Chapter 2: Cost Terminology

1
Chapter 2 Cost Terminology

• Costs can be classified along many different
  dimensions, depending on the intended use of the
  information.
• Expired or Unexpired
• Direct or Indirect
• Manufacturing or Non-manufacturing
• Product or Period
• Fixed or Variable

2
Definition of Cost

• Value sacrificed in exchange for goods or
  services that are expected to have future
  benefit.
• Unexpired costs
• Assets
• Expired costs
• Expenses
• Losses

3
Direct or Indirect Cost

• Can the cost be traced to a particular cost
  object?
• Ex. Division, department, product line, unit
• Direct cost
• Indirect cost
• Tracing methods
• Direct Attribution
• Driver Tracing
• Allocation

4
Manufacturing or Non-Manufacturing

• Is the cost necessary for PRODUCING the product?
• Assumes the company makes a tangible product.
• Same concepts can be applied to service
  companies.
• Look for keywords manufacturing, production,
  factory

5
Manufacturing Costs

• Direct Material
• Direct Labor
• Manufacturing Overhead
• -Examples
• Prime Cost DM DL
• Conversion Cost DL MOH

6
Non-Manufacturing Costs

• General and Administrative (Corporate Overhead)
• Research and Development
• Marketing and Selling

7
Product or Period Costs

• When are the costs deducted from income?
• Product Costs
• Inventoriable Costs
• Period Costs
• Expenses
• GAAP
• All manufacturing costs treated as product costs.
• Full Absorption Costing

8
Full Absorption Costing

• Purpose External Reporting
• Sales
• -Cost of Goods Sold
• Gross Margin
• -General and Administrative Expenses
• -Selling and Marketing Expenses
• Net Income
• What type of costs go into Cost of Goods Sold?

9
Accounting for DM, DL and OH

• Beg. Direct Materials Inv.
• Purchases
• - End. Direct Materials Inv.
• Direct Materials Used in Production
• Direct Labor
• Manufacturing Overhead
• Total Manufacturing Costs

10
Cost of Goods Manufactured and Sold

• Total Manufacturing Costs (DM DL OH)
• Beg. Work in Process Inv.
• - End. Work in Process Inv.
• Cost of Goods Manufactured (Completed)
• Beg. Finished Goods Inv.
• - End. Finished Goods Inv.
• Cost of Goods Sold

11
Fixed or Variable Costs

• How does the cost respond to a change in some
  activity level?
• Relevant range
• Fixed Cost
• Total Cost
• Cost per unit
• Variable Cost
• Total Cost
• Cost per unit

12
Variable Costing

• Purpose Internal Decision Making
• Sales
• -Variable Costs
• Contribution Margin
• -Fixed Costs
• Net Income
• Is Contribution Margin the same as Gross Margin?

13
Summary

• Absorption Costing Variable Costing
• (External) (Internal)
• Sales Sales
• -COGS -Var. Cost
• Gross Margin Contribution Margin
• -Period Expenses -Fixed Costs
• Net Income Net Income
• Can you think of costs that would be classified
  differently between the two formats?