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
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