Cost Classifications

Costs are classified according to the purpose of the cost information that is sought (see Exhibit 4.2). Product and period costs provide information needed to create external financial statements, such as the income statement and balance sheet. Cost behavior helps a company look into the future by seeing how costs may change based on other changing variables, such as demand or production rate, or how a fixed cost affects different situations. Costs must also be assigned to a source, giving rise to the concept of direct and indirect costs.

Exhibit 4.2 Cost Classificationsa

Financial Statements

  • Product Cost
  • Period Cost

Cost Behavior

  • Variable
  • Fixed
  • Semi-variable

Assigning Costs

  • Direct
  • Indirect

Cost Decisions

  • Differential Costs
  • Sunk Costs
  • Opportunity Costs

Cost of Quality

  • Prevention
  • Correction
  • Warranty
a. Based on an illustration from Ray Garrison & Eric Noreen, Managerial Accounting (New York: McGraw-Hill, 2003).

At other times, cost information supports business decisions, such as understanding the differential between costs of two possibilities or the cost of pursuing one opportunity over another. Finally, cost of quality compares the cost of preventing defects as opposed to correcting defects and the cost of providing a warranty on products or services.

The rest of this chapter explains each cost classification and describes its importance to project management.

Product and Period Cost

Period and product costs provide information to ...

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