©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster An Introduction to Cost Terms and Purposes Chapter

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Define and illustrate a cost object.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost and Cost Terminology Cost is a resource sacrificed or forgone to achieve a specific objective. An actual cost is the cost incurred (a historical cost) as distinguished from budgeted costs. A cost object is anything for which a separate measurement of costs is desired.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Distinguish between direct costs and indirect costs.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Direct and Indirect Costs Direct Costs Example: Paper on which Sports Illustrated magazine is printed Indirect Costs Example: Lease cost for Time-Warner building housing the senior editors of its magazine COST OBJECT Example: Sports Illustrated magazine COST OBJECT Example: Sports Illustrated magazine

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Explain variable costs and fixed costs.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 2 - 7

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 2 - 8

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Relationships of Types of Costs Direct Indirect VariableFixed

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Interpret unit costs cautiously.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Distinguish among manufacturing companies, merchandising companies, and service-sector companies.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Manufacturing Manufacturing companies purchase materials and components and convert them into finished goods. A manufacturing company must also develop, design, market, and distribute its products.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Merchandising Merchandising companies purchase and then sell tangible products without changing their basic form.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Merchandising Service companies provide services or intangible products to their customers. Labor is the most significant cost category.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Differentiate between inventoriable costs and period costs.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Types of Inventory Manufacturing-sector companies typically have one or more of the following three types of inventories: 1. Direct materials inventory 2. Work in process inventory (work in progress) 3. Finished goods inventory

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Types of Inventory Merchandising-sector companies hold only one type of inventory – the product in its original purchased form. Service-sector companies do not hold inventories of tangible products.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Classification of Manufacturing Costs Direct materials costs Direct manufacturing labor costs Indirect manufacturing costs

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective Describe the three categories of inventories commonly found in manufacturing companies.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Inventoriable Costs Inventoriable costs (assets)… become cost of goods sold… after a sale takes place.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Period Costs Period costs are all costs in the income statement other than cost of goods sold. Period costs are recorded as expenses of the accounting period in which they are incurred.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Manufacturing Company Materials Inventory Finished Goods Inventory Revenues Cost of Goods Sold INCOME STATEMENT Period Costs Inventoriable Costs BALANCE SHEET Equals Operating Income when sales occur deduct Equals Gross Margin deduct Work in Process Inventory

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Merchandising Company INCOME STATEMENTBALANCE SHEET when sales occur Inventoriable Costs Merchandise Purchases Inventory Revenues deduct Cost of Goods Sold Equals Gross Margin deduct Period Costs Equals Operating Income

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Prime Costs Direct Materials Direct Labor Prime Costs +=

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Conversion Costs Direct Labor Manufacturing Overhead += Conversion Costs Indirect Labor Indirect Materials Other