An Introduction to Cost
Terms and Purposes
Chapter 2
WHAT IS COST ?
a resource sacrificed or forgone to achieve
COST a specific objective.
COST anything for which a separate
OBJECT measurement of costs is desired.
COST is the unit of an activity that causes the
DRIVER change in activity's cost
Cost versus Expenses
Cost
Outlay Cost Opportunity Costs
Past, present, Forgone benefit from
or future cash the best alternative
outflow course of action
Expense
Cost charged against
revenue in an
accounting period
Why Does Cost Need to be Calculated ?
Evaluation
Strategic
Decision
Short Term
Decision
Steps in Costing
1. Accumulating Cost
Accumulating costs is the way that costs are
measured and recorded.
TRACING
2. Assigning Cost
ALLOCATING
Assigning costs is the way that a cost is linked to
some cost object.
Direct and Indirect Cost
Direct costs are those costs that can
be easily and accurately traced to a
cost object.
Indirect costs are costs that cannot
be easily and accurately traced to a
cost object.
Cost Behavior
Variable
Cost Fixed Cost
Manufacturing
Manufacturing
Manufacturing companies
companies
purchase
purchase materials
materials and
and components
components andand
convert
convert them
them into
into finished
finished goods.
goods.
Merchandising
Merchandising
Merchandising companies
companies
purchase
purchase and
and then
then sell
sell tangible
tangible products
products
without
without changing
changing their
their basic
basic form.
form.
Service
Service
Service companies
companies
provide
provide services
services oror intangible
intangible
products
products to
to their
their customers.
customers.
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
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Types of Production Cost
01 DIRECT MATERIAL COST
02 DIRECT LABOR COST
03 OVERHEAD COST
Distinctions Between Costs
Inventoriable Costs – product manufacturing
costs. These costs are capitalized as assets
(inventory) until they are sold and transferred to
Cost of Goods Sold
Period Costs – have no future value and are
expensed as incurred
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Manufacturing Company
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Revenues
when deduct
Finished sales
Materials occur Cost of
Goods
Inventory Goods Sold
Inventory
Equals Gross Margin
deduct
Work in
Process Period
Inventory Costs
Equals Operating Income
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Merchandising Company
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Revenues
when deduct
sales
Merchandise occur Cost of
Inventory
Purchases Goods Sold
Equals Gross Margin
deduct
Period
Costs
Equals Operating Income
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Prime Costs
Direct Direct Prime
Materials + Labor = Costs
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Conversion Costs
Direct Manufacturing Conversion
Labor + Overhead = Costs
Indirect Indirect
Labor Materials Other
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