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ManagementAccounting|51ClassificationofManufacturingCostsandExpensesIntroductionManagementaccounting,aspreviouslyexplained,consistsprimarilyofplanning,performanceevaluation,anddecision‑makingmodelsusefultomanagementinmakingbetterdecisions.Ineverycase,thesetoolsrequirecostandrevenueinfor‑mation.Abasicassumptionofmanagementaccountingisthatitistheresponsibilityofthemanagementaccountanttoprovidetheneededcostandrevenueinformation.Consequently,themanagementaccountantneedsacompleteunderstandingofthedifferenttypesofcostsrequiredbythevariousmodels.InFigure4.1,themajorcostsassociatedwitheachmanagementaccountingtoolislisted.Inmanagementaccounting,asinfinancialaccounting,itmaybesaidthatamajorbuildingblockintheconceptualfoundationiscost.Boththefinancialandmanage‑mentaccountantmusthaveasoundunderstandingofthevariedandcomplexrami‑ficationsofcost.Fromafinancialaccountingviewpoint,afaultyunderstandingofcostmaycausefinancialstatementstobeincorrectlyprepared.Fromamanagementaccountingviewpoint,aninadequateunderstandingoruseofcostswillresultinpoordecisions.Therearetwobroadaspectofthetermcostthatneedstobeunderstood:costclassificationandcostbehavior.Costclassificationreferstotheseparationofcostsintocategoriesforproperpreparationoffinancialstatementsorforuseindeci‑sion‑makingmodels.Costbehaviorreferstotheeffectthatvolume(productionorsales)hasontotalexpensesorcosts.Inthischapter,bothaspectswillbediscussedinsomedepth.52|CHAPTERFOUR•ClassificationofManufacturingCostsandExpensesCostClassificationInaccounting,thetermcostreferstotheexpenditureorsacrificemadetoacquiresomethingofvalue.Infinancialaccounting,alltransactionsarerecordedintermsofhistoricalcost;thatis,themoneyexpendedortobeexpendedatthedateofthetransaction.Themonetaryvalueassociatedwithanassetacquiredissaidtobeitscost.Costisthesacrificemadeinresourcestoacquireanotherresource.CostismeasuredinmonetaryunitswhichintheUnitedStatesisthedollar.Forexample,amachineispurchasedbypaying$4,000incashandtradinginanoldmachinehavingasalesvalueof$1,000.Thecostofthenewmachineis$5,000becauseresourcesworthatotalof$5,000weregivenintheexchange.Stateddifferently,resourcesworth$5,000weresacrificed.Figure4.1ToolsCostInformationRequiredFlexibleBudgetFixedandvariablecostsCost‑volume‑profitanalysisFixedandvariablecostsDirectcostingFixedandvariablecostsBudgetingPlanneddata,fixedandvariablecostsVarianceanalysisFixedandvariablecostsIncrementalanalysisEscapable,opportunity,relevantSegmentalreportingIndirectcosts,directcostsInventorymodelsPurchasingcost,carryingcostPresentvaluemodelsCashinflows,cashoutflowsDependingonthetypeofactivityandthepassageoftime,thecostofanassetinaccountingcanbeclassifiedinseveralways.Properfinancialreportingandcorrectdecision‑makingrequireanunderstandingofthedifferentwaysinwhichcostscanbeclassified.InFigure4.2isalistofcoststhatpertaintobothfinancialstatementpreparationanddecision‑makinganalysis.Forpurposesofmanagementaccounting,therearethreeimportantdualclassifica‑tionsofcostthatrequiresomeunderstanding:Expiredandunexpired,manufacturingandnonmanufacturing,andfixedandvariable.Thesethreeclassificationsaresomewhatinterrelated,particularlyconcerningfinancialstatements.ExpiredandUnexpiredCostsExpiredcostsorexpensesaretheusedupvalueofassets.Expiredcostsarealwaysshownontheincomestatementasdeductionsfromrevenue.Expiredcostsmaybethoughtofasthatportionoftheassetvaluebenefittingcurrentoperations.Itishelpfultothinkofexpiredcostsasformerassetsvalues.Toillustrate,suppliesexpenseisanexpiredcost.Thecostallocatedtosuppliesexpense,ofcourse,istheusedportionofsupplies,anasset.TherelationshipbetweenassetvaluesandexpiredcostsisfurtherillustratedinFigure4.3.ManagementAccounting|53Figure4.2FinancialStatementsCostConceptsManagementAccountingCostConcepts(Decision‑makingCostConcepts)DirectandindirectPrimeJointFixedandvariableManufacturingandnonmanufacturingExpiredandunexpiredExpensesFixedandvariableexpensesRelevantandirrelevantEscapableandinescapableSunkFixedandvariableOpportunityandsunkIncrementalDirectandindirectMixed,semi‑variableCarryingcost,purchasingcostManufacturingCosts/ExpensesThedifferencebetweenacostandanexpenseisfrequentlymisunderstood.Becausethetermsvariablecostsandvariableexpenseswillbeusedlaterinthischapter,andalsothroughoutthisbook,thedifferenceinmeaningbetweenacostandaexpensewillnowbeclarified.Technically,thereisadifferencebetweenamanufacturingcostandamanufac‑turingexpense.Thetermmanufacturingcostsusuallyreferstomaterialused,directlaborincurred,andoverheadincurredinamanufacturingbusiness.Materialused,directlabor,andmanufacturingoverheadatthetimeincurredarenotexpenses;rathertheyincurredcosts.Inthemanufacturingprocess,material,labor,andoverheaddonotexpire;ratherthroughmanufacturingactivitytheybecometransformedfromonetypeofutilitytoanother.Inamanufacturingbusiness,theaccountantwilldebitworkinprocessformate‑rialsused,directlaborincurred,andmanufacturingoverhead.Sinceworkinprocessisanassetaccount,itwouldnotbelogicaltoregardmaterialused,directlabor,andmanufacturingoverheadasexpenses.Expensescannotbetr