18 -- Cost Behavior and Definitions

18 -- Cost Behavior and Definitions - CPA BEC - STUDY UNIT...

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CPA BEC - STUDY UNIT 18 Cost Behavior and Definitions: Core Concepts A. Cost Measurement Terminology 1. Manufacturing vs. Nonmanufacturing a. The costs of manufacturing a product can be classified as one of three types: direct materials, direct labor, and manufacturing overhead (indirect materials, indirect labor, and factory operating costs). b. Prime cost equals direct materials plus direct labor. Conversion cost equals direct labor plus manufacturing overhead. 2. Product vs. Period a. The costs that are capitalized as part of finished goods inventory are referred to as product, or inventoriable, costs. They eventually become a component of cost of goods sold. Those costs not capitalized in finished goods inventory are termed period costs and are excluded from cost of goods sold. b. Under GAAP, all manufacturing costs must be treated as product costs. For internal reporting, a manufacturer has other options. 3. Direct vs. Indirect a. A direct cost is one that can be associated with a particular cost object in an economically feasible way, i.e., traced to that object. An indirect cost is one that cannot be associated with a cost object in an economically feasible way and thus must be allocated to that cost object. 4. Fixed vs. Variable a. Fixed costs in total remain unchanged in the short run regardless of production level, e.g., the amount paid for an assembly line is the same even if production is halted entirely. Fixed cost per unit, however, varies indirectly with the activity level.
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This note was uploaded on 08/29/2010 for the course CBEAM BEC taught by Professor Gleim during the Spring '10 term at De La Salle Lipa.

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18 -- Cost Behavior and Definitions - CPA BEC - STUDY UNIT...

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