Cost Terminology Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 2

2 What is a Cost? Asset  Expected to provide future economic benefits (not used up) Expense  Not expected to provide future economic benefits (used up)  Can be an asset or an expense  Dependent upon whether it has future economic benefits or not

Some New Terminology  Activity  An event that causes a cost or other amount to increase or decrease  For cost behavior purposes  The number of units produced and/or the number of units sold  Unit cost  The cost of one unit of product or service  Total cost  The cost of all units of product or services produced or sold during a period 3

4 Cost Terms Based on Behavior Variable costs  Total cost increases when production/sales increases  Cost per unit stays the same  Examples: cost of products, hourly wages Fixed costs  Total cost stays the same when production increases  Cost per unit decreases  Examples: Rent, depreciation, insurance, salaries, advertising More activity (sales) causes total costs to increase 4

5 Controllable Versus Non-controllable Costs  Controllable  Can be influenced by the manager  Non-controllable  Cannot be influenced by the manager  Only controllable costs should be used as performance criteria 5

6 Opportunity Costs An amount or benefit given up when choosing a particular course of action Never recorded in accounting records Always part of management decision making 6

7 Sunk Costs  Amounts incurred in the past  Costs that exist no matter which decision is made  Generally ignored in decision making 7

8 Incremental Costs  Also called relevant costs  Costs that differ between decision alternatives  Always considered in decision making 8

9 Cost Terms Based on Function Product Costs Inventoriable costs Reported as inventory on the balance sheet until sold Reported as cost of goods sold on the income statement when sold Period Costs Non-inventoriable costs Often reported as prepaids or plant assets on the balance sheet until used Reported as operating expenses on the income statement once used Expensed when the product is sold Expensed in a period unrelated to sales 9

10 The End