bb
, bb bb bb
ditionKinney b
d
CostTerminologyandCostBehaviors b b b
Learning Objectives bb
After reading and studying Chapter 2, you should be able to answer the following questions:
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1. Why are costs associated with a costdobject?
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2. Whatdassumptions do accountants make about cost behavior, and why are these b b bb bb bb bb bb bb bb bb bb
assumptions necessary?
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3. How are costs classified on the financial statements, and why are such classifications useful?
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4. How does the conversion process occur in manufacturing and service companies?
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5. Whatdare the product cost categories, and what items comprise those categories?
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6. How do productdcosts flow through a cost system?
bb bb bb bb bb bb bb
7. How is cost of goods manufactured calculated and used in preparing an income statement?
bb bb bb bb bb bb bb bb bb bb bb bb bb
Terminology
Actual cost system: A costing system that charges Work in Process Inventory with thed
b b b b b b bb b b b b b b bb b b b b b b bb b b
actual direct material, direct labor, and overhead costs of producing a product
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Appraisal costs: Costs incurred to find mistakes not eliminated through prevention
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Conversion costs: The costs (directd labor and overhead)
b b b b b b b b bb b b b b b b required to convert b b b b b b direct
material into a fi nished good or service
b b b b b b bb bb bb bb bb
Cost: The monetary measure of resources given up to attain an objective such as producing a product
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or p roviding a service
bb bb bb bb bb
Cost allocation: The assignment of an indirectdcostdto one or more cost objects using some reasonable
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all ocation base or driver
bb bb bb bb bb
Cost driver: A factor that has an absolute cause-effect relationship to a cost
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Cost management system (CMS): Adset of formal methods developed for planning and controlling an
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anization’s cost-generating activities relative to its strategy, goals, and objectives
bb bb bb bb bb bb bb bb bb bb
Cost object: Anything for which managementdwants to collectdor accumulate costs
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Cost of goods manufactured (CGM): The total costdof the goods completed and transferred to
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Finished G oods Inventory during the period
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©Cambridge Business Publishers, 2021 bb bb bb
Instructor’s Manual, Chapterd2 bb bb 2-1
mynursytest.store
, bb bb bb
ditionKinney b
Direct costs: Costs which are conveniently and economically traceable to a particular costdobject
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Direct labor: Labor costs of individuals who workdspecifically on manufacturing a product or
bb bb bb bb bb bb bb bb bb bb bb bb
performing a service
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Direct material: Material costs that can be easily and economically traced to a product
bb bb bb bb bb bb bb bb bb bb bb bb bb
Distribution cost: bb b b Any costdincurred to warehouse, transport, or deliver a product or service
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Expired cost: The portion of an asset’s value thatdhas been consumed or sacrificed during the period
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an d which is reported as an expense or loss on the income statement
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Failure costs: Internal costs (e.g., scrap and rework) and external costs (e.g., product returns,
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warranty c osts, complaints to customer service) caused by quality problems
bb bb bb bb bb bb bb bb bb bb bb
Finished goods: The costs of units of inventory that have been fully completed
bb bb bb bb bb bb bb bb bb bb bb bb
Fixed cost: A cost thatdremains constantdin total within the relevant range of activity butdvaries on a
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unit b asis
bb bb bb
Indirect costs: Costs that cannotdbe economically traced toda particular cost objectdand therefore
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must b e allocated to the object instead
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Inventoriable costs: The direct costs of materials and labor plus the indirect costs of overhead
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which be come partdof the costdof inventory
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Manufacturer: Adcompany engaged in a high degree of conversion of raw material that results in a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
tangib le output
bb bb bb
Mixed cost: A cost thatdhas both a variable and a fixed component and that changes with changes
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
in acti vity, butdnot proportionately
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Normal cost system: A costing system that charges the Work in Process Inventory with the actual
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
costs of direct material and direct labor and an assigned amount of overhead based on a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
predetermined overhe ad rate
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Overhead: Any factory or production cost that is indirect to the product or service (that is, a production-
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related costdthat cannot be directly traced to the product)
bb bb bb bb bb bb bb bb bb
Period costs: Costs related to business functions other than production (such as selling and
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administrati ve costs) which are expensed in the current accounting period
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Predetermined overhead rate: A charge per unitdof activity used to allocate or apply overhead cost
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from the Overhead Control account to Work in Process Inventory for the period’s production or
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
services
bb
Predictor: An activity measure that, when changed, is accompanied by consistent, observable
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changes i n a cost item
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Prevention costs: Costs incurred to improve quality by precluding product defects and improper
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process ing from occurring
bb bb bb bb
Prime costs: The primary costs (directdmaterial and directdlabor) of producing a product or delivering a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
s ervice
bb bb
Product costs: Costs associated with making or acquiring the products or providing the services
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thatddire ctly generate the revenues of an entity
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Raw material: The materials used in the production process. From the standpoint of conversion, raw
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mat erial represents work notdyet started
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Relevant range: The assumed range of activity that reflects the company’s normal operating range and
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o ver which unit variable costs and total fixed costs are assumed to remain constant
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©Cambridge Business Publishers, 2021 bb bb bb
2-2 CostdAccounting, 10th Edition bb bb
mynursytest.store
, bb bb bb
ditionKinney b
Service company: A firm engaged
b b b b b b b b b b in a high or moderate degree of
b b b b b b b b b b b b b b conversion using b b
a significantda mount of labor
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Step cost: Ad costd that increases (decreases) in distinctd amounts because of increased
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(decreased) a ctivity. Step variable costs have small steps and step fixed costs have large steps
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Total cost to accountdfor:
bb bb bb b b The sum of the beginning WIP Inventorydand the total current manufacturing
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co sts (DM, DL, OH)
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Unexpired cost: The portion of an asset’s value thatdhas not yet been consumed or sacrificed and
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which i s reported on the balance sheet as an asset
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Variable cost: Adcost that varies in total proportionately with changes in activity butdwhich is a constant
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am ountdper unit
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Work in process: The costs of work started but not yet completed
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©CambridgedBusiness Publishers, 2021 bb bb
Instructor’s Manual, Chapterd2 bb bb 2-3
mynursytest.store
, bb bb bb
ditionKinney b
d
CostTerminologyandCostBehaviors b b b
Learning Objectives bb
After reading and studying Chapter 2, you should be able to answer the following questions:
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
1. Why are costs associated with a costdobject?
bb bb bb bb bb bb
2. Whatdassumptions do accountants make about cost behavior, and why are these b b bb bb bb bb bb bb bb bb bb
assumptions necessary?
bb bb
3. How are costs classified on the financial statements, and why are such classifications useful?
bb bb bb bb bb bb bb bb bb bb bb bb bb
4. How does the conversion process occur in manufacturing and service companies?
bb bb bb bb bb bb bb bb bb bb
5. Whatdare the product cost categories, and what items comprise those categories?
bb bb bb bb bb bb bb bb bb bb
6. How do productdcosts flow through a cost system?
bb bb bb bb bb bb bb
7. How is cost of goods manufactured calculated and used in preparing an income statement?
bb bb bb bb bb bb bb bb bb bb bb bb bb
Terminology
Actual cost system: A costing system that charges Work in Process Inventory with thed
b b b b b b bb b b b b b b bb b b b b b b bb b b
actual direct material, direct labor, and overhead costs of producing a product
bb b b bb bb bb bb bb bb bb bb bb bb
Appraisal costs: Costs incurred to find mistakes not eliminated through prevention
bb bb bb bb bb bb bb bb bb bb
Conversion costs: The costs (directd labor and overhead)
b b b b b b b b bb b b b b b b required to convert b b b b b b direct
material into a fi nished good or service
b b b b b b bb bb bb bb bb
Cost: The monetary measure of resources given up to attain an objective such as producing a product
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
or p roviding a service
bb bb bb bb bb
Cost allocation: The assignment of an indirectdcostdto one or more cost objects using some reasonable
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
all ocation base or driver
bb bb bb bb bb
Cost driver: A factor that has an absolute cause-effect relationship to a cost
bb bb bb bb bb bb bb bb bb bb bb bb
Cost management system (CMS): Adset of formal methods developed for planning and controlling an
bb bb bb bb bb bb bb bb bb bb bb bb bb b b org
anization’s cost-generating activities relative to its strategy, goals, and objectives
bb bb bb bb bb bb bb bb bb bb
Cost object: Anything for which managementdwants to collectdor accumulate costs
bb bb bb bb bb bb bb bb bb
Cost of goods manufactured (CGM): The total costdof the goods completed and transferred to
bb bb bb bb bb bb bb bb bb bb bb bb bb
Finished G oods Inventory during the period
bb bb bb bb bb bb bb
©Cambridge Business Publishers, 2021 bb bb bb
Instructor’s Manual, Chapterd2 bb bb 2-1
mynursytest.store
, bb bb bb
ditionKinney b
Direct costs: Costs which are conveniently and economically traceable to a particular costdobject
bb bb bb bb bb bb bb bb bb bb bb bb
Direct labor: Labor costs of individuals who workdspecifically on manufacturing a product or
bb bb bb bb bb bb bb bb bb bb bb bb
performing a service
bb bb bb
Direct material: Material costs that can be easily and economically traced to a product
bb bb bb bb bb bb bb bb bb bb bb bb bb
Distribution cost: bb b b Any costdincurred to warehouse, transport, or deliver a product or service
bb bb bb bb bb bb bb bb bb bb
Expired cost: The portion of an asset’s value thatdhas been consumed or sacrificed during the period
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
an d which is reported as an expense or loss on the income statement
b b bb bb bb bb bb bb bb bb bb bb bb bb bb
Failure costs: Internal costs (e.g., scrap and rework) and external costs (e.g., product returns,
bb bb bb bb bb bb bb bb bb bb bb bb bb
warranty c osts, complaints to customer service) caused by quality problems
bb bb bb bb bb bb bb bb bb bb bb
Finished goods: The costs of units of inventory that have been fully completed
bb bb bb bb bb bb bb bb bb bb bb bb
Fixed cost: A cost thatdremains constantdin total within the relevant range of activity butdvaries on a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
unit b asis
bb bb bb
Indirect costs: Costs that cannotdbe economically traced toda particular cost objectdand therefore
bb b b bb bb bb bb bb bb bb bb bb
must b e allocated to the object instead
bb bb bb bb bb bb bb bb
Inventoriable costs: The direct costs of materials and labor plus the indirect costs of overhead
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
which be come partdof the costdof inventory
bb bb bb bb bb bb bb
Manufacturer: Adcompany engaged in a high degree of conversion of raw material that results in a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
tangib le output
bb bb bb
Mixed cost: A cost thatdhas both a variable and a fixed component and that changes with changes
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
in acti vity, butdnot proportionately
bb bb bb bb bb
Normal cost system: A costing system that charges the Work in Process Inventory with the actual
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
costs of direct material and direct labor and an assigned amount of overhead based on a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
predetermined overhe ad rate
bb bb bb bb
Overhead: Any factory or production cost that is indirect to the product or service (that is, a production-
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
related costdthat cannot be directly traced to the product)
bb bb bb bb bb bb bb bb bb
Period costs: Costs related to business functions other than production (such as selling and
bb bb bb bb bb bb bb bb bb bb bb bb bb
administrati ve costs) which are expensed in the current accounting period
bb bb bb bb bb bb bb bb bb bb bb
Predetermined overhead rate: A charge per unitdof activity used to allocate or apply overhead cost
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
from the Overhead Control account to Work in Process Inventory for the period’s production or
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
services
bb
Predictor: An activity measure that, when changed, is accompanied by consistent, observable
bb bb bb bb bb bb bb bb bb bb bb
changes i n a cost item
bb b b bb bb bb bb
Prevention costs: Costs incurred to improve quality by precluding product defects and improper
bb bb bb bb bb bb bb bb bb bb bb bb
process ing from occurring
bb bb bb bb
Prime costs: The primary costs (directdmaterial and directdlabor) of producing a product or delivering a
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
s ervice
bb bb
Product costs: Costs associated with making or acquiring the products or providing the services
bb bb bb bb bb bb bb bb bb bb bb bb bb
thatddire ctly generate the revenues of an entity
bb bb bb bb bb bb bb bb
Raw material: The materials used in the production process. From the standpoint of conversion, raw
bb bb bb bb bb bb bb bb b b bb bb bb bb bb
mat erial represents work notdyet started
bb bb bb bb bb bb
Relevant range: The assumed range of activity that reflects the company’s normal operating range and
bb bb bb bb bb bb bb bb bb bb bb bb bb bb
o ver which unit variable costs and total fixed costs are assumed to remain constant
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
©Cambridge Business Publishers, 2021 bb bb bb
2-2 CostdAccounting, 10th Edition bb bb
mynursytest.store
, bb bb bb
ditionKinney b
Service company: A firm engaged
b b b b b b b b b b in a high or moderate degree of
b b b b b b b b b b b b b b conversion using b b
a significantda mount of labor
b b b b bb bb bb
Step cost: Ad costd that increases (decreases) in distinctd amounts because of increased
b b b b bb bb b b b b b b b b bb b b b b b b
(decreased) a ctivity. Step variable costs have small steps and step fixed costs have large steps
b b bb bb b b bb bb bb bb bb bb bb bb bb bb bb bb
Total cost to accountdfor:
bb bb bb b b The sum of the beginning WIP Inventorydand the total current manufacturing
bb bb bb bb bb bb bb bb bb bb
co sts (DM, DL, OH)
bb bb bb bb bb
Unexpired cost: The portion of an asset’s value thatdhas not yet been consumed or sacrificed and
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
which i s reported on the balance sheet as an asset
bb bb bb bb bb bb bb bb bb bb bb
Variable cost: Adcost that varies in total proportionately with changes in activity butdwhich is a constant
bb bb bb bb bb bb bb bb bb bb bb bb bb bb bb
am ountdper unit
bb bb bb
Work in process: The costs of work started but not yet completed
bb bb bb bb bb bb bb bb bb bb bb
©CambridgedBusiness Publishers, 2021 bb bb
Instructor’s Manual, Chapterd2 bb bb 2-3
mynursytest.store
