* Beginning raw materials inventory: $32,000 * Raw materials purchased: $276,000 * Ending raw materials inventory: $28,000 * Raw materials available for use: $32,000 + $276,000 = $308,000 * Raw materials used: Raw materials available - Ending inventory = $308,000 - $28,000 = $280,000 The cost of direct material used is $280,000. The answer is C. material was still present. What is the cost of direct material used? A. $276,000 B. $272,000 C. $280,000 D. $ 2

1. Classification of Cost

2. Classification of Cost
Cost may be classified into different categories depending upon the purpose of
classification. Some of the important categories in which the costs are classified are as
follows:
1. Classification of cost methods on the basis of nature of production or manufacturing
process
i. Job Costing and
ii. Process Costing
2. Classification of Costs on the basis of their variability in relation to output:-
i. Fixed Cost
ii. Variable Cost
iii. Semi-Variable and Semi-Fixed Cost
3. Costs for Managerial Decision Making :-
i. Marginal Costing
ii. Incremental ( or Differential ) Cost
iii. Uniform Costing
iv. Opportunity Cost
v. Replacement Cost
vi. Sunk Cost
vii. Relevant Cost
Arunraj Arumugam

3. 4. Costs According to Functions (Manufacturing & Non-Manufacturing Cost):-
i. Manufacturing or Production Cost
ii. Administrative Cost
iii. Selling and Distribution Cost
iv. Research & Development Cost
v. Pre-Production Cost
5. Classification of cost methods on the basis of Time:-
1. Historical Cost
2. Pre-Determined Costs
6. Classification of Costs based on establishment of relationship between input and
output:-
i. Engineering Cost
ii. Managed Cost, discretionary or programmed Cost
7. Controllable and Uncontrollable costs
8. Other Types of Costs
Costs which arises in a particular contests and which are used for particular purposes are :-
Conversion Cost
Common Cost
Traceable Cost or Directly Attributable Cost
Joint Cost
Avoidable Cost
Unavoidable Cost
Total Cost Arunraj Arumugam

4. Fixed, Variable and Semi-Variable Costs
The cost which varies directly in proportion with every increase or
decrease in the volume of output or production is known as
variable cost. Some of its examples are as follows:
• Wages of laborers
• Cost of direct material
• Power
Semi-variable costs are costs that have both a variable and fixed
component. Commercial leases often have a fixed rent per month
plus an additional rent based on the amount of production or
sales.
For example, rent is $5,000 plus five cents for each pencil that is
made. The base rent of $5,000 is a fixed cost and the five cents
per pencil is a variable cost.
Step-variable costs are costs that are constant over a range of
production.
If one employee can make 10,000 pencils, then the employee’s wage
is constant over a production range of one to 10,000 pencils. If
you produce 11,000 pencils, you will need another employee. So
your cost doubles. If you make 25,000 pencils your cost triples
because you need three employees.
Arunraj Arumugam

5. Arunraj Arumugam

6. Product Costs and Period Costs
Product costs
• The costs which are a part of the cost of a product rather than an expense of the
period in which they are incurred are called as “product costs”.
e.g., cost of raw materials and direct wages, depreciation on plant and
equipment etc.
Period costs.
• The costs which are not associated with production are called period costs.
• They are treated as an expense of the period in which they are incurred. They
may also be fixed as well as variable.
• Such costs include general administration costs, salaries salesmen and
commission, depreciation on office facilities etc.
Arunraj Arumugam

7. Arunraj Arumugam

8. Direct and Indirect Costs
• The expenses incurred on material and labor which are economically and
easily traceable for a product, service or job are considered as direct
costs. In the process of manufacturing of production of articles, materials
are purchased, laborers are employed and the wages are paid to them.
• The expenses incurred on those items which are not directly chargeable
to production are known as indirect costs.
For example, salaries of timekeepers, storekeepers and foremen. Also certain
expenses incurred for running the administration are the indirect costs.
Arunraj Arumugam

9. Decision-Making Costs and
Accounting Costs
• Decision-making costs are future costs. They represent
what is expected to happen under an assumed set of
conditions.
• Accounting costs are compiled primarily from financial
statements. They have to be altered before they can be
used for decision-making
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10. Relevant and Irrelevant Costs
• Relevant costs are those which change by managerial decision.
• Irrelevant costs are those which do not get affected by the decision.
For example,
if a manufacturer is planning to close down an unprofitable retail sales
shop,
This will affect the wages payable to the workers of a shop. This is
relevant in this connection since they will disappear on closing down
of a shop.
But prepaid rent of a shop or unrecovered costs of any
equipment which will have to be scrapped are irrelevant costs
which should be ignored.
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11. Shutdown and Sunk Costs
• Sunk costs are historical or past costs. These are the costs which have
been created by a decision that was made in the past and cannot be
changed by any decision that will be made in the future.
– Investments in plant and machinery, buildings etc.
• A manufacturer or an organization may have to suspend its operations
for a period on account of some temporary difficulties, e.g., shortage of
raw material, non-availability of requisite labor etc. During this period,
though no work is done yet certain fixed costs, such as rent and
insurance of buildings, depreciation, maintenance etc., for the entire
plant will have to be incurred. Such costs of the idle plant are known as
shutdown costs.
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12. Learning Objective 1
Identify and give examples of
each of the three basic
manufacturing cost
categories.
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13. Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
The Product
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14. Direct Materials
Raw materials that become an integral part
of the product and that can be conveniently
traced directly to it.
Example: A radio installed in an automobile
Example: A radio installed in an automobile
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15. Direct Labor
Those labor costs that can be easily
traced to individual units of product.
Example: Wages paid to automobile assembly workers
Example: Wages paid to automobile assembly workers
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16. Manufacturing Overhead
Manufacturing costs cannot be traced directly
to specific units produced.
Examples: Indirect materials and indirect labor
Examples: Indirect materials and indirect labor
Materials used to support Wages paid to employees
the production process. who are not directly
involved in production
Examples: Lubricants and work.
cleaning supplies used in the Examples: Maintenance
automobile assembly plant. workers, janitors and
security guards.
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17. Classifications of Nonmanufacturing
Costs
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18. Learning Objective 2
Distinguish between
product costs and period
costs and give examples
of each.
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19. Product Costs Versus Period
Costs
Product costs include Period costs are not
direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold Expense
Sale
Balance Income Income
Sheet Statement Statement
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20. Quick Check 
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Arunraj Arumugam

21. Quick Check 
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Arunraj Arumugam

22. Prime Cost and Conversion
Cost
Manufacturing costs are often
classified as follows:
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Material
Material Labor
Labor Overhead
Overhead
Prime Conversion
Cost Cost
Arunraj Arumugam

23. Comparing Merchandising and
Manufacturing Activities
Merchandisers . . . Manufacturers . . .
– Buy finished goods. – Buy raw materials.
– Sell finished goods. – Produce and sell
finished goods.
MegaLoMart
Arunraj Arumugam

24. Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
 Cash Cash
 Receivables Receivables
 Prepaid Expenses Prepaid Expenses
 Merchandise Inventories:
Inventory 1. Raw Materials
2. Work in Process
3. Finished Goods
Arunraj Arumugam

25. Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
 Cash Cash
 Receivables Receivables
Materials waiting to
 Prepaid Expenses Prepaid Expenses
be processed.
 Merchandise
Partially complete Inventories:
Inventory – some
products 1. Raw Materials
material, labor, or 2. Work in Process
overhead has been
3. Finished Goods
added.
Completed products
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awaiting sale.

26. Learning Objective 3
Prepare an income
statement including
calculation of the cost of
goods sold.
Arunraj Arumugam

27. The Income Statement
Cost of goods sold for manufacturers
differs only slightly from cost of goods
sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory $ 14,200
+ Purchases 234,150
Goods available
for sale $ 248,350
- Ending
merchandise
inventory (12,100)
= Cost of goods
sold $ 236,250
Arunraj Arumugam

28. Inventory Flows
Withdrawals
Withdrawals
Beginning
Beginning Additions
Additions Ending
Ending
balance
balance
+ to inventory
to inventory
= balance
balance
+ from
from
inventory
inventory
Arunraj Arumugam

29. Quick Check 
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
Arunraj Arumugam

30. Quick Check 
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000. $1,000 + $100 = $1,100
B. $ 800. $1,100 - $300 = $800
C. $1,200.
D. $ 200.
Arunraj Arumugam

31. Learning Objective 4
Prepare a schedule of cost
of goods manufactured.
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32. Schedule of Cost of Goods
Manufactured
Calculates the cost of raw
material, direct labor and
manufacturing overhead used
in production.
Calculates the manufacturing
costs associated with goods
that were finished during the
period.
Arunraj Arumugam

33. Schedule of Cost of Goods
Manufactured
Manufacturing Work
As items are removed from
As items are removed from
Raw Materials Costs In Process
raw materials inventory and
raw materials inventory and
Beginning raw
materials inventory placed into the production
placed into the production
+ Raw materials process, they are called direct
process, they are called direct
purchased
= Raw materials materials.
materials.
available for use
in production
– Ending raw materials
inventory
= Raw materials used
in production
Arunraj Arumugam

34. Schedule of Cost of Goods
Manufactured
Manufacturing Work
Conversion
Conversion
Raw Materials Costs In Process
costs are costs
costs are costs
Beginning raw Direct materials incurred to
incurred to
materials inventory + Direct labor convert the
+ Raw materials + Mfg. overhead convert the
purchased = Total manufacturing direct material
direct material
= Raw materials costs into a finished
into a finished
available for use product.
product.
in production
– Ending raw materials
inventory
= Raw materials used As items are removed from raw
As items are removed from raw
in production materials inventory and placed into
materials inventory and placed into
the production process, they are
the production process, they are
called direct materials.
called direct materials.
Arunraj Arumugam

35. Schedule of Cost of Goods
Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory All manufacturing costs incurred
All manufacturing costs incurred
process inventory
= Raw materials used during the period are added to the
during the period = Cost of goods the
are added to
in production beginning balance of work in
manufactured.
beginning balance of work in
process.
process.
Arunraj Arumugam

36. Schedule of Cost of Goods
Manufactured
Manufacturing Work
Raw Materials Costs In Process
Beginning raw Direct materials Beginning work in
materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
inventory process inventory
Costs associated with the goods that
Costs associated with the goods that
= Raw materials used = Cost of goods
areincompletedduring the period are
arecompleted during the period are
production manufactured.
transferred to finished goods
transferred to finished goods
inventory.
inventory.
Arunraj Arumugam

37. Cost of Goods Sold
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38. Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Material Purchases Raw Materials Expenses
Direct Labor Work in
Process
Manufacturing
Overhead Finished Cost of
Goods Goods
Sold
Selling and Period Costs Selling and
Administrative Administrative
Arunraj Arumugam

39. Quick Check 
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Arunraj Arumugam

40. Quick Check 
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000
Arunraj Arumugam

41. Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Arunraj Arumugam

42. Quick Check 
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.
Arunraj Arumugam

43. Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
Arunraj Arumugam

44. Quick Check 
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.
Arunraj Arumugam

45. Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.
Arunraj Arumugam

46. Quick Check 
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
B. $740,000. $130,000 + $760,000 = $890,000
$890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.
Arunraj Arumugam

47. Learning Objective 5
Define and give
examples of variable
costs and fixed costs.
Arunraj Arumugam

48. Cost Classifications for Predicting
Cost Behavior
How a cost will react to
How a cost will react to
changes in the level of
changes in the level of
business activity.
business activity.
 Total variable costs
 Total variable costs
change when activity
change when activity
changes.
changes.
 Total fixed costs remain
 Total fixed costs remain
unchanged when activity
unchanged when activity
changes.
changes.
Arunraj Arumugam

49. Total Variable Cost
Your total long distance telephone bill is
based on how many minutes you talk.
Minutes Talked
Telephone Bill
Total Long Distance
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50. Variable Cost Per Unit
The cost per long distance minute talked is
constant. For example, 10 cents per minute.
Minutes Talked
Telephone Charge
Per Minute
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51. Total Fixed Cost
Your monthly basic telephone bill
probably does not change when you
make more local calls.
Number of Local Calls
Telephone Bill
Monthly Basic
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52. Fixed Cost Per Unit
The average fixed cost per local call
decreases as more local calls are made.
Monthly Basic Telephone
Bill per Local Call
Number of Local Calls
Arunraj Arumugam

53. Cost Classifications for Predicting
Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Arunraj Arumugam

54. Quick Check 
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Arunraj Arumugam

55. Quick Check 
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Arunraj Arumugam

56. Learning Objective 6
Define and give
examples of direct and
indirect costs.
Arunraj Arumugam

57. Assigning Costs to Cost Objects
Direct costs Indirect costs
• Costs that can be • Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
• Examples: Direct • Example: Manufacturing
material and direct labor overhead
Arunraj Arumugam

58. Learning Objective 7
Define and give examples of
cost classifications used in
making decisions: differential
costs, opportunity costs, and
sunk costs.
Arunraj Arumugam

59. Cost Classifications for Decision
Making
Every decision involves a choice
between at least two alternatives.
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.
Arunraj Arumugam

60. Differential Costs and Revenues
Costs and revenues that differ
among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.
Differential revenue is: Differential cost is:
$2,000 – $1,500 = $500 $300
Net Differential Benefit is:
$200
Arunraj Arumugam

61. Opportunity Costs
The potential benefit that is given up
when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000. Arumugam
Arunraj

62. Sunk Costs
Sunk costs cannot be changed by
any decision. They are not
differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.
Arunraj Arumugam

63. Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Agra to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Agra?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
Arunraj Arumugam

64. Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Agra to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Agra?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
Arunraj Arumugam

65. Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Agra to attend a
concert. You have ample cash to do either,
but you don’t want to waste money
needlessly. Is the annual cost of licensing your
car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Arunraj Arumugam

66. Quick Check 
Suppose you are trying to decide whether to
drive or take the train to Agra to attend a
concert. You have ample cash to do either,
but you don’t want to waste money
needlessly. Is the annual cost of licensing your
car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Arunraj Arumugam

67. Quick Check 
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Arunraj Arumugam

68. Quick Check 
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Arunraj Arumugam

69. Summary of the Types of Cost
Classifications
Predicting
Financial
Cost
Reporting
Behavior
Assigning
Decision
Costs to
Making
Cost Objects Arumugam
Arunraj