Cost Terms, Concepts and Classifications 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 Period Costs Manufacturing Costs Assets All Costs associated with preparing the product Period Costs Expensed in period incurred Selling and general and admin. expenses

Financial Statements Balance sheet Income statement 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