Comm 294 - Cost Concepts

Manufacturing Cost

Costs incurred during the manufacturing process

Marketing/Selling Cost

Costs needed to get the order and deliver the product (examples: advertising, commissions, sales salary, and shipping)

Administrative Costs

Costs that are neither manufacturing nor selling (examples: accounting, legal, PR)

Product Costs (Inventoriable Costs)

All costs needed to bring a product to completion; recorded in inventory when incurred, then expensed when the product is sold

Period Costs

All other operating costs; expensed immediately and not assigned to products

Cost behaviour

How a cost reacts to changes in activity level (within the relevant range)

Variable Cost (VC)

Total cost changes in direct proportion to activity level

Fixed Cost (FC)

Total cost stays constant regardless of activity level

Cost driver

Measure of what causes a variable cost to be incurred (examples: units produced, machine hours, labour hours)

Mixed cost

Has both fixed and variable components

Variable cost per unit

Fixed per unit (even though total varies)

Fixed cost per unit

Varies per unit (because the same total is spread over more or fewer units)

Cost object

Anything you want to know the cost of (product, job, department, segment)

Direct cost

Can be easily and conveniently traced to a product or cost object (examples: direct materials, direct labour)

Indirect cost

Cannot be easily and conveniently traced to a product or cost object (often impractical to trace), so it must be allocated

Allocation

Assigning indirect costs to cost objects (Not traced)

Relevant costs/benefits

Only costs and benefits that differ between alternatives matter for decisions

Opportunity cost

Foregone benefit of choosing one option over another; doesn’t appear on financial statements

Sunk cost

Already incurred, should not factor into the decision

Differential cost

A cost that differs between two alternatives

Direct Materials (DM)

Raw materials that become an integral part of the product and can be conveniently traced to it

Direct labour (DL)

“Hands-on” labour that can be physically traced to making the products without undue cost or convenience

Manufacturing overhead (MOH)

All product costs other than DM and DL; cannot be traced to specific units; includes indirect materials and indirect labour (plus items like factory rent, utilities, depreciation)

Overtime premium labour cost

Usually treated as MOH, but can be charged to a specific job if job-specific

Idle time labour cost

Wages paid for unproductive time (breakdowns, power failures, shortages). Charged to MOH if general across production, charged to DL if product/job-specific

Raw materials inventory

Materials waiting to be processed

Work in process (WIP) Inventory

Partially complete products, some material/labour/overhead added

Finished goods (FG) Inventory

Completed products awaiting sale

Basic inventory equation

Beginning balance + additions - withdrawals = ending balance