Accounting 3020 – Chapter 2

Cost Terms, Concepts and Classifications

Managerial vs. Financial

• Internal vs. External

• Future-oriented vs. past

• Flexible vs. rigid

• Timeliness is extremely important in mgl

• Segment vs. whole company

• Managerial need not follow GAAP

• Managerial is not mandatory

Introduction• Why are Costs Determined?

• Type of Business Process– Merchandising Company– Manufacturing Company– Service Company

General Cost Classifications

• Main Product Costs– Direct Materials– Direct Labor– Manufacturing Overhead– Prime costs– Conversion costs

• Nonmanufacturing Costs– Marketing/Selling– Administrative

Inventoriable Costs

• Product Costs– Manufacturing Costs– Inventoriable– Assets– All Costs associated with preparing the product

• Period Costs– Expensed in period incurred– Selling and general and admin. expenses

Financial Statements

• Balance sheet– 3 Inventories

• Raw Materials Inventory (parts not yet in production• Work in Process Inventory (partially completed goods)• Finished Goods Inventory (Finished products or completed

services)

• Income statement– Schedule of Cost of Goods Manufactured– Replaces “Purchases” in the Cost of Goods Sold

schedule– Period costs expensed as is

Schedule of Cost of Goods Manufactured

• Follows flow of inventories

• Reflects amount of goods completed in the period

• Goes to Cost of Goods Sold on the income statement

Cost Reactions to Changes in Activity

• Variable Costs

• Fixed Costs

• Relevant Range

Other cost classifications

• Direct Cost versus Indirect Cost– Depends on cost object

• Differential costs and revenues– Changes between alternatives

• Opportunity cost– Cost forgone by choosing one alternative over another

• Sunk costs– Past costs that have already been incurred