Chapter 2 Notes on Cost Terms, Concepts, and Classifications

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Rotman Commerce
Christian Campbell

RSM222H1F Chapter 2: Cost Terms, Concepts, and Classifications Purpose of Cost Classification Cost Classifications Preparing external financial statements Product costs (inventoriable): -DM -DL -MOH Period Costs (expensed): -selling & administrative costs Predicting cost behaviour in response -Variable cost to changes in activity -Fixed Cost Assigning costs to cost objects such -Direct cost (can easily be traced) as departments or products -Indirect cost (constant in total) Making decisions -Differential cost (differs bw alternatives) -Sunk Cost (past cost not affected by a decision) -Opportunity cost (forgone benefit) General Cost Classifications 1. Manufacturing Costs -Direct Materials: those materials that become an integral part of a finished product and can be conveniently traced to it raw materials: any materials that go into the final product, and the finished product of one company can become the raw materials of another company -Direct Labour (touch labour): those factory labour costs that can be traced easily to individual units of product. in some industries, sophisticated automated equipment, operated and maintained by skilled indirect workers, is increasingly replacing direct labour. in a few companies, DL has become such a minor element of cost that it has disappeared altogether as a separate cost category -Manufacturing Overhead: all costs associated with manufacturing except direct materials and direct labour only those costs other than DM and DL that are associated w operating the factory or production facility are included in the MOH category indirect materials: small items of material such as glue and nails. These items may become an integral part of a finished product but are traceable to the product only at great cost or inconvenience indirect labour: the labour costs of factory workers that cannot be conveniently traced directly to particular products (e.g. wages of janitors) MOH+DL= Conversion Cost DM + DL = Prime Cost 2. Classification of Idle Time, Overtime Premiums and Employee Benefits -Idle Time: idle time cost usually would be charged to overhead if management felt that the cost was a general cost of all production if a specific job required idle time, then the idle time could be charged to the DL costs of a job -Overtime Premiums: classification depends on the cause of the overtime
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