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• Costs are associated with all types of organizations business, non-business, service, retail, and manufacturing
• The kinds of costs that are incurred and the way in which these costs are classified will depend on the type of organization involved
• Manufacturing


  Encompasses much more than just firms in the industrial sector, it also encompasses many organizations that are typically viewed as being service in nature, such as movie studios and fast-food outlets
• Cost


  The cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization
• Costs are incurred to produce future benefits in a profit making firm, future benefits usually mean revenue
• Expired costs are called expenses
• A loss is a cost that expires without producing any revenue benefit
• The focus of cost accounting is on costs, not expenses
• Classification of Costs


  • Costs classified as to relation to a product
  • Costs classified as to variability
  • Costs classified as to relation to manufacturing departments
  • Costs classified to their nature as common or joint
  • Costs classified as to relation to an accounting period
  • Costs for planning, control, and analytical processes
• Manufacturing costs/product costs/inventoriable costs


  • Direct materials
  • Direct labor
  • Factory overhead
• Direct materials


  • Basic ingredients that are transformed into finished products through the use of labor and factory overhead in the production process
  • Can be traced to the finished product and form part of the product
• Timely purchasing of direct materials is important because if the company runs out, the manufacturing process will be forced to shut down
• Buying too many direct materials can lead to high storage costs
• Proper storage of materials will avoid waste and spoilage
• Indirect materials


  Minor materials and other production supplies that cannot be conveniently or economically traced to specific products, accounted for as part of factory overhead costs
• Direct labor


  The amount paid as wages to those working directly on the product
• Tracing many labor costs directly to individual products is difficult
• Indirect labor costs


  Wages and salaries of workers like machine helpers, supervisors, and other support personnel, accounted for as factory overhead costs
• Payroll related costs are usually included as factory overhead
• Prime costs


  Direct materials + direct labor
• Conversion costs


  Direct labor + factory overhead
• Factory overhead


  A catchall for manufacturing costs that cannot be classified as direct materials or direct labor costs
• Major classifications of factory overhead costs

  • Indirect materials and supplies
  • Indirect labor costs
  • Other indirect factory costs
• Non-manufacturing costs/period costs


  • Marketing or selling expenses
  • Administrative or general expenses
• Marketing or selling expenses


  Costs necessary to secure customer orders and get the finished product or service into the hands of the customer
• Administrative or general expenses


  Executive, organizational, and clerical expenses that cannot logically be included under either production or marketing
• Costs classified as to variability

  • Fixed costs
  • Variable costs
  • Mixed costs
• Fixed costs


  Items of cost which remain constant in total, irrespective of the volume of production
• Committed fixed costs


  Relatively long term commitments on the part of management as a result of a past decision
• Managed fixed costs


  Costs that are incurred on a short-term basis and can be more easily modified in response to changes in management objectives
• Variable costs


  Items of cost which vary directly, in total, in relation to volume of production
• Mixed costs


  Items of cost with fixed and variable components, vary with the level of production, though not in direct relation to it
• Semivariable costs


  Have a fixed portion that represents a minimum fee, and a variable portion that is the cost charged for actually using the service