costs are classified differently according to

the immediate needs of management.

 For example, managers may want cost data to

prepare external financial reports (historial

cost), to prepare planning budgets, or to

make decisions (future cost).

 Each different use of cost data demands a

different classification and definition of costs.

Assigning Costs

to Cost Objects

Predicting Cost

Behavior

Financial

Reporting

Making Business

Decisions

The Product

Direct Materials

Raw materials that become an integral

part of the product and that can be

conveniently traced directly to it.

Manufacturing Overhead

Manufacturing costs that cannot be easily

traced directly to specific units

produced.

Prime Costs and Conversion Costs

Manufacturing costs are often

classified as follows:

Learning Objective 1- 1

A cost object is anything for which cost

data are desired—including products,

customers, jobs, and organizational

subunits.

Assigning Costs to Cost Objects

Direct costs

Indirect costs

Common costs

Quick Check 

Which of the following costs would be

considered a period rather than a product

cost in a manufacturing company?

A. Manufacturing equipment depreciation.

B. Property taxes on corporate headquarters.

C. Direct materials costs.

D. Electrical costs to light the production

facility.

E. Sales commissions.

Cost behavior refers

to how a cost will

react to changes in

the level of activity.

The most common

classifications are:

▫ Variable costs.

▫ Fixed costs.

▫ Mixed costs.

Variable Cost

The Activity Base (Cost Driver)

A measure of what

causes the

incurrence of a

variable cost

Labor

hours

Miles

driven

Units

produced

Machine

hours

Fixed Cost