Ch. 2 Flashcards
What is cost?
A resource sacrificed or forgone to achieve a specific objective
Actual cost
Cost incurred (historical or past cost) distinguished from budgeted cost
Budgeted cost
Predicted or forecasted, a future cost
Cost object
Anything for which a cost measurement is desired
Cost accumulation
Collection of cost data in some organized way by means of an accounting system
Direct costs of a cost object
Related to particular cost object and can be traced to it in an economically feasible (cost effective way)
Ex) cost of steel or tires
Cost tracing
Used to describe the assignment of direct costs to a particular cost object
Indirect costs of a cost object
Related to the particular cost object but cannot be traced to it in an economically feasible (cost effective way)
Ex) salaries of plant administrators
Cost allocation
Used to describe the assignment of indirect costs to a particular cost object
Cost assignment is a general term that encompasses both
- Tracing direct costs to a cost object
2. Allocating indirect costs to a cost object
Managers want to assign costs accurately to cost objects because
Inaccurate product costs will mislead managers about the profitability
What are the factors that affect whether a cost is classified as direct or indirect?
- Materiality of the cost in question
- Available info gathering technology
- Design of operations
The smaller the amount of a cost means the cost is more
Immaterial and less likely it is economically feasible to trace it to a particular product
A specific cost can both be
A direct cost of one cost object and a indirect cost of another cost object
Example of a cost that can be both direct and indirect
Salary of an assembly department supervisor at BMW is a direct cost of the cost object is the assembly department.
However, the supervisor salary is an indirect cost of the cost object is a product such as the BMW sport vehicle
What are the two basic cost behavior patterns?
Variable cost –> changes in total in proportion to changes in the related level of total activity or volume of output produced
Fixed cost –> remains unchanged in total for a given time period despite wide changes in the related level of total activity or volume of output produced
Example of variable cost
Steering wheel cost
Because total cost changes in proportion to changes in # of vehicles produced
Fixed costs become smaller and smaller on a per unit basis as
of vehicles assembled increases
Costs are fixed when total costs remain
Unchanged despite significant changes in the level of total activity or volume
Unlike variable costs, fixed costs of resources cannot be what?
Quickly & easily changed to match the resources needed or used
Unlike variable costs that go away automatically if the resources are not used, reducing fixed costs requires what?
Active intervention on the part of managers
Cost driver
Is a variable such as the level of activity or volume that casually effects costs over a given time span
Activity Is an
Event task or unit of work with a specified purpose
ex) design products, setting up machines or testing products
The level of activity or volume is a cost driver if there is a
Cause and effect relationship between a change in the level of activity or volume and a change in the level of total costs
The cost driver of a variable cost is
The level of activity or volume whose change causes proportionate changes in the variable cost
Costs that are fixed in the short run have no what?
Cost driver in the short run but may have a cost driver in the long run
Costing systems that identify the cost of each activity such as testing, design or set up are called
Activity based costing systems
Relevant range
Is the band or range of normal activity level or volume in which there is a specific relationship between the level of activity or volume and cost in question
Can fixed costs have a chance of changing from one year to the next?
Yes
Outside relevant range, variable costs such as direct material costs may no longer change
Proportionately with changes in production volumes
Unit cost also called average cost is calculated by
Total cost/related number of units produced
Unit cost concept helps managers determine
Total costs in the income statement & balance sheets
Managers should think in terms of what type of cost rather than unit costs for many decisions
Total costs
Manufacturing sector companies
Purchase materials and components and convert them into various finished goods
Ex) automotive companies such as jaguar, CEO phone producers, food processing such as Heinz and comput r companies
Merchandising sector companies purchase
Purchase and then sell tangible products without changing their basic form.
Ex) companies engaged in retailing such as bookstores, department stores such as target, distribution such as supplier of hospital goods
Service sector companies
Provide services (intangible products) such as
Legal advice or audits to customers
Ex) law firms, banks, insurance companies, tv stations
Manufacturing companies have 3 types of inventory
1) DM
2) WIP
3) FGI
DM
in stock that will be used in manufacturing process
Ex) computer chips needed to manufacture cell phones
WIP
Goods partially worked on but not yet completed
Ex) cell phones @ various stages of completion
FGI
Goods completed but not yet sold
Merchandise sector companies only have 1 type of inventory which is
Merchandise inventory
Service sector companies do not have any
Inventories of tangible products
DM cost
Are acquisition costs of all materials that eventually become part of cost object (WIP then FGI) and can be traced to cost object in a feasible way
Direct manufacturing labor costs
Include compensation of all manufacturing labor that can be traced to cost object (WIP& FGI) in economic feasibly way
Ex) wages and fringe benefits paid to machine operators & assembly Line workers who convert DM to finished goods
Indirect manufacturing costs
All manufacturing costs that are related to cost object (WIP then FGI) but cannot be traced to cost object in an economically feasible way .
Ex) supplies, indirect materials such as lubricants, indirect manufacturing labor such as plant rent, plant insurance, property taxes, plant depreciation
Inventoriable costs
Costs of a product that are considered assets in a company’s balance sheet when the costs are incurred and that are expenses as COGS only when product is sold
For manufacturing sector companies, all manufacturing costs are
Inventoriable costs.
Inventoriable costs first accumulate as
WIP, and then FGI assets
When something is sold, costs move from assets to
COGS expense
Expenses are matched against
Revenues which are inflows of assets received for products or services customers purchase
COGS includes all
Manufacturing costs incurred to produce them
For merchandising sector companies, inventoriable costs are costs of purchasing goods that are resold in the same form. These costs are made up of the costs of
Goods themselves plus incoming freight, insurance, and handling costs for those goods
Period costs
Are costs in the income statement other than COGS
Period costs such as marketing, distribution and customer service costs are treated as
Expenses of the accounting period in which they are incurred because managers expect these costs to increase revenues in only that period and not in future periods
Expensing period costs as they incurred best matches
Expenses to revenues
For manufacturing sector companies all non manufacturing costs in the income statement are
Period costs
For merchandising sector companies all costs in the income statement not related to the cost of goods purchased for resale are
Period costs
Costs of goods manufactured
Refers to the cost of goods brought to completion
All of the manufacturing costs of finished goods such as ( DM, DML, & MOH) are
Inventoriable
Prime costs
All direct manufacturing costs
The greater the proportion of prime costs (or direct costs) to total costs , the more confident managers can be about
The accuracy of costs of products
Conversion costs
Are all manufacturing costs other than direct materials costs
Direct manufacturing labor costs is considered both
Prime and conversion costs
Computer integrated manufacturing (CIM)
- has few workers
- workers role is to monitor process and maintain equipment that that produced multiple products
- do not have direct manufacturing labor because it is relatively small and it is difficult to trace costs to products
In CIM plant the only prime cost is
And the conversion costs include
Cost of DM
Conversion cost: largely moh
Measuring costs requires
Judgement
What are th 2 classes of indirect labor?
- Overtime premium
2. Idle time
Overtime premium
Is the wage rate paid to workers (for both direct & indirect labor) in excess of their straight time wage rates
Overtime premium is usually considered to be part of
Indirect costs or overhead
Idle time
Refers to wages paid for unproductive time caused by lack of orders, machine or computer breakdowns, work delays, poor scheduling etc
Pay roll fringe costs
Included employee benefits such as social security, life insurance, health insurance & pensions
It is important for managers and management accountants to pinpoint clearly what direct labor
Includes and excludes
Product cost
Is the sum of the costs assigned to a product for a specific purpose
Pricing and product mix decisions
Managers are interested in the overall total profitability of different products &I consequently assign costs incurred in all business functions of the value chain to different products
Reimbursement under government contracts
Government contracts often reimburse contractors on the basis of cost of product plus the prespecified margin of profit
Cost plus agreements are typically used
For services & development contracts when it is not easy to predict the amount of money required to design, fabricate & test items
Preparing financial statements for external reporting under GAAP
Under GAAP only manufacturing costs can be assigned to inventories in the financial statements
The following 3 features of cost account & cost management can be used for a wide range of applications
- Calculating cost of products, services and other cost objects
- Obtaining information for planning & controlling & performance evaluation
- Analyzing the relevant info for making decisions
Budgeting is the most commonly used tool for
Planning and control
Budgets forced managers to
Look ahead, to translate a company’s strategy into plans, to coordinate & communicate with organization and to provide a benchmark for evaluating company’s performance
At the end of reporting period managers compare the company’s actual results to
Planned performance
The managers tasks is to understand the differences between actual and planned performance so
They can use information provide by these variances as feedback to promote learning and future improvement
When designing strategies and implementing them managers must what?
Understand which revenues and costs to consider and which to ignore
When making strategi decisions about which products and how much to produce, managers must know
How revenues and costs vary with changes in outputs to levels
