Notes.docx - ACCOUNTING 2600 Summer 2019 Chapter 2 Cost Cost is the amount of cash or cash equivalent sacrificed for goods and\/or services that are

Notes.docx - ACCOUNTING 2600 Summer 2019 Chapter 2 Cost...

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ACCOUNTING 2600 Summer 2019 Chapter 2 Cost Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization. Cost is a dollar measure of the resources used to achieve a given benefit. Expenses are costs that are used up (expired) in the production of revenue. On the income statement, expenses are deducted from revenues to determine income (also called profit). For a company to remain in business, revenues must be larger than expenses. In addition, the income earned must be large enough to satisfy the owners of the firm. Price is the revenue per unit. Accounting courses take the viewpoint of the owner of the company. In that case, cost and price are NOT the same. Instead, for the company, revenue and price are the same. Price must be greater than cost in order for the firm to earn income. Accumulating and Assigning Costs Accumulating Costs is the way that costs are measured and recorded. Assigning costs is the way that a cost is linked to some cost object. Direct costs are those costs that can be easily and accurately traced to a cost object. Indirect costs are costs that cannot be easily and accurately traced to a cost object. Allocation means that an indirect cost is assigned to a cost object by using a reasonable and convenient method. A variable cost is one that increases in total as output increases and decreases in total as output decreases. A fixed cost is a cost that does NOT increase in total as output increases and does NOT decrease in total as output decreases. An opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another. Determining Product Cost Product costs are those costs, both direct and indirect, of producing a product in a manufacturing firm or of acquiring a product in a merchandising firm and preparing it for sale. Therefore, only costs in the production section of the value chain are included in product costs. A key feature of product costs is that they are inventoried. Product costs initially are added to an inventory account and remain in inventory until they are sold, at which time they are transferred to cost of goods sold (COGS). Product costs can be further classified as direct materials, direct labor, and manufacturing overhead, which are the three cost elements that can be assigned to products for external financial reporting (e.g., inventories or COGS). Exhibit 2.2: Product Costs include Direct Materials, Direct Labor, and Overhead.
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Direct Materials are those materials that are a part of the final product and can be directly traced to the goods being produced. A closely related term is Raw Materials. Often the inventory of materials is called the raw materials account. Materials in the raw materials do NOT become direct materials until they are withdrawn from inventory for use in production. The raw materials inventory account can include indirect materials as well as direct materials.
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