Chapter 2: Product Costing Systems: Concepts and Design Issues EXPECTATIONS:

* Be familiar with the definitions of period and product costs and be able to provide examples * Be familiar with the definitions of direct material, direct labor and overhead costs and be able to provide examples * Be familiar with the components of inventory, the flow of goods through the manufacturing process and be able to construct a statement of cost of goods manufactured * Know what cost drivers are * Be familiar with the definitions of fixed and variable costs, be able to provide examples and be able to differentiate between them. Be mindful that we typically refer to the costs of resources used versus the cost of resources supplied. * Be aware that not all costs can be classified as either fixed or variable * Be familiar with the definitions of committed, opportunity and sunk costs and be able to provide examples

Topic Outline Section I. Cost Management and Product Costing Systems

- It is critical for a business to know what it costs to provide goods and services to its customers

Reading

Assignments

40 - 42

I. Meaning of Cost
- Definition of Cost - Product vs. Period Costs

42 Chart I - study aid 42 - 48

Class Handout HW E2.35* HW E2.36* HW E2.36*

II. Costs Reported in the Financial Statements

- How product costs are reported in financials for service firms, retail companies and manufacturing businesses - What are included in product costs for service firms, retail companies and manufacturing businesses - Classifications and what are included in manufacturing costs - Definition of Prime Cost - Definition of Conversion Cost - Classifications of non-manufacturing (period) costs

III. Stages of Production and Flow of Cost

- Three categories of inventories of a manufacturing firm - Schedule of Cost of Goods Manufactured and Sold - Income Statement for a Manufacturer

48 -52

Class E2.33* HW E2.41*; HW P2.57#

Chart II - study aid

IV. Cost Management Concepts: Different Costs for Different Purposes

- Definition of Cost Driver - Definition of Activity - Fixed vs. Variable Costs - Costs of Resources Used vs. Resources Supplied - Definition of Committed Costs - Definition of Opportunity Costs - Definition of Sunk Costs - Definition of Cost Object - Direct vs. Indirect Costs - Controllable vs. Uncontrollable

52 - 61

Class Handout; Class E2.42* HW HW HW HW HW HW P2.60* P2.61* E2.35* E2.36* P2.58* P2.59#

Chart I - Study aid Chart I - Study aid Chart I - Study aid Chart I - Study aid Chart I - Study aid

Section II. Income Reporting Effects of Alternative We'll look at this after chapter 3 Product Costing Systems V. What Costs Should be Considered Product 62 - 63 Costs?
- Treatment of fixed overhead costs
Class E2.45*; HW P2.46*, handout#

VI. Illustration of Absorption and Variable Costing 63 - 70

Handout - Absorption vs. Variable Costing - Reconciliation of Income Under Absorption and Variable Costing - Effect of Inventory Levels on Income Under Absorption and Variable Costing * Solutions for these problems contained on Chapter 2 Solutions # To be handed in