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Chapter 2 – Cost Terminology & Function
Cost Classification:
Classification Purpose Example
Behaviour Predicting Total Costs
Helpful in CVP & ST decision making Fixed Costs:
Does not change (fixed)
because of the output (Total
does not change)
Variable Costs:
Varies depending on the output
(Total changes)
Function Determining the type of costs
incurred
Manufacturing &
Product Costs:
Inventoriable Costs
Non-manufacturing &
Period Cost:
Non-Inventoriable, Gen &
Admin
Traceability Assigning (Allocating)
Shared/Common Costs Direct Costs:
y Salaries of Mgmt Dept
employees, faculty
y Equipment purchased by
Mgmt Dept
Indirect Costs:
y Salaries of Registrar’s Office
employees
y Salaries of Librarians
y Utilities of Gym
Relevance Decision-Making Sunk Cost:
Irrelevant in decision making,
unavoidable or unchangeable
Out-of-pocket cost requires a
future outlay of cash, relevant in
decision making
Opportunity Cost
Controllability Performance Evaluation Controllable Cost:
VP controls costs of
investment in equipment and
buildings
Non-Controllable:
VP has no control over costs of
investment in equipment and
buildings made by previous VP
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Cost Functions
Definition:
• A cost function is a mathematical function describing cost behavior pattern – how costs change with
changes in the cost driver. Y = a + bX
Two Major Types of Cost Functions – Linear vs. Non-linear
Linear Cost Function Non-linear Cost Function
Cost function in which the graph of total cost vs. a single
cost driver forms a straight line within the relevant range. Cost function in which the graph of total cost vs. a single cost
driver does not form a straight line within the relevant range.