Topic 2 Cost Classification 2016 - Topic 2 Cost classifications 1 Content General definition of cost An overview of cost terms Cost classification

Topic 2 Cost Classification 2016 - Topic 2 Cost...

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1 Topic 2: Cost classifications
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Content General definition of cost An overview of cost terms Cost classification Manufacturing cost flows Cost for decision making Example Reference 2
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Process of Management Decision Making Directing Control Planning Managers need cost information to perform each of these functions. 3
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4 General definition Cost is resource sacrificed or forgone to achieve a specific objective (accountant approach). Cost is a measurement, in monetary terms, of the amount of resources used for some purpose. Three important points: Use of resources Monetary measurement Purpose (cost object)
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Cost object Cost object is anything for which a measurement of costs is desired. Cost object: Product Service Project Customer Activity Department 5
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6 An overview of cost terms Purpose of cost classification Cost classifications Preparing an income statement and balance sheet Product costs (direct material, direct labor, manufacturing overhead) Period costs/Non manufacturing costs (marketing and selling costs, administrative costs) Predicting changes in cost due to changes in activity Variable costs Fixed costs Assigning costs Direct costs Indirect costs Making decisions Differential costs Sunk costs Opportunity costs
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7 PRODUCT COSTS versus PERIOD COSTS Product costs (manufacturing costs, inventoriable costs) Direct materials are materials that become an integral part of the finished product and can be easily traced to it. Direct labor is reserved for those labor costs that can be easily traced to individual units of product. Manufacturing overhead or factory overhead costs are indirect costs that assist to maintain and manage the production process. Example: indirect labor, depreciation of assets, power electricity.
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8 PRODUCT COSTS versus PERIOD COSTS Prime costs are all direct manufacturing costs (direct material + direct labor) Conversion costs are all manufacturing costs other than direct material costs (direct labor + manufacturing overhead) Non manufacturing (period) costs Administrative costs – all cost of general administration of the company as a whole.
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