Chapter 2 handout - CHAPTER2 BASICCOSTMANAGEMENTCONCEPTSAND...

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CHAPTER 2 BASIC COST MANAGEMENT CONCEPTS AND ACCOUNTING FOR MASS CUSTOMIZATION OPERATIONS Key Lecture Concepts 1. WHAT IS A COST? cost  is the sacrifice made  to achieve a particular purpose. There are different costs for different purposes, with  costs that are  appropriate  for one use being totally inappropriate  for others (e.g., a cost  that is used  to determine  inventory  valuation  may be irrelevant  in  deciding  whether  or not to manufacture  that same product). An  expense  is defined  as the cost incurred  when  an asset is used  up  or  sold for the purpose  of generating  revenue.  The terms "product cost" and   "period  cost" are used  to describe the timing  with  which expenses are  recognized. Product costs  are the costs of goods manufactured  or the cost of  goods purchased  for resale.  These costs are inventoried  until the  goods are sold.   Period costs  are all other non-product  costs in an organization  (e.g.,  selling and  administrative).  Such costs are not inventoried  but are  expensed  as time passes. 2. COSTS ON FINANCIAL STATEMENTS Product costs are shown  as cost of goods sold on the income statement   when  goods are sold.  Income statements  of service enterprises lack a cost- of-goods-sold section and  instead  reveal a firm's operating  expenses. 1
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Product costs, housed  on the balance sheet until sale, are found  in three  inventory  accounts:   Raw materials— materials   that await production Work in process— partially   completed  production Finished goods— completed   production  that awaits sale 3. TYPES OF PRODUCTION  PROCESSES There are various  types of production  processes; for example: Job shop— low production  volume, little standardization; one-of-a- kind  products Batch— multiple products; low volume Assembly line— a few major products; higher volume Mass customization— high production  volume; standardized   components; customized  combinations  of components Continuous flow— high volume; highly standardized  commodity   products In  mass customization,  many  standardized  components  are combined  to  produce  custom-made  goods to customer  order.  
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Chapter 2 handout - CHAPTER2 BASICCOSTMANAGEMENTCONCEPTSAND...

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