Cost - Is a sacrifice of resources. It is established by the price that we pay or promise to pay to acquire a certain item.
Expense - Is a cost that is charge against revenue in an accounting period. It is used when speaking of external financial reports.
Manufacturing Cost
Direct Materials – materials that are form an integral part of the finished product and can be included directly in calculating the cost of the product. (e.g. Lumber to make furniture, Crude oil to make gasoline, Leather to make shoes)
Direct Labor – cost of labor paid to those working directly on the product and are involved in converting the raw materials into finished goods.(e.g. Salaries of machine operators, Wages of carpenters making furnitures)
Factory (manufacturing) Overhead – normally includes indirect labor costs, supplies and other production facility cost such as depreciation, taxes, plant supervisors, etc. It is composed of all manufacturing cost that are not direct materials or direct labor. (e.g. Indirect materials – grease and factory supplies Indirect labor – wages of supervisors Rent of factory )
Commercial Expense
Marketing and Selling Expense – those necessary in order to sell the product. (e.g. Sales salaries/commissions of salesmen, Advertising, samples, entertainment, Freight and cartage out, Depreciation of delivery equipment)
Administrative or general Expenses – Those incurred in the direction, control and administration of the enterprise. (e.g. Administrative and office salaries, Rent of office building, Depreciation of office equipment, Telephone and telegraph)
Variable Cost – those items of cost which vary in directly in total, in relation with volume of production.
Characteristics:
(e.g Direct materials Direct labor, Royalties, Commission of salesmen )
Fixed Cost – those items of cost which remains constant in total, irrespective of the volume of production. Characteristics: Total amount remains constant with a relevant output range. Cost per unit decreases as volume increases Assignable to departments based on different allocation methods. Control responsibility resting with executive management rather than operating supervisors. Examples: Salaries of production executives Depreciation – straight line method Maintenance and repairs of machinery and plant equipment
Characteristics:
(e.g. Salaries of production executives, Depreciation – straight line method, Maintenance and repairs of machinery and plant equipment )
Direct Departmental Charges – Include those cost that are immediately charged to the particular manufacturing department(s) that incurred the cost since the cost can be conveniently identified or associated with the department(s) that benefited from the said costs.
Indirect Departmental charges – those cost that are originally charge to some other manufacturing department(s) or account(s) but are later allocated or transferred to another department(s) that indirectly benefited from said costs.
Common Cost - Cost of facilities on services employed into two or more accounting periods, operations, commodities, or services. Just like indirect costs, these costs are subject to allocation.
Joint Cost – Cost of materials, labor and overhead incurred in the manufacture of two or more products at the same time. These costs are subject also to allocation.
Capital Expenditures – Is intended to benefit more than one accounting periods and is recorded as an asset. The allocation of the cost to the different periods is by: depreciation for fixed tangible assets, amortization for tangible assets and depletion for wasting assets.
Revenue Expenditures – benefits current period only and is recorded as an expense.
Standard Cost – Predetermined cost for direct materials, direct labor, and factory overhead. They are established by using the information accumulated from the past experience and data secured from research studies.
Opportunity Cost – The benefit given up when one alternative is chosen over another. Opportunity costs are not usually recorded on the accounting system, however, opportunity cost should be considered when evaluating alternatives for decision making.
Differential Cost or Incremental Cost – The amount by which a cost differs between two alternatives.
Out of Pocket Cost - Is a future cost that involves a current cash outlay.
Relevant Cost - Is a future cost that changes across the alternatives.
Sunk Cost – A cost for which an outlay has already been made and it cannot be changed by present or future decisions.
Controllable Cost – Costs that can be influenced by a manager.
Prime Cost = Direct Materials + Direct Labor
Conversion Cost = Direct Labor + Manufacturing Overhead
Total Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead
Cost of Make and Sell = Total Manufacturing Cost + Selling and Administrative Expenses
Cost Flow For Manufacturing, Merchandising, & Service Forms
Cost flow for Manufacturing firms:
Cost flow for Merchandising firms:
Cash flow for service Organizations:
These organizations also differ from one another in many respects. The differences between these organizations are reflected in their accounting systems.
A merchandising organization starts with a finished product and markets it. Because inventory is acquired in finished form, its cost is easily ascertained.
The accounting system for a manufacturing organization is more complex because direct materials are first acquired and then converted into finished products. A manufacturer's accounting system focuses on work in process, which is the account that reflects the cost involved in transforming input materials in to finished goods.
Service organizations are different from manufacturers and merchandisers because they have no inventory of goods for sale. Costs are charged into responsibility centers for performance evaluation. In a public accounting firm, for example, cost are charged into the audit department, the tax department, and so fourth. Cost are also charged to jobs. The assignment of cost to jobs and departments helps managers control cost. It also facilitates performance evaluation. The manager of each department is also responsible for the cost of the department; the manager of each job is held responsible for the cost of that job.
Of the three kinds of operations, manufacturers acquire the most complex and comprehensive cost accounting system. All three need cost information for decision making and performance evaluation. But in addition, manufacturers need product costing for inventory evaluation and to measure cost of goods sold reported on the external financial statements. Many manufacturers also have service and merchandising activities whose cost must be also be recorded.