Cost Terms, Concepts, and Classifications:
After Studying this chapter you should be
able to:
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Identify and give examples of each of the
three basic manufacturing cost categories.
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Distinguish between product costs and period
costs and give examples of each.
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Prepare an income statement including
calculation of the cost of goods sold.
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Prepare a schedule of cost of goods
manufactured.
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Understand the difference between variable
costs and fixed costs.
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Understand the differences between direct and
indirect costs.
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Define and give examples of cost
classifications used in making decisions: differential costs, opportunity
costs, and sunk costs.
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Properly account for labor costs associated
with idle time, overtime, and fringe benefits.
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Identify the four types of quality costs
associated and explain how they interact.
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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.
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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
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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......
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article.
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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......
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read full article
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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......
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article.
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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......
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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......
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article.
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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.
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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.
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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?.....
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full article.
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