Chapter 2
Managerial Accounting
Cost Terminology
Prepared by Diane Tanner
University of North Florida
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What is a Cost?
 Can be an asset or an expense
 Dependent upon whether it has future
economic benefits or not
Asset
 Expected to provide future
economic benefits (not used
up)
Expense
 Not expected to provide future
economic benefits (used up)
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Some New Terminology
 Activity
 An event that causes a cost or other amount
to increase or decrease
 For cost behavior purposes
 The number of units produced and/or the
number of units sold
 Unit cost
 The cost of one unit of product or service
 Total cost
 The cost of all units of product or services
produced or sold during a period
Cost Terms Based on Behavior
Variable costs
 Total cost increases when production/sales
increases
 Cost per unit stays the same
 Examples: cost of products, hourly wages
Fixed costs
 Total cost stays the same when production
increases
 Cost per unit decreases
 Examples: Rent, depreciation, insurance,
salaries, advertising
More activity (sales) causes total costs to increase
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Controllable Versus Non-controllable Costs
 Controllable
 Can be influenced by the manager
 Non-controllable
 Cannot be influenced by the manager
 Only controllable costs should be used as
performance criteria
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Opportunity Costs
• An amount or benefit given up when
choosing a particular course of action
• Never recorded in accounting records
• Always part of management decision
making
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Sunk Costs
 Amounts incurred in the past
 Costs that exist no matter which
decision is made
 Generally ignored in decision making
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Incremental Costs
 Also called relevant costs
 Costs that differ between decision
alternatives
 Always considered in decision making
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Cost Terms Based on Function
Product Costs
• Inventoriable costs
• Reported as inventory
on the balance sheet
until sold
• Reported as cost of
goods sold on the
income statement
when sold
Expensed when
the product is
sold
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Period Costs
• Non-inventoriable costs
• Often reported as
prepaids or plant assets
on the balance sheet
until used
• Reported as operating
expenses on the income
statement once used
Expensed in a
period unrelated
to sales
The End
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