Cost Classification Flashcards

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.

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.