Manufacturer engaged in a high degree of conversion of raw

material input into a tangible output using people and

machines. It uses three inventory accounts: (1) Raw Material
Inventory, (2) Work in Process Inventory, and (3) Finished
Goods Inventory.
Cost- monetary measure of resources given up to attain an Service Company uses a significant amount of labor to
objective such as making a good or delivering a service. engage in a high or moderate degree of conversion, whose
a. Unexpired Cost- portion of an asset’s value that has outputs can be tangible or intangible. Some service firms use
not yet been consumed. Reported on the balance two accounts (a Supplies Inventory account and a Work in
sheet as an asset. Process Inventory account) to accumulate these costs.
b. Expired Cost- portion of an asset’s value that has
been consumed. Reported as an expense on the i. Work not started (raw material);
income statement. ii. Work started but not completed (work in process); and
iii. Work completed (finished goods).
Cost Management System- a set of formal methods
developed for planning and controlling an organization’s cost- 1. Direct Material- includes the direct cost of all
generating activities relative to its strategy, goals, and materials used to manufacture a product or perform
objectives. a service.
2. Direct Labor- refers to the effort of individuals who
1. Association with cost object: manufacture a product or perform a service.
[Cost object- anything for which management wants 3. Overhead- any factory or production cost that is
to collect or accumulate costs.] indirect to manufacturing a product or providing a
a. Direct Costs- conveniently and economically service. Includes the costs of indirect material,
traceable to the cost object. indirect labor paid on an hourly basis, lubricants
b. Indirect Costs- non-traceable but must be used for machine maintenance, and the variable
allocated to the cost object. portion of factory utility charges.
a. Variable overhead- includes the costs of indirect
2. Reaction to changes in activity: material, indirect labor paid on an hourly basis,
[Relevant Range- assumed range of activity that lubricants used for machine maintenance, and
reflects the company’s normal operating range.] the variable portion of factory utility charges.
a. Variable Cost- fluctuates in total, directly b. Fixed overhead- includes costs such as straight-
proportionate when activity changes but line depreciation on factory assets, factory
constant on unit basis. license fees, factory insurance and property
b. Fixed Cost- remains constant in total when taxes, and fixed indirect labor costs.
activity changes but inversely proportional on
unit basis.  Prevention costs- are costs to prevent product
c. Step Cost- cost that shifts upward and defects.
downward when activity changes by certain  Appraisal costs- are costs for monitoring or
interval or “step.” This can be variable or fixed; inspecting products in order to find mistakes not
step variable costs have small steps while fixed eliminated through prevention.
costs have large steps.  Internal Failure costs- are costs such as scrap and
d. Mixed Cost- both variable and fixed and must be rework before the product reaches the final
separated in order to make valid estimates. customer.
 External Failure costs- are costs after the product
A. Predictor- an activity measure that, when has been delivered to the final customer and include
changed, is accompanied by consistent, costs such as product returns and warranty claims.
observable changes in a cost item.
B. Cost Driver- a predictor that has an absolute  Cost allocation- the assignment of an indirect cost to
cause-and-effect relationship with the cost in one or more cost objects using driver.
question.
3. Classification on the Financial Statements: 1. Actual Cost System- actual direct material and direct
A. Product Costs or Inventoriable Costs- related to labor costs are accumulated in Work in Process
making or acquiring the products or providing (WIP) Inventory as the costs are incurred.
the services that directly generate the revenues 2. Normal Cost System- actual direct material and
of an entity. direct labor costs and an estimated amount of
a.a. Direct material- any material that can be overhead (assigned using a predetermined overhead
easily and economically traced to a product. rate or rates) are accumulated in WIP.
a.b. Direct labor- refers to the time spent by  Predetermined Overhead Rate- (or overhead
individuals who work specifically on application rate) is a charge per unit of activity that is
manufacturing a product or performing a used to allocate (or apply) overhead cost from the
service. Overhead Control account to WIP Inventory for the
a.c. Overhead- any factory or production cost period’s production or services.
that is indirect (i.e., not direct material or direct
labor) to the product or service.  Cost of Goods Manufactured= Beg. WIP + Direct
 Conversion cost- the sum of direct Materials + Direct Labor + Overhead Costs – End.
labor and overhead costs. WIP
 Prime cost- the sum of direct material  Direct Materials= Beg. Raw Materials + Raw
and direct labor cost. Materials Purchases – End. Raw Materials
B. Period Costs- are related to business functions  Cost of Goods Sold= Beg. Finished Goods Inventory +
other than production, such as selling and Cost of Goods Manufactured – End. Finished Goods
administration. It is generally more closely Inventory
associated with a particular time period.
C. Distribution costs- are period costs incurred to
warehouse, transport, or deliver a product or
service.