The document discusses cost terminology, concepts, classifications, and cost behavior. It defines costs as the value foregone to achieve economic benefits and outlines how costs are accumulated and assigned. Costs are classified in various ways for different purposes like product versus period costs for financial statements or current versus historical costs for decision making. A cost management system guides the measurement of costs through cost pools, cost objects, and assigning costs. Common cost objects include products, services, departments, and projects.
The document discusses cost terminology, concepts, classifications, and cost behavior. It defines costs as the value foregone to achieve economic benefits and outlines how costs are accumulated and assigned. Costs are classified in various ways for different purposes like product versus period costs for financial statements or current versus historical costs for decision making. A cost management system guides the measurement of costs through cost pools, cost objects, and assigning costs. Common cost objects include products, services, departments, and projects.
The document discusses cost terminology, concepts, classifications, and cost behavior. It defines costs as the value foregone to achieve economic benefits and outlines how costs are accumulated and assigned. Costs are classified in various ways for different purposes like product versus period costs for financial statements or current versus historical costs for decision making. A cost management system guides the measurement of costs through cost pools, cost objects, and assigning costs. Common cost objects include products, services, departments, and projects.
The document discusses cost terminology, concepts, classifications, and cost behavior. It defines costs as the value foregone to achieve economic benefits and outlines how costs are accumulated and assigned. Costs are classified in various ways for different purposes like product versus period costs for financial statements or current versus historical costs for decision making. A cost management system guides the measurement of costs through cost pools, cost objects, and assigning costs. Common cost objects include products, services, departments, and projects.
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COST TERMINOLOGY, CONCEPTS, CLASSIFICATIONS AND COST BEHAVIOR
INTRODUCTION
• No product can be produced without the incurrence of costs for material, labor, and overhead. At a minimum, no service can be produced without the incurrence of costs for labor and overhead; a cost for material may or may not be involved.
• However, the term cost must be defined more specifically before “the cost” of a product or service can be determined and communicated to others.
• Thus, a clarifying adjective is generally used to specify the type of cost being considered.
• For example, the balance sheet value of an asset is an unexpired cost, but the portion of an asset’s value consumed or sacrificed during a period is an expense or expired cost, which is shown on the income statement.
• To effectively communicate information, accountants must clearly understand the differences
among various types of costs, how those costs are computed, and how those costs are used.
• The chapter also presents cost flows and the process of cost accumulation in a production environment.
NATURE OF COST
• All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities.
• Accounting costs are classified in numerous ways. To prepare financial statements, accountants must associate costs with specific time periods. The classification of costs into product and period costs allows accountant to do that.
• In managerial accounting, the term cost may be used in different ways because there are many types of costs that may be classified differently according to the immediate needs of management.
• For instance, external financial reports require the use of historical data whereas decision making may require current cost data.
• Costs are also classified differently depending on the type of organization involved, that is, merchandizing, service, or manufacturing. Cost data that are classified and recorded in a particular way may be inappropriate for another use.
• Cost reflects the monetary measure of resources used to attain an objective such as making a good or performing a service.
• Cost may be defined as the value foregone or sacrifice of resources for the purpose of achieving some economic benefit which will promote the profit-making ability of the firm.
• It is also an outlay or expenditure of money to acquire goods and services that assist in performing operations. • A costing system accounts for costs in two basic steps, namely, cost accumulation and cost assignment.
COST MANAGEMENT SYSTEM
• A cost management system is a set of formal methods developed for planning and controlling an organization’s cost-generating activities relative to its strategy, goals, and objectives.
• This system is designed to communicate all value chain functions about product costs, product profitability, cost management, strategy implementation, and management performance.
• Cost concepts and terms have been developed to facilitate this communication process.
• Cost Management System is a guide on the correct measurement of costs and consists of cost accumulation and cost assignment to a cost object.
• These are important to managers for their planning and control and for their decision making purposes.
COST CLASSIFICATION CATEGORIES
COST POOLS
• Cost pools are costs collected into meaningful groups. Cost pools maybe classified as:
1) By type of cost (labor cost in one pool, materials cost in another)
2) By source (department 1, department 2, and so on)
3) By responsibility (manager 1, manager 2 and so on), and many more.
COST OBJECT
• Cost Object is anything that management needs to accumulate or collect cost.
• A cost object is any product, service or organizational unit to which costs are assigned for some management purpose.
• Here are different “cost objects” of different organizations.
COST OBJECT ILLUSTRATION
Program An athletic program of a university.
Department A department within DENR that studies air emission standards
Research and Development Department, Human Resource Department
Activity A test to determine the quality level of television set
Development and updating of accounting software
Brand Category All soft drinks sold by a Pepsi-Cola Bottling Company with “Pepsi” in their name
Sunsilk, Safeguard, Gap, Coke
Customer All products purchased by Landmark (the customer) from Purefoods, Inc.
Project A special sports car assembled by Toyota Motors
Service An airline flight from NAIA to Hongkong
Product A motorcycle, Shampoo, soap, bread, softdrink, etc.
EXAMPLES OF COST OBJECTS
COST OBJECT
• Products and services are generally cost objects, while manufacturing departments are considered either cost pools or cost objects, depending on whether management’s main focus is on the costs of the products or for the production department.
• Any item to where costs can be traced and that has a key role in management strategy can be considered a cost object. • Production operations and product lines are common cost objects.
• Costs related to the making of a product or performance of a service are appropriately labeled product or service costs.
• The costs associated with any cost object can be classified according to their relationship to the cost object.
