Types of Costs

• A cost object is any item for which cost measurement is required
• An example of a cost object for a retail bank is a retail banking client.
• A cost driver is any factor that causes a change in the cost of an activity.
• An example of a cost driver is labour hours.
• Capitalised costs are expenses incurred by a company that are not immediately expensed on the income statement but instead recorded as assets on the balance sheet.
• Capitalised costs are recorded as assets on the balance sheet because they are expected to provide future benefits to the company, so they are spread out over time rather than being deducted all at once.
• Expensed costs are costs immediately deducted from a company's income on the income statement in the period they are incurred.
• Expensed costs are immediately deducted from a company's income on the income statement because they are not expected to provide future benefits.
• Product costs are the total cost of producing goods/services
• Period costs are all other selling and administrative costs that are not included in product costs.
• Examples of period costs include advertising and salaries.
• Stepped costs are costs fixed to a certain level of activity, which then change in a step-like fashion once they reach a threshold.
• An example of a stepped cost is that as the level of production rises, the machinery hire costs remain fixed up to a certain level of production, at which point another machine needs to be hired.
• Semi-variable costs are a mix of fixed and variable costs; when output is zero, costs are greater than zero and continue to rise as output increases.
• An example of a semi-variable cost is a billing structure for a mobile phone - there is a flat rate (fixed cost), but extra usage of texts, calls, or internet data is a variable cost.
• Direct materials are materials that can be traced back to the product.
• An example of direct material cost is a radio installed in a car.
• Direct labour is labour costs that can be directly traced back to individual units of a product.
• An example of direct labour costs is wages paid to car assembly workers.
• Manufacturing overhead are the indirect costs during production.
• Manufacturing overhead is the indirect cost during production.
• An example of manufacturing overhead is electricity used to operate equipment.
• Prime Cost = Direct Materials + Direct Labour
• Conversion Cost = Direct Labour + Manufacturing Overhead
• Non-manufacturing costs include marketing & selling costs and administrative costs.
• Marketing & selling costs are costs for getting the orders and delivering the product.
• Administrative costs are organisational & clerical costs.
• Manufacturing costs include direct materials, direct labour and manufacturing overhead.
• Cost of Goods Sold = (100% - % Gross Profit Margin) * Sales
• Gross profit margin is the profit after subtracting the cost of goods sold
• Cost of Goods Manufactured = Cost of Goods Available for Sale - Opening Balance of Finished Goods
• Direct costs can be identified with a specific cost object
• Indirect costs cannot be clearly identified with a particular cost object