A SUMMARY OF COST TERMS

PREPARING PRODUCT COSTS Inventoriable Costs until Sold

FINANCIAL
STATEMENTS Direct Materials Raw materials traced to a cost object

Direct Labor Touch labor like an assembly line worker

Manufacturing Overhead Indirect materials and labor, overhead costs

PERIOD COSTS Income Statement Costs

Marketing and Selling Costs Order dept., shipping, advertising, sales commissions

Administrative costs Staff functions like accounting

STAGES OF INVENTORY

Direct (Raw) Materials Materials purchased and awaiting use in the
manufacturing process

Work In Process Goods not fully completed, conversion costs are added
during this stage

Finished Goods Goods fully completed but not yet sold


ASSIGNING DIRECT COSTS Direct Materials & Direct Labor: traced to a cost object
COSTS
INDIRECT COSTS Manufacturing Overhead: allocated to a cost object

PRIME COST Direct Materials + Direct Labor

CONVERSION COST Direct Labor + Manufacturing Overhead
Costs to convert raw materials to finished goods

COST OBJECT Anything for which cost data is required; can be a
product, customer, department, or job.

COST DRIVER A variable with a cause-and-effect relationship
between activity level and total costs

RELEVANT RANGE Range of activity where a cost relationship holds true


PREDICTING VARIABLE COSTS Vary in total Fixed per unit Focus on per
CHANGES
IN COSTS
FIXED COSTS Fixed in total Vary per unit Focus on total costs


DECISION DIFFERENTIAL COSTS Relevant costs as they differ between alternatives.
MAKING
SUNK COSTS Not relevant costs since they cannot be changed in the
near term no matter what action is taken.
OPPORTUNITY COSTS Relevant costs as they represent income foregone by
selecting one alternative over another.