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ACG 4361
Basic Cost Terminology
Prepared by
Diane Tanner
University of North Florida
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What is a Cost?
 A sacrificed resource
 Can be an asset or an expense
 Dependent upon whether the cost has
future economic benefits or not
Asset
• A resource that is expected to
provide future economic
benefits (not used up)
Expense
• A resource that is not expected
to provide future economic
benefits (used up)
Cost Terms
 Cost object
 Any product, project, customer,
department, activity or service for
which a company wants to know
its cost
 Cost pool
 A group of costs to be allocated to
cost objects
 Cost driver
Can be
actual or
budgeted
 An activity that causes a cost to
change
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Grouping Costs
 Cost accumulation
 A process of collecting costs
 Cost assignment
 Designating accumulated costs to a cost object
 If accumulated costs are direct costs
 Trace to cost object
 Must be easily identified with cost object
 If accumulated costs are indirect costs
 Allocate to cost object
 Distribute in a systematic and rational manner
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Cost Terms Based on Behavior
Variable costs
 When activity increases
(decreases)
 Total cost increases
 Cost per unit stays the same
Fixed costs
 When activity increases
(decreases)
 Total cost stays the same
 Cost per unit decreases
(increases)
Relevant range
Examples
Cost of most
materials &
supplies, hourly
wages
Examples
Rent, insurance,
depreciation,
salaries, advertising
Activity span in which cost behavior can be relied upon
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Cost Terms Based on Function
Product Costs
• Inventoriable costs
Expensed when
the product is
sold
Per GAAP
Period Costs
• Non-inventoriable costs
Expensed in a period
unrelated to sales;
i.e., when used
Costs are expensed in the same period
the related revenue is earned
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Costs on the Financial Statements
Merchandiser
Manufacturer
Product Costs Period Costs Product Costs Period Costs
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Merchandise
Inventory or
Inventory
Often
capitalized as
prepaids or
plant assets
Raw Materials,
Work in
Process, or
Finished Goods
Cost of
Goods Sold
Operating
expenses
(SG&A)
Cost of
Goods Sold
Operating
expenses
(SG&A)
Operating
expenses
(SG&A)
Manufacturing Inventories
• Raw Materials
– Direct and indirect materials to be
used in production
• Work in process
– Products started but not yet
completed
• Finished goods
– Products completed and ready for
sale
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Product Costs for Manufacturers
Direct Materials
• Traced to products
• Easily identified with
specific products
Direct Labor
• Traced to products
• Easily identified with
specific products
Manufacturing
Overhead
• Allocated to products
• Not easily identified
with specific products
Prime
Costs
Conversion
Costs
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Direct Materials
• Includes all materials costs directly related to
getting the materials ready to use in production
(ultimately to get the product ready to sell)
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Invoice cost to buy materials
Less cash discount
Plus sales taxes
Plus freight-in
 Traced to cost objects
Parallels accounting
for merchandise
inventory
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Direct Labor
• Includes all direct labor needed to get the
product ready to sell
• Labor is assumed to be hourly wages
• Can be directly traced to products or services
provided
 Fringe benefits should be included as part of
the hourly rate
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Manufacturing Overhead
INDIRECT manufacturing (product) costs that cannot be
efficiently traced directly to specific units produced, but
are costs of production
Indirect materials
Indirect labor
Factory-related
costs
• Factory supplies
• Oil, lubricants, blades
• Glue, staples
• Janitor labor
• Production supervisor labor
• Dedicated cost accountant
labor
• Factory and equipment
depreciation
• Factory insurance
• Factory rent and utilities
• Other factory costs
Classification of Costs
 Product costs can be  Period costs can be
 Fixed or variable
 Controllable or
uncontrollable
 Direct or indirect
 Fixed or variable
 Controllable or
uncontrollable
Direct materials
Direct labor
Manufacturing overhead
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Other Cost Classifications
Opportunity Costs
• An amount or benefit
given up when choosing
a particular course of
action
• Never recorded in
accounting records
• Always part of
management decision
making
Sunk Costs
 Amounts incurred in
the past
 Costs that exist no
matter which decision
is made
 Generally ignored in
decision making
The End
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