I. Definition Of Cost Accounting
The board definition of cost accounting is an internal reporting system designed to identify,
summarize, and interpret information needed for:
(1) Planning and Control.
(2) Management Decisions,
(3) Product Costing.
II. Objectives Of Cost Accounting• Product Costing
• Inventory Valuation
• Income Determination
• Assessing Departmental Efficiency
• Planning, Evaluating, and Controlling Operations
III. Cost Classifications
Classification of costs is necessary inorder to determine the most suitable method of
accumulating and allocating costs. The principle methods of accumulating costs are
a) Classification by Nature
b) Classification by Variability
c) Classification by Department
d) Classification by Inventoriable
e) Classification by Period Covered
f) Classification by Controllability
A) Classification by Nature
1. Manufacturing Costs
Cost associated with the manufacturing activities which include:
a. Direct Materials
The costs of raw materials that can feasibly be traced to a particular product or job.
Examples include wood used in making furniture and iron used in making steel.
b. Direct Labor
The costs of wages paid to labor that can feasibly be traced to a particular product or jobs.
Examples include wages to workers who assemble furniture or operate melting machine.
c. Factory (Manufacturing) Overhead
All manufacturing costs other than direct materials and direct labor. It includes both fixed and variable costs.
Examples include indirect materials (supplies), indirect labor, repairs and maintenance on machinery, taxes, factory utilities, rent of factory building, insurance, and depreciation on factory equipment and plant.
Other Costs Concepts
* Direct Costs: Costs that can be identified with or traced to a specific cost object
(product, service, or activity). Examples include direct materials and direct labor.
* Indirect Costs: Costs that can not be identified with or traced to a specific cost object
(product, service, or activity). Examples include factory overhead.
2. Nonmanufacturing Costs
All Costs that are not related to the manufacturing activities such as:
* Administrative and office (management) salaries.
* Sales personnel salaries and commissions.
* Freight - out Expense
* Depreciation on management building
* Legal Expenses
* Other selling and administrative Expenses
B) Classification by Variability
1. Variable Costs
* Costs that change in total, directly in proportion to changes in the level of
* The unit cost remains the same over a wide range of volume
(referred to as the relevant range).
* Relevant Range is the range of activity (production volume) within which variable
unit costs are constant and fixed costs are constant and fixed costs are constant
in total. In this range, the incremental cost of one additional unit of production is
* Examples include direct materials, direct labor, and part of manufacturing
2. Fixed Costs
* Costs that do not change in total regardless of changes in activity.
* The unit cost decreases as volume increases.
* Examples include rent, taxes, and insurance on manufacturing plant.
3. Semivariable (Mixed) Costs
* Costs that contain both variable and fixed costs.
* Examples include: light, heat, and power.
C) Classification by Department
* A unit in which operations are performed on a product.
* Example: manufacturing department.
* A unit not directly engaged in production and whose costs are ultimately allocated to
a production unit.
* Examples include: maintenance and personnel department.
D) Classification by Inventoriability
1. Inventoriable (product) costs
* Inventoriable (product) costs are included in inventory when the product is produced
and in cost of sales when the product is sold.
* It includes: direct materials, direct labor, and manufacturing overhead.
2. Noninventoriable (Period) Costs
* Costs associated with the passage of time rather than with the product.
* These costs are not inventoried and are charged to income as incurred since no
future benefits are expected.
* Examples include: selling, general, and administrative expenses.
E) Classification by Period Covered
1. Capital Costs
Costs that are expected to benefit future periods and are classified as assets.
2. Revenue Costs
Costs that benefit only the current period and are thus expensed as incurred.
F) Classification by Controllability
1. Controllable Costs
* Costs that directly regulated by management at a given level of production within a
given time span.
* All variable costs such as direct materials, direct labor, and variable overhead, are
* Fixed costs are not usually controllable.
2. Noncontrollable Costs
* Costs that are not regulated by management at a given level of production within a
given time span.
* All fixed costs are usually not controllable.