CHAPTER 2

 Explain the basic concept of “cost”.

 Explain how costs are classified in financial
statements.
 Understand the product cost categories, and
what items comprise those categories.
 Explain the process of cost allocation.
 Define basic cost behaviors, including fixed,
variable, mixed, and step costs.
 Understand how cost of goods manufactured
is calculated and used in preparing income
statement.
 DIRECT COSTS
 INDIRECT COSTS
 Variable Cost
 Fixed Cost
 Mixed Cost
 Step Cost
 Unexpired Cost
 Expired Cost
 Product Costs
- Prime Costs
- Conversion Costs
=Direct Material
=Direct Labor
=Overhead
 Period Costs
 Product Costs are related to making or
acquiring the products or providing the
services that directly generate the revenues of
an entity

 Period Costs are related to business functions

other than production, such as selling and
administration.
 Direct Material
 Direct Labor
 Overhead
 Selling
- Advertising, Sales commissions, Shipping costs
 Administrative
- Executive salaries, Data processing, Legal costs
 refers to the assignment of an indirect cost to
one or more cost objects using some
reasonable allocation base or driver.
 Define the cost pool

 Determine the cost allocation rule

 Assign the costs in the cost pool to the

cost object
 Blinks Corporation has two divisions, Black
Division and Pink Division.
Revenue
Black Division $40 million
Pink Division $10 million
Total $50 million

Define the cost pool: Department’s costs of $1,000,000

Determine the cost allocation rule:Costs are allocated based
on divisional revenue. (% of revenue)
Assign to the cost object: Black Division: 80% of cost
Pink Division: 20% of cost
 Predictor
 Cost Driver
Beginning balance of working in process
xxx
Manufacturing costs for the period:
Raw material (all direct):
Beginning balance xxx
Purchases of material xxx
Raw material available for use xxx
Ending balance (xxx)
Direct Material used xxx
Direct Labor xxx
Variable Overhead xxx
Fixed Overhead xxx
Total current period manufacturing costs xxx
Total cost to account for xxx
Ending balance of work in process inventory (xxx)
Cost of goods manufactured xxx
Beginning balance of finished goods inventory xxx
Cost of goods manufactured xxx
Cost of goods available for sale xxx
Ending balance of finished goods inventory (xxx)
Cost of goods sold xxx