Cost Concepts and Classifications

Cost is "a foregoing, measured in monetary terms, incurred or potentially to be incurred to achieve a specific objective" (American Accounting Association).

Cost refers the monetary measure of the amount of resources given up or used for some specified purpose. It is the value the goods or services expended to obtain current or future benefits.

Costs can be classified in different ways. There are manufacturing costs and non-manufacturing costs, direct and indirect costs, product and period costs, controllable and uncontrollable costs, fixed and variable, etc.

Management accountants need to understand cost concepts because they are vital in many areas of planning, control, and decision-making. In this unit, we will learn about the different types of costs and product costing systems.

Lesson 1

Types of Costs: Cost Classifications

Costs can be classified into different categories for different purposes. Costs may be categorized according to their management function, traceability, timing of charge against revenues, behavior, and relevance to decision-making. Read more..
Lesson 2

Manufacturing Costs and Non-manufacturing Costs

Manufacturing costs refer to those that are spent to transform materials into finished goods. Manufacturing costs include direct materials, direct labor, and factory overhead. Read more..
Lesson 3

Direct Costs and Indirect Costs

Direct costs are those that can be easily traced to or associated directly with a specific cost object. A cost object is something for which cost is measured such as a specific product, a specific department or a specific branch. Read more..
Lesson 4

Product Costs and Period Costs

Product costs refer to inventoriable costs. These costs are included as part of inventory and are charged against revenues as cost of sales only when sold. Period costs are immediately charged against revenues. Read more..
Lesson 5

Controllable Costs and Uncontrollable Costs

Controllable costs are costs that can be influenced or regulated by the manager or head responsible for it. Uncontrollable costs, on the other hand, are those that are not under the control or influence of the manager. Read more..
Lesson 6

Prime Costs and Conversion Costs

Prime costs refer to the total cost of direct materials and direct labor. Conversion costs refer to those that are spent to transform raw materials into finished goods. Conversion cost is equal to direct labor plus factory overhead. Read more..
Lesson 7

Product Costing Systems (Cost Accumulation Methods)

Companies use either job order costing or process costing. The records may reflect either actual values or estimated amounts based on standard costs and are adjusted later. Also, many companies today use backflush costing and activity-based costing. Read more..
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