Video Notes Review: Chapter 2 — Cost Classification & Inventory

Flashcards cover core concepts from the notes: cost classifications (product vs period, direct vs indirect), cost behaviors (variable vs fixed), cost objects and tracing/allocation, inventory accounts (WIP, finished goods), overhead and labor distinctions, and standard formulas for COGM/COGS, prime vs conversion costs, and basic CVP-style operating income references. Use these to review terms and definitions for exam readiness.

Product costs (inventoriable costs)

Costs that are inventoried and expensed as cost of goods sold when the product is sold; include direct materials, direct labor, and manufacturing overhead.

Period costs

Costs expensed in the period incurred; not included in inventory.

Direct costs

Costs that can be traced to a specific cost object (such as a product or department).

Indirect costs

Costs that cannot be traced easily to a single cost object and are allocated to objects via cost allocation.

Direct materials

Materials that become part of the product and can be traced to the product.

Direct labor

Wages paid to workers who directly convert materials into the product; traceable to the product.

Manufacturing overhead

Indirect manufacturing costs, including indirect materials and indirect labor; allocated to products.

Overtime premium

Wages paid for hours beyond straight-time; can be treated as direct labor or overhead depending on context.

Prime costs

Direct materials plus direct manufacturing labor.

Conversion costs

Direct labor plus manufacturing overhead.

Cost object

Anything for which costs are measured (products, departments, customers, etc.).

Cost tracing

Assignment of direct costs to the cost object.

Cost allocation

Assignment of indirect costs to the cost object.

Cost driver

A factor that causes costs to change (e.g., miles driven, volume).

Variable costs

Costs that vary in total with the level of activity.

Fixed costs

Costs that do not change in total within the relevant range.

Relevant range

The band of activity within which cost behavior assumptions hold and costs remain linear.

Cost of goods manufactured (COGM)

Beginning WIP + total manufacturing costs incurred during the period − Ending WIP.

Cost of goods sold (COGS)

COGM + Beginning finished goods − Ending finished goods.

Work-in-process inventory (WIP)

Costs accumulated for products that are not yet complete.

Finished goods inventory

Costs attached to completed but unsold products.

Indirect materials

Materials used in production that cannot be traced to a specific product and are part of overhead.

Indirect labor (manufacturing)

Labor not directly traceable to a product (e.g., plant supervision); part of overhead.

Plant supervisor wages (example)

Often classified as a product cost (inventoriable) when tied to production.

Sales commissions

Variable selling costs often modeled as a per-unit or percentage of sales.

Direct manufacturing labor

Labor directly involved in making the product.

Manufacturing overhead (example components)

Indirect costs of production, including indirect materials, indirect labor, depreciation of factory, utilities, etc.

COGM schedule components

Direct materials used, direct labor, manufacturing overhead, beginning WIP, ending WIP.

COGS schedule components (manufacturing)

COGM + beginning finished goods − ending finished goods.

Average manufacturing cost per unit

Total manufacturing costs divided by units produced.

Gross margin

Sales minus cost of goods sold.

Inventoriable costs for external reporting

Product costs (costs capitalized in inventory until sold).

Prime vs conversion costs (summary)

Prime costs = direct materials + direct labor; Conversion costs = direct labor + manufacturing overhead.

Fill-in-the-blank (COGM formula)

COGM = Beginning WIP + total manufacturing costs incurred during the period − Ending WIP.

Fill-in-the-blank (inventoriable costs)

Inventoriable costs are also known as product costs (costs capitalized in inventory).