Cost Classification and Cost Curves

Cost classification

the arrangement of cost items into categories according to their nature or purpose.

Cost

a measure of resources used or given up for some purpose.

Product cost (inventoriable or manufacturing costs)

costs that are directly associated with purchasing or making the products a company sells.

first recorded as assets (inventory) in the balance sheet and becomes an expense (cost of goods sold) in the income statement when the product is sold.

* included in inventory valuation.

Period cost (non-inventoriable costs or non-manufacturing costs.)

are costs that are not directly related to making or purchasing a product but are treated as expenses in the period in which they are incurred.

not included in inventory valuation. They are matched with the revenue of a specific period rather than attached to products for inventory valuation purposes.

Cost behavior

to how a cost reacts to changes in the level of activity or volume.

Relevant range

to the specific activity level or volume within which a business's cost behaviour assumptions hold true.

Variable cost 

costs that vary in total, in direct proportion to changes in the level of activity within the relevant range. These costs increase as activity level increases and decrease as activity level falls.

Fixed Cost

Total cost remains constant; per-unit cost changes inversely with activity levels.

Step Cost

Fixed over a range, then jumps at thresholds; includes step-variable (narrow steps) and step-fixed (wide steps)

Mixed cost (semi - variable)

costs that vary with changes in volume but not in direct proportion. These costs have both a variable and fixed component

Step variable cost 

cost that is fixed over a small range of activity but increases in small steps instead of continuously.

Step fixed cost

cost that remains fixed over a wide range of activity but increases (or steps up) to a new level once activity goes beyond that range.

Controllable cost

Costs managers can influence (e.g., labour).

Non- controllable cost

Costs outside managerial control (e.g., sales commissions

Planned cost

Budgeted or estimated before activity begins.

Actual cost

Real costs incurred during activity.

Relevant cost

Future costs that differ between alternatives; includes:

• Differential Cost: Change in cost between options.

• Opportunity Cost: Benefit forgone by choosing one option over another.

Irrelevant Cost

Costs that remain unchanged regardless of decision; includes:

• Sunk Cost: Past costs that can't be recovered.

• Unavoidable Cost: Future costs that will occur no matter the decision.

Product cost examples

• Direct materials

• Direct labour

• Direct expense

• Manufacturing overhead

Period cost examples

• Advertising

• Salespersons’ salaries

• Sales commission

• Carriage outwards

• Office supplies expense

• Office salaries

• Utilities expense

Variable cost examples

• Direct materials

• Direct labour

• Sales commissions

Fixed cost examples

• Rent

• Insurance

• Salaries

• Straight-line depreciation

• Property taxes

• Supervisory salaries

• Administrative salaries

• Advertising

Step cost examples 

Step Variable Cost Example

• Kayaking guides hired per 5 guests (1–5 guests = 1 guide, 6–10 = 2 guides, etc.)

Step Fixed Cost Example

• Diagnostic machine rental: $20,000/month per 3,000 tests (1 machine for 0–3,000 tests, 2 machines for 3,001–6,000 tests)

Mixed cost examples

• Telephone bills

• Electricity charges

• Water bills (Each includes a fixed service fee + variable usage cost)

Controllable costs examples

• Direct materials

• Direct labour

• Variable overhead

Non-controllable cost examples

• Sales commissions

• General administrative costs

Planned Cost examples

• Budgeted labour cost

• Estimated material cost

• Standard cost for production

Actual costs examples 

• Real wages paid

• Actual material expenses

• Final utility bill

Relevant cost examples

• Differential cost (e.g., cost difference between two suppliers)

• Opportunity cost (e.g., income forgone by choosing full-time study over part-time work)

Irrelevant cost examples

• Sunk cost (e.g., past car repair expenses)

• Unavoidable cost (e.g., committed rent or admin salaries)