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University of North Florida. Basic Cost Terminology. ACG 4361. 1-1. What is a . Cost. ?. Asset . A resource that is expected . to provide future economic benefits (not used up). Expense. A resource that is not . ID: 720441

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Prepared by Diane Tanner

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Prepared byDiane TannerUniversity of North Florida
Basic Cost Terminology
ACG 4361
1-1
Slide2
What is a Cost?Asset A resource that is expected to provide future economic benefits (not used up)ExpenseA resource that is not expected to provide future economic benefits (used up)2A sacrificed resource Can be an asset or an expenseDependent upon whether
the cost has future economic benefits or not
Slide3
Cost TermsCost objectAny product, project, customer, department, activity or service for which a company wants to know its costCost poolA group of costs to be allocated to cost objectsCost driverAn activity that causes a cost to change3Can be actual or budgeted
Slide4
Grouping CostsCost accumulationA process of collecting costs Cost assignmentDesignating accumulated costs to a cost objectIf accumulated costs are direct costsTrace to cost objectMust be easily identified with cost objectIf accumulated costs are indirect costsAllocate to cost object
Distribute in a systematic and rational manner
Slide5
Cost Terms Based on BehaviorVariable costsWhen activity increases (decreases)Total cost increases Cost per unit stays the sameFixed costsWhen activity increases (decreases)Total cost stays the same
Cost per unit decreases (increases)
5
Examples
Cost
of
most materials & supplies,
hourly wages
Examples
Rent
, insurance,
depreciation
,
salaries
, advertising
Relevant range
Activity span in which cost behavior can be relied upon
Slide6
Cost Terms Based on FunctionProduct CostsInventoriable costsPeriod CostsNon-inventoriable costs 6Expensed when the product is sold
Expensed in a period unrelated to sales; i.e., when used
Per GAAP
Costs are expensed in the same period the related revenue is earned
Slide7
Costs on the Financial Statements77MerchandiserManufacturerIncome statement
Balance SheetMerchandise Inventory or Inventory
Raw Materials, Work in Process, or Finished Goods
Cost of Goods Sold
Cost of Goods Sold
Product Costs
Period
Costs
Often capitalized as
prepaids
or plant assets
Product Costs
Period
Costs
Operating expenses (SG&A)
Operating expenses (SG&A)
Operating expenses (SG&A)
Slide8
Manufacturing InventoriesRaw Materials Direct and indirect materials to be used in productionWork in processProducts started but not yet completedFinished goodsProducts completed and ready for sale8
Slide9
Product Costs for Manufacturers9Prime Costs
Conversion Costs
Slide10
Direct MaterialsIncludes all materials costs directly related to getting the materials ready to use in production (ultimately to get the product ready to sell) Invoice cost to buy materialsLess cash discountPlus sales taxesPlus freight-inTraced to cost objects 10Parallels accounting for merchandise inventory
Slide11
Direct LaborIncludes all direct labor needed to get the product ready to sellLabor is assumed to be hourly wagesCan be directly traced to products or services providedFringe benefits should be included as part of the hourly rate11
Slide12
Manufacturing OverheadINDIRECT manufacturing (product) costs that cannot be efficiently traced directly to specific units produced, but are costs of production12
Slide13
Classification of Costs13Product costs can beFixed or variableControllable or uncontrollableDirect or indirectPeriod costs can beFixed or variableControllable or uncontrollable
Direct materialsDirect labor
Manufacturing overhead
Slide14
Other Cost ClassificationsOpportunity CostsAn amount or benefit given up when choosing a particular course of actionNever recorded in accounting recordsAlways part of management decision makingSunk CostsAmounts incurred in the pastCosts that exist no matter which decision is madeGenerally ignored in decision making
Slide15
15The End