Summary BULLET NOTES ON COST CONCEPTS AND COST BEHAVIOR ANALYSIS
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Course
CPA
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CPA
Cost concepts are fundamental in financial management. They involve understanding how costs are classified and allocated in a business. Cost concepts help in determining the cost structure of a business and its impact on profitability. It includes the identification and categorization of different ...
BULLET NOTES ON COST CONCEPTS AND COST BEHAVIOR ANALYSIS
Manufacturing Costs
Manufacturing costs are classified as (1) direct materials, (2) direct labor, or (3)
manufacturing overhead.
ο Direct materials are raw materials that can be physically and directly
associated with the finished product during the manufacturing process.
Indirect materials:
Do not physically become part of the finished product.
Cannot be traced because their physical association with the
finished product is too small in terms of cost (i.e. lock washers).
Companies account for indirect materials as part of manufacturing
overhead.
ο Direct labor is the work of factory employees that can be physically and
directly associated with converting raw materials into finished goods.
Indirect labor has no physical association with the finished product, or
it is impractical to trace the costs to the goods Companies classify indirect
labor as manufacturing overhead.
ο Manufacturing overhead consists of costs that are indirectly associated with
the manufacture of the finished product.
Manufacturing overhead includes indirect materials, indirect labor,
depreciation on factory buildings and machines, and insurance, taxes,
and maintenance on factory facilities.
Manufacturing Costs in Financial Statements
The principal differences in a manufacturer’s financial statements occur in the cost of
goods sold section in the income statement and the current assets section in the
balance sheet.
Manufacturers compute cost of goods sold by adding the beginning finished goods
inventory to the cost of goods manufactured and subtracting the ending finished
goods inventory.
To determine the cost of goods manufactured, companies add the cost of the
beginning work in process to the total manufacturing costs for the current year to
find the total cost of work in process for the Companies then subtract the ending work
in process from the total cost of work in process to find the cost of goods manufactured.
The balance sheet for a manufacturing company may have three inventory accounts:
Finished Goods Inventory, which shows the cost of completed goods on
hand.
Work in Process Inventory, which shows the cost applicable to units that
have been started into production but are only partially completed.
Raw Materials Inventory, which shows the cost of raw materials on hand.
Cost Terms
Cost – the monetary amount of the resources given up or sacrificed to attain some
objective such as acquiring goods and services.
Cost behavior – describes how a cost behaves or changes as the amount of cost driver
changes.
Cost pool – an account in which a variety of similar costs are accumulated prior to
allocation to cost objects. It is a group of costs associated with an activity. Example:
overhead control account.
Cost object – the intermediate and final disposition of cost pools. Example: product, job,
process.
Cost driver – a factor that causes a change in the cost pool for a particular activity. It is
used as a basis for cost allocation; any factor or activity that has a direct cause-effect
relationship.
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