1. Management Accounting2
Cost Definition and Classification

2. Cost Concept
Cost is a source of sacrifice to achieve specific objective. Generally cost may be explained as the amount of expenditure, actual or estimated, relating to a specific thing or activity such as product, job, service, process etc.

3. Cost Concept Cost can be identified as; Acquisition Costs
Manufacturing costs (Production costs)
Period costs
Selling and Marketing Costs
Material Costs, Labor Costs, Overheads,
Variable and Fixed Costs
Actual cost, budgeted cost, historical cost.

4. Cost Concept Acquisition (Purchasing) Cost
Acquisition costs consist of;
acquisition price,
transportation,
insurance
assembly cost
tax and other expense related with acquisition.

5. Classification of Costs
According to Nature and Function
Nature
Material
Labor
Other Expenses (Wages, Salaries, Depreciation, Utility, etc.)
Function
Production Costs
Selling Costs
Administrative Costs
Research and Development Costs
According to the Identifiable (Cost Center and Production)
Direct Costs
Indirect Costs
According to Behavior (Variability)
Fixed Costs
Variable Costs

6. Cost Concept Manufacturing Cost
Production or Manufacturing costs are all production cost incurred to manufacture the products and to bring them to a saleable condition, including direct materials, direct labor and indirect manufacturing (or factory overhead) costs.

7. Cost Concept Manufacturing Cost
Manufacturing Costs
Direct Material
Direct Labor
Factory Overhead (Indirect Material, Indirect Labor, factory and Depreciation, Rent, etc.)

8. Cost Concept Manufacturing Cost
Manufacturing costs are often classified as follows:
Direct Material
Direct Labor
Manufacturing Overhead
Prime Cost
Conversion Cost

9. Manufacturing Costs Versus Period Costs
Manufacturing (Production) costs include direct materials, direct labor, and manufacturing overhead.
Period costs are not included in product costs. They are expensed on the income statement.
Inventory
Cost of Goods Sold
Balance Sheet
Income Statement
Sale
Costs can also be classified as product or period costs.
Product costs include all the costs that are involved in acquiring or making a product. More specifically, it includes direct materials, direct labor, and manufacturing overhead. Consistent with the matching principle, product costs are recognized as expenses when the products are sold. This can result in a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement. Product costs are also known as inventoriable costs. The discussion in the chapter follows the usual interpretation of GAAP, whereby all manufacturing costs are treated as product costs.
Period costs include all marketing or selling costs and administrative costs. These costs are expensed on the income statement in the period incurred. All selling and administrative costs are typically considered to be period costs. The usual rules of accrual accounting apply to period costs. For example, administrative salary costs are “incurred” when they are earned by the employees and not necessarily when they are paid to employees.
Expense
Income Statement

10. Cost Concept Period Costs
Administrative Cost is the cost of formulating the policy, directing and controlling the business activities which is not related directly to a production, selling & distribution, research or development activity or function. Selling Costs are the costs of marketing function. Distribution costs include expenditure incurred in packing, unpacking, and transporting activities. Research and Development Costs are the cost of research and development activity.

11. Cost Concept Period Costs
Selling Costs
Costs necessary to get the order and deliver the product.
Administrative Costs
All executive, organizational, and clerical costs.

12. Product Costs Versus Period Costs
Balance Sheet
Product Costs (manufacturing costs)
Current assets and inventory
Income Statement
Revenue
COGS
Gross profit
Expenses
Net income.
When goods are sold.
as incurred
Period Costs (operating expenses and income taxes.)
as incurred

13. Comparing Merchandising and Manufacturing Activities
Merchandisers . . .
Buy finished goods.
Sell finished goods.
Manufacturers . . .
Buy raw materials.
Produce and sell finished goods.
MegaLoMart

14. Cost Concept Reporting Merchandising Activity
BALANCE SHEET
Assets
Liability and Equity
Inventory Costs
Inventory
Raw Material and Other Supplies
Merchandise
Tangible Assets (Property, Plant and Equipment)
Investment Costs
Intangible Assets

15. Cost Concept Reporting Manufacturing Activity
BALANCE SHEET
Assets
Liability and Equity
Inventory Costs
Inventory
Raw Material and Other Supplies
Work-in Progress
Finished Goods
Tangible Assets (Property, Plant and Equipment)
Investment Costs
Intangible Assets

16. The Flow Of Manufacturing Costs
Direct materials purchased
Materials Inventory
$$$
Direct materials used
Work in Process Inventory
$$$
Direct Material, Direct labor & Manufacturing overhead
Cost of goods manufactured
Cost of Goods Sold
$$$
Finished Goods Inventory
$$$

17. Cost Concept Reporting Manufacturing Activity
BALANCE SHEET
Assets
Liability and Equity
Inventory
Raw Material and Other Supplies
Work-in Progress
Finished Goods
Materials waiting to be processed.
Partially complete products – some material, labor, or overhead has been added.
Part I
Raw materials are the materials used to make the product.
Part II
Work in process consists of units of product that are partially complete, but will require further work to be saleable to customers.
Part III
Finished goods consists of units of product that have been completed, but not yet sold to customers.
Completed products awaiting sale.

18. Cost Concept Expenditure
An expenditure is a payment in cash or barter credits, or the incurrence of a liability by an entity, in exchange for goods or services.

19. Cost Concept Expenditure
There is a close association between incurring expenditure and generating assets but the two do not necessarily same.

20. Cost Concept Expenditure
An asset is recognized in the balance sheet when expenditure has been incurred for which it is considered probable that economic benefits will flow to the entity.

21. Cost Concept Reporting Cost of Assets
BALANCE SHEET
Assets
Liability and Equity
Inventory Costs
Inventory
Raw Material and Other Supplies
Merchandise
Tangible Assets (Property, Plant and Equipment)
Investment Costs
Intangible Assets

22. Loss is lost cost. Cost Concept Loss
In financial accounting, it is used to describe a circumstance where expenses exceed revenues for an accounting period, that is, the reverse of net income (earnings) for the accounting period.

23. Cost Concept Loss
Loss also defined as unfavorable event which does not arise from a normal business activity but from non-operating transactions or events.

24. Basic Cost Concepts Expenditure- Cost- Expense
Expenditure and Expired Costs
Favorable and Normal
Yes
Expense No
Unfavorable and Abnormal
Loss

25. Basic Cost Concepts Expenditure-Cost- Expense
Expenditure and Expired Costs
Used up in Generating Revenue
Yes
Favorable and Normal
Expense No
Loss
Generating Assets
Cost

26. Cost Concept Reporting Expired Cost
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

27. Manufacturing Cost Flows
Balance Sheet Costs Inventories
Income Statement Expenses
Material Purchases
Raw Materials
Manufacturing Overhead
Work in Process
Direct Labor
Finished Goods
Cost of Goods Sold
Selling and Administrative
Selling and Administrative
Period Costs

28. Reporting in Financial Statements Cost, Expense and Loss
BALANCE SHEET
Assets
Liability and Equity
INCOME STATEMENT
Inventory Costs
Inventory
Expired Cost
Sales
Cost of Goods Sold
Tangible Assets (Property, Plant and Equipment)
Gross Sales Profit
Investment Costs
Intangible Assets
Depreciation
Operating Expense
Operating Profit
Other Income and Profit
Other Expense and Loss
Expense
Finance Cost

29. Fixed Cost Variable Cost Semi Variable Cost Semi Fixed Cost
Classification of Cost
According to Behavior
Fixed Cost
Variable Cost
Semi Variable Cost
Semi Fixed Cost

30. Cost Classifications for Predicting Cost Behavior
How a cost will react to changes in the level of business activity.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.

31. Cost Classifications for Predicting Cost Behavior
Managers often need to be able to predict how costs will change in response to changes in activity.
The activity might be the output of goods or services or it might be some measure of activity, internal to the company, such as the number of purchase orders processed during a period.
In this chapter, nearly all of the illustrations assume that the activity is the output of goods or services. Later, other measures of activity will be introduced.

32. Classification of Cost
According to Behavior
In this classification, costs are classified by their behavior to changes in the level of activity.
This is the analysis of how cost or profits change as volume changes.
In this context volume might be an activity such as the number of machine hours, the number of units produced, the number of pounds processed, the number of units sold, or the TL of goods sold.

33. Cost Classifications for Predicting Cost Behavior Total Variable Cost
The costs tend to vary with the volume of output called variable costs .
Any increase in the volume of production results in an increase in the variable cost.
Example: cost of material, cost of labor etc.
For example total direct material cost will vary on the base of change in level of production.
Product Unit=x
Direct Material Cost=y

34. a=Variable cost per unit Total Variable Cost = ax x=production unit
Cost Classifications for Predicting Cost Behavior Total Variable Cost Per Unit
Although variable costs change in total as the activity level rises and falls, variable cost per unit is constant.
For example, direct material per unit is constant.
a=Variable cost per unit
Total Variable Cost = ax
x=production unit
Variable cost per unit remains constant.
Production Unit=x
Direct Material Per Unit=a

35. Cost Classifications for Predicting Cost Behavior Total Fixed Cost
The cost which does not vary but remains constant within a given period of time or range of activity is called fixed costs.
Example: Rent, insurance of factory buildings, depreciation etc. remain the same for different levels of production.
For example depreciation cost will remain constant change in level of production (activity).
Product Unit
Depreciation Cost

36. Unit Depreciation Cost
Cost Classifications for Predicting Cost Behavior Total Fixed Cost Per Unit
When expressed on a per unit basis, The total fixed cost per unit will decreases on the base of level of activity.
For example, the average depreciation cost per production unit decreases as more the production are made.
b=Total Fixed Cost
Unit Fixed Cost= b x
x=production unit
Fixed cost per unit decreases when activity rises and increases when activity falls.
Production Unit
Unit Depreciation Cost

37. Total Cost=Variable Cost + Fixed Cost TC= ax + b
Cost Classifications for Predicting Cost Behavior Variable-Fixed
Total Cost=Variable Cost + Fixed Cost
TC= ax + b

38. Cost Classifications For Decision Making
It is important to realize that every decision involves a choice between at least two alternatives. The goal of making decisions is to identify those costs that are either relevant or irrelevant to the decision. Costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits are irrelevant and can and should be ignored.
Every decision involves a choice between at least two alternatives.

39. Costing Methods In Decision Making Illustration
Example: The costs of ABC company occurred in September are as follows:
Costs’ Nature
Fixed Costs
Variable Costs
Material Costs
Direct Material
Indirect Material -
50.000
40.000
10.000
Labor Costs
Direct Labor
Indirect Labor
20.000
Utility Costs
25.000
35.000
Depreciation Costs
55.000
Other Costs
9.000
6.000
Total
While the monthly normal production capacity is unit in September, company has decided to manufacture unit. On 20th of September company received an additional order involving unit production with 4TL unit price. Selling price of each product is 8 TL. Company sold unit finished goods in September.
Required: Ascertain the total and unit cost of current production and evaluate whether the additional order to accept or reject.

40. Costing Methods in Decision Making Costing Methods On The Base Of Behavior
These methods deals with the behavior of costs to the changes in level of activity.
Prime Costing
Absorption Costing
Variable Costing and
Normal Costing

41. Costing Methods In Decision Making
Absorption Costing Method (Tam Maliyet) This method also termed as Full Costing. It is the technique that takes into account charging of all costs both variable and fixed costs to operation processed or products or services. Under absorption costing full costs, i.e. fixed and variable costs are absorbed to the production
Variable (Marginal) Costing (Değişken Maliyet) In Marginal Costing, it allocates only variable costs to the production. It does not take into account the fixed cost of production. This type of costing emphasizes the distinction between fixed and variable costs.

42. Differential (Ek Maliyet) Costs And Revenues
Costs and revenues that differ among alternatives. Differential costs (or incremental costs) is a difference in cost between any two alternatives. A difference in revenue between two alternatives is called differential revenue. Differential costs can be either fixed or variable.

43. Differential Costs And Revenues
For example, assume you have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. In this example, the differential revenue is $500 and the differential cost is $300.
Differential revenue is:
$2,000 – $1,500 = $500
Differential cost is:
$300

44. Opportunity Costs (Fırsat Maliyeti)
An opportunity cost is the potential benefit that is given up when one alternative is selected over another. These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions.

45. Opportunity Costs (Fırsat Maliyeti)

46. Sunk Costs (Batık Maliyet)
A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Since sunk costs cannot be changed, they cannot be differential costs; therefore, sunk costs should be ignored in decision making.

47. Sunk Costs (Batık Maliyet)
Example: You bought an automobile that cost $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.