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.