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Cost terminology and cost behaviors

Cost reflects the monetary measure of resources used to attain an

objective (making a good or performing a service).
Unexpired cost (balance sheet) value of the goods not yet
consumed (asset).
Expired cost (income statement) portion of the assets value
consumed or sacrificed during the period (expense).
Exercise No. 21
Cost management system set of formal methods developed for
planning and controlling an organizations cost-generating activities
relative to its strategies, goals, and objectives.
Cost object anything for which management wants to collect or
accumulate costs.
Direct cost conveniently and economically traceable to the cost
Indirect cost cannot be economically traced to the cost object
but instead are allocated to the cost object.
Relevant range assumed ranged of activity that reflects the
companys normal operating range.
Variable cost cost that varies in total proportionately with
Fixed cost cost that remains constant in total within the
relevant range of activity.
Mixed cost cost that has both variable and fixed component.
Step cost shifts upward or downward when activity changes by
a certain interval or step.
Exercise No. 14, 15, 16
Cost predictor an activity that when changed is accompanied by a
consistent, observable change in a cost item.
Cost driver a predictor that has an absolute cause-and-effect
relationship to a cost.
Exercise No. 18
Product cost related to making or acquiring the products or providing
the services that directly generates revenue.

Direct materials any material that can be directly traced to a

Direct labor time spend by individuals who work specifically on
manufacturing a product or performing a service.
Overhead factory costs that cannot be classified as either direct
materials or direct labor.
o Indirect materials
o Indirect labor
o Other factory overhead
Exercise No. 25, 26, 27, 28, 29

Quality cost cost of controlling quality or cost of failing to

control quality.
o Prevention cost incurred to improve quality by precluding
product defects and improper processing from occurring.
o Appraisal cost incurred to find mistakes not eliminated
though prevention.
o Failure cost inability to control quality.
Direct or prime cost sum of direct materials and direct labor.
Conversion cost sum of direct labor and overhead.

Period cost related to business functions other than production.

Selling cost
Administrative cost
Distribution cost cost incurred to warehouse, transport, or
deliver a product or service.
Exercise No. 19, 20, 22
Conversion process refers to the process of transforming raw
materials into saleable products.
Merchandising, trading or retailers engage in the buying and
selling of goods with low or moderate conversion process.
Manufacturing engage in a high degree of conversion of raw
materials into a tangible output.
Service company uses a significant amount of labor to engage
in a high or moderate degree of conversion.
Exercise No. 24, 23, 36
Raw materials inventory cost of raw materials purchased not issued
to production.

Work in process inventory cost of partially completed materials

started during the period but remained unfinished at the end of the
Finished goods inventory cost of goods finished and ready for sale.
Exercise No. 35
Cost allocation assignment of an indirect cost to one or more cost
object using some reasonable allocation cost or driver.
To determine to full cost of the cost object.
To motivate the manager in charge of the cost object to manage
it efficiently.
To compare alternative courses of action for management
planning, controlling, and decision-making.
Actual cost direct materials, direct labor and overhead are recorded
at actual cost.
Normal cost direct materials and direct labor are regarded at actual
cost while overhead is assigned using a predetermined rate.
Predetermined overhead rate charge per unit of activity used
to allocate or apply overhead cost from the overhead control
account to work in process.
Exercise No. 30
Cost of goods manufactured total production cost of the goods that
were completed and transferred to finished goods inventory.
Exercise No. 31, 32, 33, 34
Problems 38, 41, 48, 49, 51