Chapter 2: Managerial Accounting and Cost Concepts
Cost and cost classification:
A: cost in relation to a product – manufacturing cost (direct materials, direct labor and factory
overhead) and nonmanufacturing cost or commercial cost (administrative and marketing
cost).
B: Assigning cost to objects – direct cost and indirect cost
C: Cost in relation to preparing financial statement – product cost and period cost
D: Cost in relation to activity – variable cost, fixed cost and mixed cost
E: Cost in relation to making decisions – differential cost, sunk cost and opportunity cost
F: Cost in relation to manufacturing departments – producing departments and service
departments
♦ Costs classification based on financial statements:
(a) Income statement – Cost of goods manufactured and cost of goods sold.
(b) Balance sheet – Raw materials, work-in-process and finished goods inventory.
♦ Costs classification from controlling viewpoint:
(a) Controllable cost: The cost that’s controlling power remains within the authority of an
individual is called controllable cost. The entertainment cost for the purchase
department is controllable cost for the purchase manager. Because the manager can
increase or decrease this cost by applying his power.
(b) Noncontrollable cost: The cost that’s controlling power does not remain within the
authority of an individual is called noncontrollable cost. The depreciation cost of the
equipment is noncontrollable cost for the purchase manager. Because the manager
cannot increase or decrease this cost by applying his power.
