2. Costing Flashcards
What is a cost object?
Anything for which a separate measurement of costs is desired.
What are direct costs?
Direct costs of a cost object are costs that are related to the particular cost object and can be traced to the particular cost object in an economically feasible way
What are indirect costs?
Indirect costs of a cost object are costs that are related to the particular cost object but cannot be traced to it in an economically feasible way (bulk of the activity)
What are cost pools?
Cost pool is a grouping of individual cost items (=cost center)
What is cost allocation base / cost driver?
A factor that is the “common denominator” for systematically linking an indirect cost or group of indirect costs to a cost object
What are the different cost pool types?
Product cost pools: collects costs that are associated with any set of products
- Direct product cost pool: a product cost pool that is associated with a single product (i.e. direct costs are traceable to a single product)
- Indirect product pool costs: collects indirect costs, i.e. those that are not directly traceable to individual products but allocated to them according to an allocation base determined as part of the accounting system
Period costs: Expenses that are neither traceable nor allocated to products, but are associated with the time period
What is the matching principle?
Product costs are expenses in the period in which the revenue is realized, period-related expenses. Period costs are charged against the income of the period.
What is the difference in treatment between Product costs and Period costs?
Product costs: Included in inventory value in BS and COGS in IS
Period costs: Directly assigned to the income statement
What are examples of cost objects?
- a product
- a customer
- a product-category
- a period of time
- a project (R&D or reorganization)
- an activity (quality control)
- a department
What is the assignment of direct and indirect costs to cost objects called?
Direct: Tracing
Indirect: Allocation
What is the central problem of cost allocation?
How to include (allocate) indirect costs that often cannot be allocated to products/services (i.e. cost objects) without ambiguity. We try to look for a causal relationship between the indirect cost and the cost object (where/if there might be one), but otherwise the choice of how to allocate can be arbitrary (degree of ambiguity in indirect cost allocation).
What is the objective of cost accounting?
To assign costs to their cost objects
What does it mean to classify costs by traceability?
To differentiate between direct and indirect costs
What does traceability classification depend on?
- The choice of cost object
- The materiality of the cost in question
- Available information-gathering technology
- Design of operations
- Contractual agreements
Cause-and-effect relationships may arise in several ways to determine cost drivers, like:
- Physical relationships (but correlation is not equal to causation)
- Contractual agreements
- Logic and knowledge of operations
What are some examples of costs and corresponding drivers?
- Direct materials: # of units
- Direct labor: # of labor hours
- Quality control: # of units inspected
- Distribution: # of shipments
- Advertising: # of advertisements
When may a job costing system be applied?
Distinct unit of a product or service
The product is differentiated, customised or unique, and individual jobs use different quantities of resources
When may a process costing system be applied?
Masses of identical or similar units of a product or service
The product is homogeneous, and each unit presumed to receive the identical quantities of resources
What is the 7 steps of the general approach to job costing?
- Identify the job (=the cost object)
- Identify the direct costs of the job
- Identify the total indirect costs to be allocated
- Select the cost allocation base (= cost driver) to use in allocating indirect costs to the job
- Develop the rate per unit of the cost allocation base used to allocate indirect costs
- Calculate the indirect costs allocated to the job
- Compute the total costs of the job
What may be a problem with job costing in the manufacturing industry?
Particularly in this sector we might have more than one cost driver
What is actual costing?
Actual costing uses actual costs to determine the cost of individual jobs
- This method traces direct costs to a cost object and allocates indirect costs to a cost object based on the actual indirect cost rate * the actual quantity of the cost allocation base
What is the difficulty with actual costing?
That you have to wait until the end of the reporting period to allocate total indirect costs, but managers often want more timely information before the end of the reporting cycle