 A cost object is anything a manager might want to know the cost of. You can see some common examples on the slide, but the most common is the cost of a product. Product costs are one of the most important costs managers need to know. Knowing the cost of a product is a necessity to make sure that it's priced correctly, or if the company should increase or decrease production, or even discontinue the product altogether. Most companies use two different definitions of cost, total product cost and inventoryable product cost. The total cost is used for internal decision making. It includes all the costs of the value chain. Management needs to know total costs so it can price goods high enough to cover these costs and still make a normal profit. Inventoryable product costs, which are sometimes just called product costs, are only the costs incurred during the production stage of the value chain. Since inventoryable product costs include only costs incurred during production, all costs incurred in other stages of the value chain must be reported in the period in which they are incurred as expenses. Inventoryable product costs are required by GAP to be used for the cost of the asset, you know, inventory rather than total product costs. Because GAP will not allow total product cost to be reported on the balance sheet as an asset, the cost incurred in R&D, design, marketing, distribution and customer service are known as period costs. Period costs are reported on the income statement as expenses in the period in which they were incurred. They are often known as operating expenses or selling general and administrative expenses or SG&A for short. The product costs incurred in the production stage are not expensed when incurred. These costs are debited to an inventory account. The cost will remain as assets until the goods are sold, which could be in subsequent periods. And then we would record the cost as cost of goods sold and expense. So let's flash back to financial accounting for a moment. We learned that the cost of an asset is all of the costs incurred to get the asset ready for its intended purpose. That definition applies to inventory because it's an asset. So for merchandisers, the cost of the product, plus shipping and handling, et cetera, are included in the cost of the asset and debited to inventory. Manufacturers have to take raw materials and convert them into finished products. So the inventoryable product costs for manufacturers are direct materials, direct labor, and manufacturing overhead, which is an indirect cost. Direct costs are those that can be easily traced to a product. A car has four tires, so the cost of four tires is easily traced to a car. Indirect costs cannot easily be traced to a product. Because of this, we allocate indirect costs to products. Depreciation expense on a production facility isn't easily traceable to each finished good. So it is allocated to all of them. So direct materials and direct labor are direct costs, and manufacturing overhead is an indirect cost, which needs to be allocated to the products. You'll learn how to do that in future video podcasts. Finally, let's conclude this with a couple additional terms that you want to be familiar with. Prime costs include direct material and direct labor. Conversion costs include direct labor and manufacturing overhead. These are the costs incurred to convert materials into finished products. Make sure you don't make the mistake of adding prime costs plus conversion costs to get product costs. They can't be added together because direct labor would be added twice.