What do we mean by the term cost?
The monetary value of efforts, materials, resources, time and utilities consumed, risks incurred, and opportunities forgone in the production and delivery of goods or services.
Classification of costs
Cost can be classified differently according to different purposes.
- Direct and indirect costs
Classified based on the identification and traceability of costs with a cost object.
Direct cost - cost specifically and exclusively identified with a given cost object.
Indirect cost - a cost that cannot be specifically and exclusively identified with a given cost object.
Total manufacturing costs
Direct material cost xx
Direct Labouré cost xx
Direct other manufacturing cost xx
Total direct cost xx
Manufacturing overheads xx
Total manufacturing cost xx
Classification of costs for the purpose of short-term decision making
Based on the cost behavior, the following categories of cost can be identified:
Variable cost - The costs that vary in direct proportion to the volume of activity are called variable costs.
Fixed cost - Fixed costs are costs which remain constant over a wide range of activity for a specific time period.
Step fixed cost -Up to a certain level of activity the fixed cost remains constant and if that level of activity exceeds, the additional fixed cost would be required.
Other costs
Product costs - Costs identified with goods purchased or produced for resale. Used for inventory valuation. Manufacturing costs and costs of goods purchased are regarded as product costs.
Period costs/Expenses - Treated as expenses in the period in which they are incurred. Not included in the inventory valuation. Administration, selling and distribution, finance, and other expenses are examples for period costs.
Relevant costs - Relevant costs are those future costs that will be changed by a decision.
Irrelevant costs - Irrelevant costs are those costs that will not be affected by a decision.
Avoidable costs - Cost that can be saved by not adopting a given alternative.
Unavoidable costs - Cost that cannot be saved by not adopting a given alternative.
Sunk cost - Classified based on the reversibility of decisions taken on costs. Created by a decision made in the past and that cannot be changed by any decision that will be made in the future.
Opportunity cost - Classified based on the reversibility of decisions taken on costs. Created by a decision made in the past and that cannot be changed by any decision that will be made in the future.
Okay, that’s it for this article.
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