Managerial Accounting

Costs can be classified on the basis of business function, product vs. period cost, cost objective etc. Costs on the Basis of Business Function • Manufacturing costs – “All costs needed to acquire basic materials from a supplier and convert them into finished products” (Helmkamp, 1990, p. 36) • Selling costs – “All costs incurred to market and deliver finished products” (Helmkamp, 1990, p. 36) • Administrative costs – “All costs needed for the general management of the organization” (Helmkamp, 1990, p. 36) e. g. executive salaries, office supplies etc. Product and Period Costs

• Product costs – All costs needed to acquire or develop inventory that is ready for sale. For a manufacturing enterprise, these costs would include raw material costs, direct labor costs etc. For a merchandising enterprise, product cost is the cost of inventory purchased for sale. A service enterprise would however have no product cost as it does not maintain inventories for sale or resale. • Period costs – All costs incurred over a specific time period that are not directly related to the acquisition or development of a saleable product. For example, sales commission.

Costs on Basis of Cost Objective • Direct costs – All costs that can be traced to a specific cost objective . For example in a manufacturing enterprise, finished goods can be a cost objective. The costs of raw materials used in the production of a finished good are direct costs. • Indirect costs – A cost that is incurred for multiple cost objectives. For example, the rent on a building that houses several departments. Indirect costs are then allocated on some allocation base. Other Cost Categories Costs can be categorized on several other basis as well.

These include: • Variable and Fixed costs – Variable costs are those that vary proportionately with some measure of business activity while fixed costs remain constant over a wide range of activity or over a given period. For example, cost of raw material required in production is a variable cost while the rent on factory building is a fixed cost. • Controllable and Uncontrollable costs – A controllable cost is one that can be regulated by a manger over a given time period while an uncontrollable cost is one which is beyond the authority or influence of a manager.

• Relevant and Irrelevant cost – “A relevant cost is a future expected cost that will differ depending on the alternative selected in a specific situation” (Helmkamp, 1990, p. 53). An irrelevant cost is one that is the same for all alternatives. For example if the cost of direct material used is different for two machines, one of which has to be bought, then direct material cost is a relevant cost. If both machines use up the same amount of direct material, then it is an irrelevant cost.


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