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MAC2601NOTES
,STUDY UNIT 1 – COST OBJECTS, CLASSIFICATION
AND BEHAVIOUR
Introduction
Cost accounting - process and procedures used to obtain record and report cost data.
Used with other accounting info by management when planning and controlling activities of
the entity.
Cost control - comparing the actual results with the expected results, determining the
causes of deviations and making management decisions to ensure that planned results are
achieved, or to amend the initial plan because of the changed conditions.
Costs - total resources used to achieve specified aims
Cost objects and classification of costs
Cost objects
A cost object is a term used primarily in cost accounting to describe something to
which costs are assigned. Common examples of cost objects are: product lines, geographic
territories, customers, departments or anything else for which management would like to
quantify cost.
Classification of costs:
Costs can be classified in a number of ways—depending on the purpose of the
classification. For example, classification of costs for purposes of determining inventory
valuations and cost of goods sold for external reports differs from the classification of costs
that would be carried out to aid decision-making. It is important to note that the
classifications of costs are not mutually exclusive. That is, a particular cost may be classified
in many different ways—depending on the purpose of the classification.
,Classification of costs according to their nature or origin
Cost - monetary measure of resources given up to acquire goods or services that will benefit
the enterprise at present or future date. Either:
Manufacturing costs – sum of costs incurred in manufacturing process, direct
materials, direct labour and manufacturing overheads
commercial costs :
Marketing costs – including all costs with promotion of product, acquisition of
orders, and admin of marketing function and delivery of finished goods. Costs for
obtaining orders for and delivery of manufactured products
Administrative costs – relate to executive, organizational and clerical costs of
enterprise, but EXCLUDING costs for manufacturing and marketing functions. All
costs relating to day-to-day function of entity.
Total operating costs
Manufacturing costs Commercial costs
Marketing costs Administrative costs
Period costs -costs associated with given accounting period rather than given product e.g.
marketing and admin costs are incurred to generate income in specific period but not related
to sale of given number of units. Also rent paid for shops to market goods are not influenced
by the volume of sales.
In accounting match costs against income earned during the same period.
Deferred costs - unexpired period costs and shown as asset in Balance Sheet (have not
received benefit of outlay yet – so cannot be expensed against income for that period).
Product costs - associated with products that are manufactured and can be either expired
cost or unexpired cost.
Unexpired cost - when product has not been sold e.g. cost of finished goods on hand.
Unexpired costs are shown as an asset in the Balance Sheet.
Expired cost – an expired cost is a cost that has been recognized as an expense. This
happens when an entity fully consumes or receives benefit from a cost (sometimes resulting
, in the generation of revenue). An expired cost may also be construed as the total loss in
value of an asset.
Period costs Production costs of total
products produced
Expired Unexpired Expired Unexpired
(items sold) (items unsold) (items sold) (items unsold)
Charged in period during which Inventory still on hand Assets in
product was sold / cost expired Costs in / prepaid costs Balance Sheet
Income Stmt
Cost classification in relation to product
Cost of goods in manufacturing entity determine by knowing which are product costs in entity
and also having an understanding of the flow of costs through the accounts of entity.
Production costs classified as:
A) Direct material - primary materials and easily traced to manufacturing of goods or
services rendered. Integral part of end product and normally in predetermined
measurable quantities proportional to the volume of production usages. Direct
material forms cost element on its own.
B) Indirect material -secondary material that is not part of the end product and quantity
used is not directly related to volume of production and cannot be linked directly to
particular product. Not part of cost element and normally under manufacturing
overheads.
C) Direct labour -cost of all essential labour physically expended on manufacturing the
product and traced conveniently to manufacture of goods or services rendered.
Indirect labour costs cannot be directly linked to particular cost objective and are
classified under manufacturing overheads
D) Manufacturing overheads - refers to all other costs expended in manufacturing
process, EXCLUDING direct material and direct labour costs, but INCLUDING
indirect material and indirect labour costs. E.g. depreciation, insurance costs etc. So
basically they occur during course of production, but can be attributed directly to the
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