Usage of cost classifications.

Cost Traceability - control cost by determining which are traceable to a particular cost object, such as a service or product Direct costs are costs that can be conveniently and economically traced to a cost object (ex. wages of workers who make a product can be traced to that individual product because of time cards and payroll records) Indirect costs are costs that cannot be conveniently and economically traced to a cost object (ex. nails used in furniture, screws used in toys) but still must be included in the cost of a product or service Cost Behavior - calculate the number of units that must be sold to achieve a certain level of profit A variable cost is a cost that changes in direct proportion to a change in productive output (or some other measure of volume) A fixed cost is a cost that remains constant within a defined range of activity or time period Value-Adding Attributes - identify the costs of activities that do and do not add value to a product or service A value-adding cost is the cost of an activity that increases the market value of a product or service A nonvalue-adding cost is the cost of an activity that adds cost to a product or service but does not increase its market value Financial Reporting - classify costs for the preparation of financial statements product costs, or inventoriable costs, are costs assigned to inventory (include direct materials, direct labor, and overhead) period costs, or noninventoriable costs, are costs of resources used during the accounting period that are not assigned to products (appearing as operating expenses on the income statement; selling/administrative/general) Reporting costs and Accounting for Inventory Sales - Cost of Sales or Cost of Goods Sold = Gross Margin - Operating Expenses = Operating Income Product costs, or inventoriable costs, appear as inventory on the balance sheet and as cost of goods sold on the income statement Period costs, also called noninventoriable costs or selling, administrative, and general expenses, are reflected in the operating expenses on the income statement Service organizations sell no products and, therefore, maintain no inventories for sale or resale; no inventory accounts on balance sheets Retail organizations which purchase products ready for resale maintain just one inventory account (Merchandise Inventory) on the balance sheet which reflects the costs of goods held for resale Manufacturing organizations make products for sale and maintain three inventory accounts on the balance sheet: Materials Inventory, Work in Progress Inventory, and Finished Goods Inventory

Materials Inventory - shows cost of materials that have been purchased but not used in the production process WIP Inventory - costs of manufacturing the product are accumulated in this account during the production process Finished Goods Inventory - once the product is complete and ready for sale, its cost is transferred to this account Statement of Cost of Goods Manufactured: 1. Compute the cost of direct materials used during the accounting period = Material Inventory beginning balance - Material Inventory ending balance 2. Calculate the total manufacturing costs for the period = costs of directs materials used and direct labor + total overhead costs incurred during the period 3. Total Cost of Goods Manufactured for the period = (WIP account + total manufacturing costs = total cost of WIP) - ending balance in the WIP Inventory

Flow of costs through Manufacturer Inventory Accounts Purchase of Materials: Purchase request > purchase order > receiving report > vendors invoice Materials Inventory - shows the balance of the cost of unused materials Production of Goods: Materials request form > time card > job order cost card Work In Progress Inventory - shows the manufacturing costs that have been incurred and assigned to partially completed units of product Product Completion: job order cost card Finished Goods Inventory - shows the costs assigned to all completed products that have not been sold Product Sale: Sales invoice > shipping document > job order cost card Cost of Goods Sold Product Unit Cost and Computation thereof Direct materials costs: