1. Basic Cost Terminology
ACG 4361
Basic Cost Terminology
Prepared by
Diane Tanner
University of North Florida
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2. What is a Cost? A sacrificed resource Can be an asset or an expense
Dependent upon whether the cost has future economic benefits or not
Asset
A resource that is expected to provide future economic benefits (not used up)
Expense
A resource that is not expected to provide future economic benefits (used up)

3. Can be actual or budgeted
Cost Terms
Cost object
Any product, project, customer, department, activity or service for which a company wants to know its cost
Cost pool
A group of costs to be allocated to cost objects
Cost driver
An activity that causes a cost to change
Can be actual or budgeted

4. Grouping Costs Cost accumulation Cost assignment
A process of collecting costs
Cost assignment
Designating accumulated costs to a cost object
If accumulated costs are direct costs
Trace to cost object
Must be easily identified with cost object
If accumulated costs are indirect costs
Allocate to cost object
Distribute in a systematic and rational manner

5. Cost Terms Based on Behavior
Variable costs
When activity increases (decreases)
Total cost increases
Cost per unit stays the same
Fixed costs
Total cost stays the same
Cost per unit decreases (increases)
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

6. Cost Terms Based on Function
Product Costs
Inventoriable costs
Period Costs
Non-inventoriable costs
Expensed when the product is sold
Expensed in a period unrelated to sales; i.e., when used
Costs are expensed in the same period the related revenue is earned
Per GAAP

7. Costs on the Financial Statements
Merchandiser
Manufacturer
Product Costs
Period Costs
Product Costs
Period Costs
Merchandise Inventory or Inventory
Often capitalized as prepaids or plant assets
Raw Materials, Work in Process, or Finished Goods
Operating expenses (SG&A)
Balance Sheet
Income statement
Cost of Goods Sold
Operating expenses (SG&A)
Cost of Goods Sold
Operating expenses (SG&A)

8. Manufacturing Inventories
Raw Materials
Direct and indirect materials to be used in production
Work in process
Products started but not yet completed
Finished goods
Products completed and ready for sale

9. Product Costs for Manufacturers
Traced to products
Easily identified with specific products
Direct Materials
Direct Labor
Allocated to products
Not easily identified with specific products
Manufacturing Overhead
Prime Costs
Conversion
Costs

10. Parallels accounting for merchandise inventory
Direct Materials
Includes 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 materials
Less cash discount
Plus sales taxes
Plus freight-in
Traced to cost objects
Parallels accounting for merchandise inventory

11. Direct Labor
Includes all direct labor needed to get the product ready to sell
Labor is assumed to be hourly wages
Can be directly traced to products or services provided
Fringe benefits should be included as part of the hourly rate

12. Manufacturing Overhead
INDIRECT manufacturing (product) costs that cannot be efficiently traced directly to specific units produced, but are costs of production
Indirect materials
Indirect labor
Factory-related costs
Factory supplies
Oil, lubricants, blades
Glue, staples
Janitor labor
Production supervisor labor
Dedicated cost accountant labor
Factory and equipment depreciation
Factory insurance
Factory rent and utilities
Other factory costs

13. Classification of Costs
Product costs can be
Fixed or variable
Controllable or uncontrollable
Direct or indirect
Period costs can be
Fixed or variable
Controllable or uncontrollable
Direct materials
Direct labor
Manufacturing overhead

14. Other Cost Classifications
Opportunity Costs
An amount or benefit given up when choosing a particular course of action
Never recorded in accounting records
Always part of management decision making
Sunk Costs
Amounts incurred in the past
Costs that exist no matter which decision is made
Generally ignored in decision making

15. The End