Cost- monetary measure of resources given up to attain an
objective such as making a good or delivering a service.
a. Unexpired Cost- portion of an asset’s value that has
not yet been consumed. Reported on the balance
sheet as an asset.
b. Expired Cost- portion of an asset’s value that has
been consumed. Reported as an expense on the
income statement.
Cost Management System- a set of formal methods
developed for planning and controlling an organization’s costgenerating activities relative to its strategy, goals, and
objectives.
Manufacturer engaged in a high degree of conversion of raw
material input into a tangible output using people and
machines. It uses three inventory accounts: (1) Raw Material
Inventory, (2) Work in Process Inventory, and (3) Finished
Goods Inventory.
Service Company uses a significant amount of labor to
engage in a high or moderate degree of conversion, whose
outputs can be tangible or intangible. Some service firms use
two accounts (a Supplies Inventory account and a Work in
Process Inventory account) to accumulate these costs.
i. Work not started (raw material);
ii. Work started but not completed (work in process); and
iii. Work completed (finished goods).
1.
2.
1.
2.
Association with cost object:
[Cost object- anything for which management wants
to collect or accumulate costs.]
a. Direct Costs- conveniently and economically
traceable to the cost object.
b. Indirect Costs- non-traceable but must be
allocated to the cost object.
Reaction to changes in activity:
[Relevant Range- assumed range of activity that
reflects the company’s normal operating range.]
a. Variable Cost- fluctuates in total, directly
proportionate when activity changes but
constant on unit basis.
b. Fixed Cost- remains constant in total when
activity changes but inversely proportional on
unit basis.
c. Step Cost- cost that shifts upward and
downward when activity changes by certain
interval or “step.” This can be variable or fixed;
step variable costs have small steps while fixed
costs have large steps.
d. Mixed Cost- both variable and fixed and must be
separated in order to make valid estimates.
3.
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3.
A. Predictor- an activity measure that, when
changed, is accompanied by consistent,
observable changes in a cost item.
B. Cost Driver- a predictor that has an absolute
cause-and-effect relationship with the cost in
question.
Classification on the Financial Statements:
A. Product Costs or Inventoriable Costs- related to
making or acquiring the products or providing
the services that directly generate the revenues
of an entity.
a.a. Direct material- any material that can be
easily and economically traced to a product.
a.b. Direct labor- refers to the time spent by
individuals
who
work
specifically
on
manufacturing a product or performing a
service.
a.c. Overhead- any factory or production cost
that is indirect (i.e., not direct material or direct
labor) to the product or service.
 Conversion cost- the sum of direct
labor and overhead costs.
 Prime cost- the sum of direct material
and direct labor cost.
B. Period Costs- are related to business functions
other than production, such as selling and
administration. It is generally more closely
associated with a particular time period.
C. Distribution costs- are period costs incurred to
warehouse, transport, or deliver a product or
service.
Direct Material- includes the direct cost of all
materials used to manufacture a product or perform
a service.
Direct Labor- refers to the effort of individuals who
manufacture a product or perform a service.
Overhead- any factory or production cost that is
indirect to manufacturing a product or providing a
service. Includes the costs of indirect material,
indirect labor paid on an hourly basis, lubricants
used for machine maintenance, and the variable
portion of factory utility charges.
a. Variable overhead- includes the costs of indirect
material, indirect labor paid on an hourly basis,
lubricants used for machine maintenance, and
the variable portion of factory utility charges.
b. Fixed overhead- includes costs such as straightline depreciation on factory assets, factory
license fees, factory insurance and property
taxes, and fixed indirect labor costs.
Prevention costs- are costs to prevent product
defects.
Appraisal costs- are costs for monitoring or
inspecting products in order to find mistakes not
eliminated through prevention.
Internal Failure costs- are costs such as scrap and
rework before the product reaches the final
customer.
External Failure costs- are costs after the product
has been delivered to the final customer and include
costs such as product returns and warranty claims.

Cost allocation- the assignment of an indirect cost to
one or more cost objects using driver.
1.
Actual Cost System- actual direct material and direct
labor costs are accumulated in Work in Process
(WIP) Inventory as the costs are incurred.
Normal Cost System- actual direct material and
direct labor costs and an estimated amount of
overhead (assigned using a predetermined overhead
rate or rates) are accumulated in WIP.
Predetermined Overhead Rate- (or overhead
application rate) is a charge per unit of activity that is
used to allocate (or apply) overhead cost from the
Overhead Control account to WIP Inventory for the
period’s production or services.
2.
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Cost of Goods Manufactured= Beg. WIP + Direct
Materials + Direct Labor + Overhead Costs – End.
WIP
Direct Materials= Beg. Raw Materials + Raw
Materials Purchases – End. Raw Materials
Cost of Goods Sold= Beg. Finished Goods Inventory +
Cost of Goods Manufactured – End. Finished Goods
Inventory