1. Cost Concepts & Behaviors– Some insights

2. Types of Cost Classification

3. Cost Object [or Objective]: "any end to which a cost is assigned..." [ E.g.: a product, a department a customer [all are activities?] Purpose: to help in decisions or to prepare financial reports

4. Phases of assigning cost to objectives (1)Accumulation by some "natural" classification (2)Assignment to the objectives --Tracing --Allocating E.g.:Material costs are accumulated as material is purchased, then typically traced to units of product as they are manufactured. Indirect manufacturing costs (overhead) are allocated to units of product. Direct vs. indirect costs: can they be traced to the cost objective in an economically feasible way? [cost-benefit.] -a matter of judgment

5. Direct/Indirect Examples for Discussion For a sales office as the cost object...... The office space? A receptionist? The sales manager's salary? The company president's salary? Insurance against fire and casualty? Electricity For a manufactured circuit board...... Transistors, integrated circuits, etc., mounted on the boards? Solder used to make the connections? Insulating varnish used to coat it? Labor of the assembly line worker? Supervisor's salary?

6. Cost Driver: Any underlying factor that causes or changes total costs. Example: Cost of an audit engagement? - Client new? - No. of transactions the client has had - Whether and how computerized - Number of branch offices - Volume (units made, sold) Cost Behavior: Fixed vs. Variable

7. Purpose is Prediction: Would we predict based on a driver? e.g. -The plant manager's salary is "fixed" -- does not depend on volume. But the manager might be laid off at very low volume or a second shift manager hired at very high volume. Many fixed costs are discretionary. Fixed does not mean Unchangeable Volume

8. Inventoriable ("Product") Costs vs.Period Costs [Expensed when product sold] All costs to obtain the merchandise: –Dir. Material –Dir. Labor –Factory Overhead [Expensed Immediately] –Selling expenses –General and Administrative } "Prime"costs } "Conversion" costs

9. Fixed Cost: Variable Cost: Unit Total $ Volume $ $ $ Within the relevant range Cost Reaction to Changes in Activity Need four perspectives!