What is a Cost?
A cost is a resource sacrificed to achieve a specific objective.
Examples:
Anything for which cost information is desired.
Examples:
Can be traced directly to a cost object.
Examples:
Cannot be conveniently traced.
Examples:
Manufacturing Cost Categories
Direct Materials
Raw materials physically included in the final product.
Examples:
Employees directly involved in production.
Examples:
All manufacturing costs except direct materials and direct labor.
Examples:
Prime Cost = Direct Materials + Direct Labor
Example:
Materials = $20,000
Labor = $15,000
Prime Cost = $35,000
Conversion Cost
Conversion Cost = Direct Labor + Manufacturing Overhead
Example:
Labor = $15,000
Overhead = $10,000
Conversion Cost = $25,000
Product Costs vs Period Costs
Product Costs
Attached to inventory.
Include:
Expensed immediately.
Examples:
Relevant Costs
Future costs that differ between alternatives.
Irrelevant Costs
Costs that remain unchanged.
Sunk Costs
Already incurred and cannot be recovered.
Example:
Money spent on market research.
Opportunity Cost
Benefit sacrificed by choosing one option over another.
Example:
Using a building for storage instead of renting it out.
Key Cost Formulas
Prime Cost
= Direct Materials + Direct Labor
Conversion Cost
= Direct Labor + Manufacturing Overhead
Note: Direct Materials + Direct Labor + Overhead = Product Cost
A cost is a resource sacrificed to achieve a specific objective.
Examples:
- Rent
- Salaries
- Materials
- Utilities
Anything for which cost information is desired.
Examples:
- Product
- Customer
- Department
- Project
Can be traced directly to a cost object.
Examples:
- Wood in furniture
- Steel in vehicles
- Direct labor
- Easily traceable
- Accurate assignment
Cannot be conveniently traced.
Examples:
- Factory rent
- Supervisor salaries
- Factory insurance
Manufacturing Cost Categories
Direct Materials
Raw materials physically included in the final product.
Examples:
- Flour in bread
- Leather in shoes
Employees directly involved in production.
Examples:
- Assembly workers
- Machine operators
All manufacturing costs except direct materials and direct labor.
Examples:
- Factory utilities
- Maintenance
- Depreciation
Prime Cost = Direct Materials + Direct Labor
Example:
Materials = $20,000
Labor = $15,000
Prime Cost = $35,000
Conversion Cost
Conversion Cost = Direct Labor + Manufacturing Overhead
Example:
Labor = $15,000
Overhead = $10,000
Conversion Cost = $25,000
Product Costs vs Period Costs
Product Costs
Attached to inventory.
Include:
- Direct materials
- Direct labor
- Manufacturing overhead
Expensed immediately.
Examples:
- Advertising
- Office salaries
- Administrative expenses
Relevant Costs
Future costs that differ between alternatives.
Irrelevant Costs
Costs that remain unchanged.
Sunk Costs
Already incurred and cannot be recovered.
Example:
Money spent on market research.
Opportunity Cost
Benefit sacrificed by choosing one option over another.
Example:
Using a building for storage instead of renting it out.
Key Cost Formulas
Prime Cost
= Direct Materials + Direct Labor
Conversion Cost
= Direct Labor + Manufacturing Overhead
Note: Direct Materials + Direct Labor + Overhead = Product Cost
