Professional Documents
Culture Documents
Cost Terms, Concepts, and Classifications
Cost Terms, Concepts, and Classifications
Classifications
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify and give examples of each of the
three basic cost elements involved in the
manufacture of a product.
2. Distinguish between product costs and period
costs and give examples of each.
3. Prepare a schedule of cost of goods
manufactured in good form.
4. Explain the flow of direct materials cost, direct
labour cost, and manufacturing overhead cost
from the point of origin to sale of the
completed product.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
5. Identify and give examples of variable costs
and fixed costs and explain the difference in
their behaviour.
6. Define and give examples of direct and indirect
costs.
7. Define and give examples of cost classification
used in making decisions: differential costs,
opportunity costs and sunk costs.
8. (Appendix 2A) Properly classify labour costs
associated with idle time, overtime, and fringe
benefits.
Comparing Merchandising and
Manufacturing Activities
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.
MegaLoMart
Manufacturing Cost Concepts
Financial Managerial
Accounting Accounting
Cost is a measure of Product costs are the
resources used or costs a company
given up to achieve a assigns to units
stated purpose. produced.
Manufacturing Costs
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labour
Labour Overhead
Overhead
The Product
Direct Materials
Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct labour
Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers
Manufacturing Overhead
Examples:
Examples: Indirect
Indirect labour
labour and
and indirect
indirect materials
materials
Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials labour
labour Overhead
Overhead
Prime Conversion
Cost Cost
Nonmanufacturing Costs
Sale
Merchandiser Manufacturer
Current Assets Current Assets
– Cash Cash
– Receivables Receivables
– Prepaid Expenses Prepaid Expenses
– Merchandise Inventory Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Merchandiser Manufacturer
Current Assets Current Assets
– Cash Cash
– Receivables Receivables
Materials waiting to
– Prepaid Expenses be processed.
Prepaid Expenses
– Merchandise Inventory
Partially complete Inventories
products – some Raw Materials
material, labour, or Work in Process
overhead has been Finished Goods
added.
Completed products
awaiting sale.
The Income Statement
Beginning
Beginning Additions
Additions Available
Available
balance
balance + $$$
$$$
= $$$$$
$$$$$
$$
$$
_
Withdrawals
Withdrawals
$$$
$$$
=
Ending
Ending
balance
balance
$$
$$
Product Costs - A Closer Look
Manufacturing Work
Raw Materials Costs In Process
Beginning raw
materials inventory
Beginning
Beginning inventory
inventory
is
is the
the inventory
inventory
carried
carried overover from
from
the
the prior
prior period.
period.
Product Costs - A Closer Look
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
Conversion
Conversion
Beginning raw Direct materials
costs
costsare
arecosts
costs
materials inventory + Direct labour
+ Raw materials + Mfg. overhead incurred
incurredtoto
purchased = Total manufacturing convert
convert the
the
= Raw materials costs
direct
directmaterial
material
available for use
in production into
intoaafinished
finished
– Ending raw materials product.
product.
inventory
= Raw materials used
in production
Product Costs - A Closer Look
Manufacturing Work
Raw Materials Costs In Process
Manufacturing Work
Raw Materials Costs In Process
• c. $655,000
• d. Cannot be determined.
Resource Flows
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
business
business activity.
activity.
Total
Totalvariable
variablecosts
costs
change
changewhen
when activity
activity
changes.
changes.
Total
Totalfixed
fixedcosts
costs
remain
remainunchanged
unchanged
when
whenactivity
activitychanges.
changes.
Total Variable Cost
Minutes Talked
Variable Cost Per Unit
Telephone Charge
Per Minute
Minutes Talked
Total Fixed Cost
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Cost Behaviour
2A
Further Classification of
Labour Costs
Idle Time