Cost Terms, Concepts, and Classifications


Cost Terms, Concepts, and Classifications:

After Studying this chapter you should be able to:

  1. Identify and give examples of each of the three basic manufacturing cost categories.
  2. Distinguish between product costs and period costs and give examples of each.
  3. Prepare an income statement including calculation of the cost of goods sold.
  4. Prepare a schedule of cost of goods manufactured.
  5. Understand the difference between variable costs and fixed costs.
  6. Understand the differences between direct and indirect costs.
  7. Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
  8. Properly account for labor costs associated with idle time, overtime, and fringe benefits.
  9. Identify the four types of quality costs associated and explain how they interact.
  10. Prepare and interpret a quality cost report.

The work of managers focuses on (1) planning, which includes setting objectives and outlining how to attain these objectives; and (2) control, which includes the steps to take to ensure that objectives are realized. To carry out these planning and control responsibilities, managers need information about the organization. From an accounting point of view, this information often relates to the costs of organization.

The term cost is used in many different ways in managerial accounting. The reason is that there are many types of costs, and these costs are classified differently according to the immediate need of management. For example, managers may want cost data to prepare external financial reports, to prepare planning budgets, or to make decisions. Each different use of cost data demands a different classification and definition of cost. For example, the preparation of external financial reports require historical cost data, whereas decision making may require predictions about future costs. In the following paragraphs we have discussed many of possible use of cost data and how costs are defined and classified for each use.

  1. Manufacturing and Non-manufacturing Costs:
    Manufacturing firms are involved in acquiring raw materials producing finished goods and then administrative, marketing and selling activities. All these activities require costs to be incurred. These costs are normally classified by manufacturing companies as manufacturing and non-manufacturing costs…… Click here to read full article.

  2. Product Costs Versus Period Costs:
    In addition to the distinction between manufacturing and non-manufacturing costs, there are other ways to look at costs. Costs can also be classified as either product cost or period cost. To understand the difference between product costs and period costs, we must first refresh our understanding of the matching principle from financial accounting…… Click here to read full article.

  3. Cost Classifications on Financial Statement:
    Merchandising and manufacturing firms, both prepare financial statement reports for creditors, stockholders, and others to show the financial condition of the firm and the firm’s earnings performance over some specified intervals…… Click here to read full article

  4. Cost Classifications for Predicting Cost Behavior (Variable and Fixed cost):
    Cost behavior refers to how a cost will react or respond to changes in the level of business activity. As the level of activity rises and falls, a particular cost may rise and fall as well–or it may remain constant…… Click here to read full article.

  5. Mixed or Semi variable Cost:
    A mixed cost is one that contains both variable and fixed cost elements. Mixed cost is also known as semi variable cost. Examples of mixed costs include electricity and telephone bills…… Click here to read full article.

  6. Cost classification for Assigning Costs to Cost Objects (Direct and Indirect Cost)
    Costs are assigned to objects for a variety of purposes including pricing, profitability studies, and control of spending. A cost object is any thing for which cost data are desired including products, product lines, customers, jobs, and organizational subunits…… Click here to read full article.

  7. Decision making costs – cost classification for decision making:
    Costs can be classified for decision making. Costs are important feature of many business decisions. For the purpose of decision making, costs are usually classified as differential cost, opportunity cost, and sunk cost……Click here to read full article.

  8. Quality Costs:
    A product that meets or exceeds its design specifications and is free of defects that mar its appearance or degrade its performance is said to have high quality of conformance. Note that if an economy car is free of defects, it can have a quality of conformance that is just as high as defect-free luxury car. The purchasers of economy cars cannot expect their cars to be as opulently as luxury cars, but they can and do expect to be free of defects……Click here to full article.

  9. Further Classification of Labor Costs:
    Idle time, overtime, and fringe benefits associated with direct labor workers pose particular problems in accounting for labor costs. Are these costs a part of the costs of direct labor or are they something else?….. Click here to read full article.

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