Cost terms,

Concepts and
Classification

Purpose of Classification
1. Preparing an Income Statement
and Balance Sheet.

1
Cost
Classifica
tion

1. PRODUCT COST
a. Direct material
b. Direct labour
c. Manufacturing Overhead
2. PERIOD COST
(Non-Manufacturing Cost)
a. Marketing and Selling cost
b. Administrative cost

Cost terms, Concepts and

Classification

Purpose of Classification
2. Predicting changes in cost due to
changes in activity

1. VARIABLE COSTS
2. FIXED COSTS

Cost
Classifica
tion

2
Cost terms, Concepts and
Classification

Purpose of Classification
3. Assigning Cost

1. DIRECT COST
2. INDIRECT COST

Cost
Classifica
tion

Cost terms, Concepts and

Classification

Purpose of Classification
4. Making decisions

1. DIFFERENTIAL COST
2. SUNK COST

Cost
Classifica
tion

Cost terms, Concepts and

Classification

Cost flow in
Manufacturing
Firm

Prime Cost

Direct Material
Raw
material
Inventory
A/c

Conversion Cost

Manufacturing
PRODUCT COS
Overhead

Direct Labour

Once we begin to
produce the
Work In
Product, the cost
Progress
flows to WIP
The destination ofinventory
all these product
cost is
A/c.
to get the final account

After completion of
product.

Finished
Goods
Inventory

The Product cost is recorded in

these three Inventory account
on the Balance sheet.

Sales (-)
Sa
le

Cost of Good
Sold

Gross
Profit
(-) Selling
and?Administrative
expenses
Net Profit

Income Statement

Product Cost

Period Cost

The connection between these two

statements is the transfer of Product
cost after the balance sheet on to income
statement in the form of Cost of Good
sold cost / Inventorial cost /
Product
Manufacturing cost
Period cost / Non-inventorial cost / non
manufacturing cost / operating expenses

For Example

Printing Paste

I am a Screen Printer

Printer
From Customer

Screen and aids

To Customer
Power and
Lights
Major factor that drives cost accounting

DM
DL& DE
MOH allocated

= Rs. 5
= Rs. 3
= Rs. 2

Manufacturing Cost /Product

cost /Inventorial cost
=

Rs. 10

Manufacturing Over Heads

Lightings,
Salary of supervisor, helper, sweeper etc,
Taxes, Insurance, etc

can sell it Rs.15 by adding profit.. (but this is not a real pofit)

Product Cost Vs. Period Cost

Factory

Two different
Buildings on a
business Property

Direct material
Product cost

Direct Labour
MOH

Sales and administration

Administrative expenses
Selling and distribution cost

Period cost

ROAD

Any cost
associated with
factory is Product
cost
Any cost
associated with
sales and
administrative of
the company is
Period cost

Manufacturing cost flows

Cost

Balance Sheet Inventories

Income Statement
Expenses

Direct Material Purchases Direct Material Inventory

Direct Labour
Work in Progress Inventory
Manufacturing Over Head
Sale
Finished Goods Inventory
Cost of Goods Sold
Sales and Administrative Costs

Period cost

S&A Expenses