Textbook Notes (369,050)
United States (206,171)
Business (43)
BUS 215 (11)
Chapter 2

BUS 215 Chapter 2: Cost Concepts

5 Pages

Course Code
BUS 215
Trisha Anderson

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Many types of costs, and these costs are classified differently according to the immediate needs of management. o Notion of different costs for different purposes is a critically important aspect of managerial accounting Costs are assigned to cost objects for a variety of purposes including pricing, preparing profitability studies, and controlling spending. A cost object is anything for which cost data are desired including products, customers, jobs, and organizational subunits. o Costs are classified as either direct or indirect Direct Cost A direct cost is a cost that can be easily and conveniently traced to a specified cost object. Purpose of Cost Classification Cost Classifications Assigning costs to cost objects Direct cost (can be easily traced) Indirect cost (cannot be easily traced) Accounting for costs in manufacturing Manufacturing costs companies Direct materials Direct labor Manufacturing overhead Nonmanufacturing costs Seling costs Administrative costs Preparing financial statements Product costs (inventoriable) Period costs (expensed) Predicting cost behavior in response to Variable cost (proportional to activity) changes in activity Fixed cost (constant in total) Mixed cost (has variable and fixed elements) Making decisions Differential cost (differs between alternatives) Sunk cost (should be ignored) Opportunity cost (foregone benefit) Indirect Cost An indirect cost is a cost that cannot be easily and conveniently traced to a specified cost object. o To be traced to a cost object such as a particular product, the cost must be caused by the cost object. A common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. Manufacturing Costs Direct Materials o The materials that go into the final product are called raw materials Raw materials refer to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company. o Direct materials are those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. o Indirect materials and are included as part of manufacturing overhead Direct Labor o Direct labor consists of labor costs that can be easily traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made o Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience, are termed indirect labor. Manufacturing Overhead
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