Chapter 2

Cost

Cost; the resources forfeited to receive some goods or services.

Cost object

Cost object; Any activity or item for which a separate cost measurement is desired.

Direct cost

Direct cost; a cost that can be easily traced to an individual cost object.

Indirect cost

Indirect cost; a cost that supports more than one cost object.

Product cost

Product cost: the cost of the various products a company sells.

Inventoriable cost

Inventoriable cost; another name for product cost

Period cost

Period cost; all costs incurred by a company that are not considered product cost. Includes selling and administrative cost.

Selling cost

Selling cost; the cost of locating customers, attracting customers, convincing customers to buy, and the cost of necessary paperwork to document and record sales.

Administrative cost

Administrative cost; all costs incurred by a company that are not product costs or selling costs. The cost or areas that provide support to the product and selling areas such as the cost of accounting, finance, employees relations, and executive functions.

Cost of goods schedule

Beginning inventory

(+) Purchases

(-) Goods available for sale

(-) Ending Inventory

(=) Cost of Goods Sold

Direct material cost

Direct material cost; the cost of all raw materials that can be traced directly to a unit of manufactured product.

Direct labor cost

Direct labor cost; the cost of all production labor that can be traced directly to a unit of manufactured product.

Manufacturing overhead cost

Manufacturing overhead cost; all costs associated with the operation of the manufacturing facility besides direct material cost and direct labor cost. It is composed entirely of indirect manufacturing cost incurred to support multiple cost objects.

Raw materials inventory

Raw materials inventory; materials that have been purchased but have but have not yet entered the production process.

Material stores

Material stores; another name for raw materials inventory.

Work in process inventory

Work in process inventory; products that have entered the production process but have not yet been completed.

Finished good inventory

Finished goods inventory; products that have been completed and are ready to sell.

Direct material

Direct material; the raw material that becomes a part of the final product and can be easily traced to the units produced.

Direct labor hours

Direct labor hours; the time spent by production workers as they transform raw materials into units of finished products..

Manufacturing overhead

Manufacturing overhead; all activities involved in the manufacture of products besides direct materials or direct labor.

Factory overhead

Factory overhead; another name for manufacturing overhead cost.

Overhead

Overhead; in a manufacturing company, another name for manufacturing overhead cost, in a service type business, the indirect service cost.

Indirect manufacturing cost

Indirect manufacturing cost; another name for manufacturing overhead cost.

Indirect materials

Indirect materials; materials consumed in support of multiple cost objects.

Indirect labor

Indirect labor; the labor incurred in support of multiple cost objects.

Hybrid firms

Hybrid firms; companies that generate revenue from both providing services and selling products.

Direct or indirect costBlue Water Travel operates a chain of travel offices in eastern United States. Blue Water Travel’s home office is in New York. There are six sales offices and a district office located in Florida.

If the cost object is one of the sales offices in Florida, indicate which would describe an indirect cost (I) and a direct cost as (D).

Rent for the Florida district office building;

This is an indirect cost.

Rent for the home office building in New York.

This is an indirect cost.

Rent for the sales office.

This is a direct cost.

The company president’s salary.

This is an indirect cost.

The salary of the vice president in charge of the Florida division.

This is an indirect cost.

The salary of the sales office manager.

This is a direct cost.

The salary of the sales associate.

This is a direct cost.

Material incorporated into products.

Direct Material costs

Sales supplies

Selling costs

Supplies used in the factory

Manufacturing overhead costs

Wages of plant security guard

Manufacturing overhead cost

Wages of a security guard for the sales office

Selling costs

Depreciation on a file cabinet used in the factory

Manufacturing overhead cost

Depreciation on a file cabinet used general accounting office

Administrative cost

Presidents salary

Administrative cost

Salary of the Presidents secretary

Administrative cost

Manufacturing vice presidents salary

Manufacturing overhead cost

Salary of the manufacturing vice presidents secretary

Manufacturing overhead cost

Wages paid to production line workers.

Direct labor cost

Factory rent

Manufacturing overhead cost

Accounting office rent

Administrative cost

Depreciation on a copy machine used in the sales department

Selling cost

Depreciation on a copy machine used to copy work orders in the factory

Manufacturing overhead cost

Salary of plant supervisor

Manufacturing overhead cost