Costing Overview and Nature of Costs

The method and process of determining the costs of producing goods or services by classifying, recording, and allocating expenditure.

Costs that can be directly traced to a specific product, department, or branch.

Costs that cannot be directly traced to a specific product, department, or branch. Also called common costs or joint costs.

Costs included in the inventory and charged against revenue when the product is sold. Essentially, it's the cost of making the goods.

Costs immediately charged against revenue in the period they are incurred. They are not associated with inventory.

Expenditure for acquiring assets or expanding earning capacity. It's a long-term investment.

Expenditure for maintaining assets and not meant to increase earning capacity. It benefits the current accounting period.

Costs that remain constant regardless of changes in production volume. Example: rent.

Costs that vary directly with the production volume. Example: raw materials used.

Costs that have both a fixed component and a variable component. Example: utilities.

Costs which remain constant for a particular output level, but increase by a fixed amount when the output level changes. Example: salary of supervisors.

This system uses actual direct costs (direct materials and direct labor) and actual overhead, providing an accurate cost picture but requires extensive record-keeping.

This system uses predetermined overhead rates based on estimations, simplifying cost allocation but may not reflect actual costs accurately. It is based on a predetermined overhead rate.

A ratio of the estimated total overhead to the estimated total cost driver, used to allocate manufacturing overhead costs to production.

The benefit that is forgone or given up by choosing one alternative over another.

A cost that has already been incurred and cannot be recovered. It has no relevance to future decisions.

These are costs related to an organization's structure or facilities, largely uncontrollable in the short term. Example: salaries of executives.

Costs that are subject to management discretion and can be changed relatively easily. Example: advertising or research and development expenses.

Costs that can be influenced or controlled by a supervisor or manager in a given period. Example: office supplies.

A stock card or a continuous record of inventory status, updated with each purchase and issuance. It provides real-time inventory balances.

This method involves physical counting of inventory periodically to determine the ending balance. It does not require continuous record-keeping.

The raw materials that are waiting to be used in the production process.

Partially completed products that are still in the production process, representing work in progress.

Completed products that are ready to be shipped or sold to customers.

The delivery of raw materials from inventory to the production process. It is a vital step in the flow of costs.

The allocation of actual overhead costs to production jobs, usually done using a predetermined overhead rate.

Moving the accumulated cost of production from work-in-process to finished goods inventory, indicating the completion of a production run.

Setting the price for a completed product or service, usually involves considering costs, desired profit, and competitor prices.

A method of pricing where the selling price is set by adding a markup percentage to the cost of production, including both manufacturing costs and non-manufacturing costs.

A method of cost accumulation where all production overhead costs are known and available before allocation. It provides an accurate cost picture.

A method of cost accumulation where a predetermined overhead rate is used to allocate manufacturing overhead costs to production. It simplifies cost allocation but might not reflect actual costs accurately.