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Financial Management 1
Chapter 5Cost Classification
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Agenda
Define the concept of a cost
Explain the difference between an expense
and a cost Cost Concept Classifications
Distinguish between expired and
unexpired cost, product and period cost Describe the elements of cost
Cost behaviours
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Cost concepts
Cost is different to different people
Broad term
We speak about the:
- Cost of living
- Cost of food and clothing
- Transport costs
And many more
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Cost definition and difference
versus Expenses Faul et al
Costs are a necessary sacrifice in order to
deliver a product or service. Expenses are classified as resources
sacrificed in order to earn income.
Expenses could be incurred without havingbeen paid yet.
Expenses are not always known withcertainty
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Classification of Costs
Material costs
A) Direct
B) Indirect Labour costs
A) Direct
B) Indirect Manufacturing overheads
A) Fixed
B) Variable
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Manufacturing Costs
Manufacturing Costs consist of:
1. Direct Material
2. Direct Labour
3. Manufacturing overheads
Terms such as primary and conversion
costs also used
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Non-Manufacturing costs
Selling & Marketing costs
Administrative costs
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Expired costs vs Unexpired
Costs Expired = expenses incurred during the
period when benefits were received
Unexpired = the future benefits that remainof an asset that is being used in theproduction process
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Product costs vs Period Costs
Terms used for external financial reporting
Period costs = shown on the income
statement in the period in which they areincurred
Product costs = directly linked to the
products and recognised on the incomestatement as goods are sold ( Cost of salesor cost of goods sold)
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Product costs vs Period Costs
Product costs = Manufacturing costs in amanufacturing company
Period costs = non-manufactring costs in amanufacturing company
Manufacturing costs not realised recorded
on the balance sheet Manufacturing company split into Raw
Materials, WIP, Finished goods
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Cost Behaviours
Variable costs
Fixed Costs
Can become variable when there is a big
change in activities
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Cost Decision making
Differential coststhe difference in costbetween 2 alternatives
Opportunity costs
the cost of foregoingone opportunity for making the decision tochoose another opportunity
Sunk cost
cost that has already beenincurred and cannot change
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Labour Costs
Direct Labour
Indirect Labour
Idle time
Overtime premiumpart of manufacturingoverheads
Labour fringe benefits
