B3 - Operations Management: Cost Accounting and Performance Management Flashcards
Cost Objects
Resources or activities that serve as the basis for management decisions
They may be products, product lines, departments, geographic territories, or any other classification of aid in decision making.
Product Costs
All costs related to the manufacture of a product.
These consist of direct materials, direct labor, and manufacturing overhead applied.
Period Costs
The costs of selling the product and administering and managing the operations of a firm.
They are expensed in the period in which they are incurred and are not inventoriable.
These costs include selling, general, and administrative expenses as well as interest (financing) expenses.
Manufacturing Costs
(Treated as Product Costs)
Include all costs associated with the manufacture of a product.
They are specifically capitalized to the cost of the manufactured product.
They consist of both direct and indirect costs.
Nonmanufacturing Costs
(Treated as Period Costs)
Costs that do not relate to the manufacture of a product.
These costs are expensed in the period incurred.
(e.g., selling, general, and administrative expenses.)
Direct Costs
Can be easily traced to a cost pool or object, as the cost directly relates to them.
Common direct costs include direct materials and direct labor.
Direct Labor
The cost of labor that is directly related to the production of a product or the performance of a service plus a reasonable amount of “downtime” for the labor.
(e.g., breaks, setup, training, etc.)
Direct Materials
Costs of materials purchased to be used in production (including freight-in net of any applicable purchase discounts) plus a reasonable amount of normal scrap created by the process.
Indirect Costs
The costs that are not easily traceable to a cost pool or cost object.
This cost is known as overhead.
The specific benefit each cost gives to the cost pool or object cannot be determined without making some sort of reasonable estimate or using an allocation methodology.
Indirect Materials
The costs of materials that were not used specifically or could not be traced to the completed product with ease.
(e.g., cleaning supplies and small replacement parts used for a custom couch manufacturing company.)
Indirect Labor
The cost of labor that is not easily traceable to a particular product, service, etc.
This type of labor supports the manufacturing process but does not work directly on the specific job.
Prime Cost Formula
Prime Cost = Direct Labor + Direct Material
Conversion Cost Formula
Conversion Cost = Direct Labor + Manufacturing Overhead
Cost Drivers
A.k.a. Allocation Bases
The unit of an activity that causes the change in activity’s cost.
Cost driver is any factor which causes a change in the cost of an activity.
(e.g., typical cost drivers include sales volume and production volume.)
Variable Costs
Changes proportionally with the cost driver.
VC changes in total but remains constant per unit.
As production volume increases (or decreases), the total VC will increase (or decrease), but the VC per unit will always remain the same.
The short and long-run effects of VC are the same within relevant ranges.
Fixed Costs
In the short term within a relevant range, a FC does not change when the cost driver changes.
FC remain constant in total, but they vary per unit.
As production volume increases (or decreases), FC will remain the same, but the FC per unit will decrease (or increase), respectively.
Mixed Costs (Semi-Variable)
Costs containing both fixed and variable components.
Costs that remain constant over the relevant range and include components that fluctuate in direct relation to production.
Relevant Range
The range for which the assumptions of the cost driver (i.e., linear relationship with the costs incurred) are valid.
When the cost driver is no longer within the relevant range, the variable and fixed cost assumptions for that cost driver cannot be used to allocate costs to cost objects.
Activity-Based
Refines the traditional costing methods and assumes that the resource-consuming activities with specific purposes cause costs. ABC assumes that the best way to assign indirect costs to products (cost objects) is based on the product’s demand for resource-consuming activities (i.e., costs are assigned based on the consumption of resources).
Such as tasks, units of work, etc.
Volume-Based
Traditional costing systems assign overhead as a single cost pool with a single plant-wide overhead application rate using a single allocation base.
Such as direct labor hours or machine hours.
Value-Added Activities
A series of activities in which customer usefulness is added to the product. Support activities directly support value-added activities.
Non-Value-Added Activities
Do not increase product value or service and are targeted for elimination. Often, these types of activities (e.g., warehousing) should be eliminated.
Engineered Cost
An engineered cost bears an observable and known relationship to a quantifiable activity base
