Cost Terms, Concepts, and Classifications:

After studying this chapter you should be able to:

1. Identify and give examples of each of the three basic manufacturing cost categories.
2. Distinguish between product costs and period costs and give examples of each.
3. Prepare an income statement including calculation of the cost of goods sold.
4. Prepare a schedule of cost of goods manufactured.
5. Understand the difference between variable costs and fixed costs.
6. Understand the differences between direct and indirect costs.
7. Define and give examples of cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.
8. Properly account for labor costs associated with idle time, overtime, and fringe benefits.
9. Identify the four types of quality costs associated and explain how they interact.
10. Prepare and interpret a quality cost report.
11. The work of managers focuses on (1) planning, which includes setting objectives and outlining how to attain these objectives; and (2) control, which includes the steps to take to ensure that objectives are realized. To carry out these planning and control responsibilities, managers need information about the organization. From an accounting point of view, this information often relates to the costs of organization.
    The term cost is used in many different ways in managerial accounting. The reason is that there are many types of costs, and these costs are classified differently according to the immediate need of management. For example, managers may want cost data to prepare external financial reports, to prepare planning budgets, or to make decisions. Each different use of cost data demands a different classification and definition of cost. For example, the preparation of external financial reports require historical cost data, whereas decision making may require predictions about future costs. In the following paragraphs we have discussed many of possible use of cost data and how costs are defined and classified for each use.