ACC2200 · Introduction to Management Accounting
Cost Types: Terms and Concepts
Cost Types: Terms and Concepts is the Week 2 vocabulary chapter of ACC2200 Introduction to Management Accounting at Monash University — the terms every later topic (product costing, ABC, CVP, relevant-cost decisions) is built on. A cost is the value of resources given up to achieve an objective, and the same dollar amount can be classified many ways depending on the decision at hand. The core skills are classifying a cost (product vs period, direct vs indirect, variable vs fixed) and tracing how manufacturing costs flow through inventory into the Cost of Goods Manufactured, Cost of Goods Sold and income-statement schedules.
What this chapter covers
- 011. What a cost is — resources given up; benefit outlives the period → asset, used up → expense
- 022. Different costs for different purposes — one amount, five classification lenses, total unchanged
- 033. The five bases — behaviour, traceability, controllability, value chain, timing
- 044. Product (inventoriable) vs period cost — what is capitalised into inventory vs expensed now
- 055. Direct vs indirect — always defined relative to a chosen cost object
- 066. Manufacturing cost = DM + DL + MOH, and prime (DM + DL) vs conversion (DL + MOH) cost
- 077. The cost flow — Raw Materials → Work in Process → Finished Goods → Cost of Sales
- 088. The COGM, COGS and income-statement schedules that trace that flow
Cost of Goods Manufactured → COGS → income statement
- +1Direct materials used = opening + purchases − closing = 48,000 + 415,000 − 39,000 = 424,000.
- +1Manufacturing overhead = indirect labour 52,000 + factory rent 60,000 + equipment depreciation 44,000 + factory utilities 29,000 + indirect materials 15,000 = 200,000. Administrative salaries and sales commissions are period costs, so they are excluded.
- +1Total manufacturing cost = DM used 424,000 + direct labour 268,000 + overhead 200,000 = 892,000.
- +1Cost of Goods Manufactured = total manufacturing cost + opening WIP − closing WIP = 892,000 + 31,000 − 25,000 = 898,000.
- +1Cost of Goods Sold = opening finished goods + COGM − closing finished goods = 54,000 + 898,000 − 63,000 = 889,000.
- +1Gross profit = sales 1,120,000 − COGS 889,000 = 231,000; operating profit = 231,000 − period costs (88,000 + 71,000 = 159,000) = 72,000.
Key terms
- Cost object
- Anything for which a separate cost is measured — a product, a job, a department or a customer. Whether a cost is direct or indirect is only meaningful once the cost object is named, because a cost can be direct to one object and indirect to another.
- Product (inventoriable) cost
- A manufacturing cost — direct material, direct labour or manufacturing overhead — that is capitalised into inventory and expensed as Cost of Goods Sold only when the unit is sold, possibly in a later period.
- Period cost
- A non-manufacturing cost (selling, distribution and general administration) that is expensed as incurred and never routed through inventory. In a pure service firm, with no inventory to value, every cost is a period cost.
- Prime cost
- The directly traceable core of a product: direct material + direct labour. It captures the material you can see plus the labour that shaped the unit.
- Conversion cost
- The cost of converting raw material into finished product: direct labour + manufacturing overhead. Because direct labour sits in both prime and conversion cost, the two cannot simply be added to get total manufacturing cost.
- Manufacturing overhead (MOH)
- Every factory cost that is not direct material or direct labour — indirect material, indirect labour, factory rent, machine depreciation, utilities, and also overtime premium and idle time. It is indirect to any single unit and is applied to products rather than traced.
- Cost of Goods Manufactured (COGM)
- The total cost of units completed during the period: total manufacturing cost (DM + DL + MOH) adjusted for the change in work-in-process inventory. It differs from Cost of Goods Sold, which is adjusted for the change in finished-goods inventory instead.
Cost Types: Terms and Concepts FAQ
What is the difference between a product cost and a period cost?
A product (inventoriable) cost is a manufacturing cost — direct material, direct labour or manufacturing overhead — that is stored in inventory and expensed as Cost of Goods Sold only when the unit is sold. A period cost is a non-manufacturing cost (selling, distribution, administration) that is expensed as incurred. The timing of when the cost hits profit is the whole point of the distinction.
What is prime cost versus conversion cost, and why can't I add them for total manufacturing cost?
Prime cost = direct material + direct labour; conversion cost = direct labour + manufacturing overhead. Direct labour appears in both, so adding prime and conversion double-counts it. To recover total manufacturing cost you take prime + conversion − direct labour, which is a favourite exam and quiz trap.
What is the difference between COGM and COGS?
Cost of Goods Manufactured is the cost of units finished this period; Cost of Goods Sold is the cost of units actually sold. They differ whenever finished-goods inventory changes. You adjust work in process to reach COGM and finished goods to reach COGS — mixing the two inventory adjustments is a common structural error.
Can whether a cost is direct or indirect ever change?
Yes — direct versus indirect is defined relative to a chosen cost object, not fixed to the cost itself. A designer's salary is direct to the design department but indirect to any single product. And a cost is only direct if it is both physically traceable and economically feasible to trace, which is why trivial items like glue are treated as indirect overhead.
How are costs classified in a service firm like a bank or law firm?
A pure service business holds no inventory to value, so there is no product-cost versus period-cost split — every cost is a period cost. You should not build a manufacturing-style COGM schedule for a service entity; that is a classic mistake carried over from the manufacturing chapters.
Can AI help me with cost terms and concepts?
Yes — ask Sia to walk through any cost terms and concepts problem or concept step by step, the way Monash University tests it. Sia is an AI tutor that explains each classification and each line of a Cost of Goods Manufactured schedule so you understand the reasoning, rather than just handing you a number.
Studying with AI? Sia — free AI accounting tutor works through ACC2200 step by step.
Exam move
Drill the two guaranteed Week 2 items. First, the classification question: take every cost through three independent axes — product/period, direct/indirect (to a stated cost object), variable/fixed — and never assume that because a cost is overhead it must be fixed. Second, the Cost of Goods Manufactured → COGS → income-statement build: tag each line as factory or non-factory first, then work top-down with visible subtotals (DM used, total manufacturing cost, COGM), keeping administrative and selling costs out of overhead. Memorise the two reconciliations — adjust WIP for COGM, adjust finished goods for COGS — and the prime + conversion − direct labour cross-check. Because the closed-book exam is roughly 60% calculation, practise laying the schedules out cleanly under time pressure; the working earns as many marks as the final figure.
