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Unit 2: Cost Elements and Classification

will provide a better way to analyze derivatives and their interrelation with other profit Notes
centers for better decision making.
How is the Solution Used Across the Entire Organization?
Rottenberg: Every month the management team gets a presentation on all the profitability
centers of the bank, and that’s based on the data. That’s ultimately how they see profit and
loss. Marketing uses the data to put customers into relevant profit segments. It’s impressive
that the profitability system is so detailed that it’s even used widely in all compensation
programs at the bank. Branch managers, customer relationship managers and their teams
are compensated based on data, including profitability data.
Who Uses the data?

Rottenberg: More than 1,000 users can directly access profitability reports, and the data is
also presented to all executives and managers. It’s used by everyone: CEO, CFO, all the
management division managers use the profitability data. Each division in the bank makes
plans based on management targets, which are based on this data.
Why Did You Choose to Upgrade your Ability to Capture and Analyze Profitability
data?
Rottenberg: As Israel’s largest bank, we have a commitment to be a leader in every aspect
of our business. Deeper analytics help us better understand business costs and profitability
drivers, and make better decisions. Teradata Value Analyzer lets us leverage the detailed
data in our warehouse to provide accurate profitability data that is used across our entire
business.

2.3 Classification of Costs

Costs can be classified according to: general classification and technical classification.

2.3.1 General Classification

Generally, the costs are classified as follows:

Product vs. Period Costs: product costs include all the costs that are involved in acquiring
or making product. For a manufacturer, they would be the direct materials, direct labor, and
manufacturing overhead used in making its products. Product costs are viewed as “attaching”
to units of product as the goods are purchased or manufactured and they remain attached as the
goods go into inventory awaiting sale. So initially, product costs are assigned to an inventory
account on the balance sheet. When the goods are sold, the costs are released from inventory as
expense (typically called Cost of Goods Sold) and matched against sales revenue.
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Caution The product costs of direct materials, direct labor, and manufacturing overhead
are also “inventoriable” costs, since these are the necessary costs of manufacturing the
products.
The purpose is to emphasize that product costs are not necessarily treated as expense in the
period in which they are incurred. Rather, as explained above, they are treated as expenses in
the period in which the related products are sold. This means that a product cost such as direct
materials or direct labor might be incurred during one period but not treated as an expense until
a following period when the completed product is sold.

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