1. Cost Terms, Concepts and Classifications
Accounting 3020 – Chapter 2
Cost Terms, Concepts and Classifications

2. 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

3. Introduction Why are Costs Determined? Type of Business Process
Merchandising Company
Manufacturing Company
Service Company

4. General Cost Classifications
Main Product Costs
Direct Materials
Direct Labor
Manufacturing Overhead
Prime costs
Conversion costs
Nonmanufacturing Costs
Marketing/Selling
Administrative

5. 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

6. 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

7. 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

8. Cost Reactions to Changes in Activity
Variable Costs
Fixed Costs
Relevant Range

9. 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