1. . Cost terms, Concepts and Classifications Topic Two by Dr. Ong Tze San tzesan@econ.upm.edu.my

2. M Variable and Fixed Cost Variable cost is a cost that varies in total in direct proportion to changes in activity. Fixed cost is a cost that remains constant in total within the relevant range of activity

3. M Cost Objects A cost object is any activity for which a separate measurement of cost is required (e.g. cost of making a product or providing a service).

4. M Direct and Indirect Costs Direct costs Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor E.g. Wood to make furniture, hours worked on project, flour to make cake. Indirect costs Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead E.g. rent of a factory that make cars/furniture, manager’s salary.

5. M Cost Drivers A cost driver is an activity or occurrence that has a direct cause-effect relationship with a cost. E.g. Production volume (units) has a direct effect on the total cost of raw materials used. A change in production volume causes a similar change in the cost of raw materials

6. M Control and Uncontrollable costs Controllable costs are those costs that can be saved by not adopting a given alternative. Uncontrollable costs are those costs that cannot be saved. Example: send a salesman to Penang for business trip. Alternatives available: drive or fly. Controllable costs: petrol/air ticket Uncontrollable costs: salary, insurance

7. M Manufacturing Costs Direct Material Direct Labor Manufacturing Overhead Prime Cost Conversion Cost Manufacturing costs are often classified as follows:

8. M Non-manufacturing Costs Marketing or Selling Cost Costs necessary to get the order and deliver the product. Administrative Cost All executive, organizational, and clerical costs.

9. M Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Period costs include all marketing or selling costs and administrative costs. Inventory Cost of Good Sold Balance Sheet Income Statement Sale Expense Income Statement