Podcast
Questions and Answers
What are the classifications of costs? (Select all that apply)
What are the classifications of costs? (Select all that apply)
What is opportunity cost?
What is opportunity cost?
A benefit forgone
What are out of pocket costs?
What are out of pocket costs?
Cash
What defines a sunk cost?
What defines a sunk cost?
Signup and view all the answers
What is differential cost?
What is differential cost?
Signup and view all the answers
What are marginal costs?
What are marginal costs?
Signup and view all the answers
What are average costs?
What are average costs?
Signup and view all the answers
What are direct costs?
What are direct costs?
Signup and view all the answers
What are indirect costs?
What are indirect costs?
Signup and view all the answers
What is the definition of cost?
What is the definition of cost?
Signup and view all the answers
What is an actual cost?
What is an actual cost?
Signup and view all the answers
What is budgeted cost?
What is budgeted cost?
Signup and view all the answers
What does cost accumulation refer to?
What does cost accumulation refer to?
Signup and view all the answers
How does a cost system determine the costs of various cost products?
How does a cost system determine the costs of various cost products?
Signup and view all the answers
What is relevant range?
What is relevant range?
Signup and view all the answers
What is the difference between fixed and variable costs?
What is the difference between fixed and variable costs?
Signup and view all the answers
What are period costs?
What are period costs?
Signup and view all the answers
What are inventoriable costs?
What are inventoriable costs?
Signup and view all the answers
What is product cost?
What is product cost?
Signup and view all the answers
What is gross margin?
What is gross margin?
Signup and view all the answers
What is operating income?
What is operating income?
Signup and view all the answers
What is budgeting?
What is budgeting?
Signup and view all the answers
What is economic cost?
What is economic cost?
Signup and view all the answers
Is total manufacturing costs the same as cost of goods manufactured?
Is total manufacturing costs the same as cost of goods manufactured?
Signup and view all the answers
Study Notes
Cost Classification
- Costs can be classified based on behavior, nature, manufacturing vs. non-manufacturing, product relation, management decisions, management control, and economic considerations.
- Opportunity cost represents the benefits forfeited when choosing one alternative over another, rather than an actual expenditure.
Types of Costs
- Out of pocket costs refer to actual cash payments made for expenses.
- Sunk costs are historical costs that cannot be changed by current or future decisions.
- Differential cost arises from alternatives; costs that do not change regardless of the decision made are not differential.
- Marginal costs are the expenses incurred when producing one additional unit, typically low and comparable to valuable costs.
- Average costs are calculated by dividing total costs by the number of units produced.
Direct and Indirect Costs
- Direct costs, also known as prime costs, comprise direct materials and direct labor, traceable to specific products.
- Indirect costs, or conversion costs, include manufacturing overhead and are allocated rather than traced directly to a product.
Cost Concepts
- Actual cost pertains to expenses incurred in the past.
- Budgeted cost is a forecasted expense for future operations.
- Cost accumulation involves organizing cost data using an accounting system.
- Cost information is crucial for pricing, investment decisions, and influencing employee performance.
Cost Behavior
- Variable costs fluctuate with changes in activity levels, while fixed costs remain constant over a defined period regardless of activity changes.
- Mixed costs have both variable and fixed components.
Inventory Types
- Manufacturing companies hold three types of inventory: direct materials, work in process, and finished goods.
- Merchandising companies buy and sell products without alteration, maintaining only merchandising inventory.
- Service-sector companies offer intangible services instead of physical goods.
Cost Components
- Direct materials inventory consists of materials used in production.
- Work in process inventory includes goods in progress but not yet completed.
- Finished goods inventory consists of completed products awaiting sale.
- Costs associated with direct materials and labor are classified into inventoriable costs, treated as assets until sold, when they convert to cost of goods sold (COGS).
Accounting Principles
- Period costs include all non-manufacturing expenses in the income statement, treated as expenses in their incurred period.
- Management involves the effective use of resources to achieve company goals.
- Budgeting refers to future-oriented planning, while control involves monitoring and adjusting plans based on feedback.
Cost Accounting Framework
- Cost accounting provides data for external reporting, operational cost control, and strategic decision-making.
- Economic costs encompass opportunity, sunk, out-of-pocket, differential, marginal, and average costs.
- Management decisions should consider total costs instead of solely unit costs.
Income Statement and Cost Calculation
- Differences exist between total manufacturing costs and cost of goods manufactured; the latter reflects completed goods ready for sale.
- Steps to compute COGS involve calculating direct material used, total manufacturing costs, and adjustments for beginning and ending inventories of work in process and finished goods.
Key Terminology
- Gross Margin is obtained by subtracting COGS from revenue.
- Operating Income is derived by subtracting period costs from gross margin.
- Prime costs include all direct manufacturing expenses and significantly impact product pricing accuracy.
- Conversion costs comprise direct labor and manufacturing overhead.
Decision-Making Process
- The cost classification process involves identifying problems, gathering information, predicting future scenarios, making decisions, and evaluating outcomes.
Conclusion
- Understanding these key cost classifications and accounting principles is essential for effective financial management and strategic business decision-making.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz focuses on the essential concepts of cost classification, including definitions for behavior, opportunity cost, out of pocket costs, and sunk costs. Perfect for students in accounting or business management, these flashcards will help reinforce understanding of financial terminology and its implications in decision-making.
