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Cost Terms, Concepts, and Classifications

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Cost Terms, Concepts, and Classifications
Chapter 2

Cost Terms, Concepts, and Classifications

Learning Objectives

LO1. Identify and give examples of each of the three basic manufacturing cost categories. LO2. Distinguish between product costs and period costs and give examples of each. LO3. Prepare an income statement including calculation of the cost of goods sold. LO4. Prepare a schedule of cost of goods manufactured. LO5. Understand the differences between variable costs and fixed costs. LO6. Understand the differences between direct and indirect costs. LO7. Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs. LO8. (Appendix 2A) Properly account for labor costs associated with idle time, overtime, and fringe benefits. LO9. (Appendix 2B) Identify the four types of quality costs and explain how they interact. LO10. (Appendix 2B) Prepare and interpret a quality cost report.

New in this Edition • Many new In Business boxes have been added. • New shorter exercises that cover a single learning objective have been created.

Chapter Overview

A. General Theme. Costs can be classified in a number of ways—depending on the purpose of the classification. For example, classification of costs for purposes of determining inventory valuations and cost of goods sold for external reports differs from the classification of costs that would be carried out to aid decision-making. It is important to note that the classifications of costs are not mutually exclusive. That is, a particular cost may be classified in many different ways—depending on the purpose of the classification.

B. Cost Classifications for Preparing External Financial Statements. (Exercises 2-1, 2-2, 2-3, 2-4, 2-10, 2-11, and 2-12.) This section of the chapter focuses on the problem of valuing inventories and determining cost of goods sold for external

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