Cost Concepts, Classifications, and Applications
Cost – Value foregone or sacrifice of resources for the purpose of
achieving some economic benefit which will promote the profit-
making ability of the firm.
Classifications of Cost
A. COSTS CLASSIFIED BY NATURE
▪ MANUFACTURING COSTS – All the costs associated with
production of goods. They are attached to the product as they
manufactured, regardless of their nature, so they capitalized
as inventory assets & don’t become “expired costs” or
“expenses” until the goods are sold.
i. Direct Materials – All raw material costs that become an
integral part of the finished product and that can be
ii. Direct Labor – All labor costs related to time spent on
products that can be conveniently and economically
assigned to specific units manufactured.
iii. Manufacturing Overhead – Includes all costs of
manufacturing except direct materials and direct labor.
✓ Indirect materials – Include materials and supplies used in
the manufacturing operation that do not become part of
the product, such as oil for the machinery & cleaning fluids
for the custodian
✓ Indirect labor – Costs that cannot be identified or traced to
specific units manufactured. (Ex: supervision, inspection,
maintenance, personnel & material handling)
▪ NON-MANUFACTURING COSTS – Generally include costs
related to selling and other activities not related to the
production of goods.
