chapter 1 Flashcards
different costs for different purposes
1) for assigning cost objects 2) for manufacturing companies 3) for preparing financial statements 4) for prediciting cost behavior 5) for making decisions
costs are assigned to what
objects
cost object
like products or custmoers. somethhing that is assigned costs
reason to assign cost
to have accurate costs to make better decisions for pricing what product lines to emphasis and to control spending
direct cost
cost that can be easily and conveniently traced to cost object like direct manufacturing or direct labor
indirect cost
cost that cannot be easily traced to cost objective
example of indirect cost
manufacturing overhead, indirect labor (janitor or security guard), indirect materials (glue, bolts), property taxes, rent, insurance
common cost
(AKA indirect cost) costs incurred to support cost objects (ie products) but are not traced to them individually
different types of orgs
manufacturing, merchandising, and service
manufacturing costs
direct manufacturing, direct labor, manufacturing overhead
manufacturing
converting raw materials into finished goods
order of most to least for percent of total product cost
DM, DL, MOH
hardest cost to trace
finsihed goods in MOH, assigning MOH costs to product lines is a form of estimation
accurate costs
important to subsequent decisions
direct mats
raw materials used to manufacture products can be classified as either DM or IDM
what are included. in MOH
indirect mats and indirect labor
manufacturing overhead
all product costs other than DL and DM
allocating to products
companies use an actviity ase to assign OH to products or product lines
nonmanufacturing costs
(AKA period costs) selling expenses and administrative expenses
selling expense and ex
all costs necessary to secure customer orders and get finished goods into hands of customers
ex. ads, shipping
administrative expnense and ex
include all costs associated with general management of org
ex. R&D, general accounting, pr
when preparing balance sheet and income statemenr company must do what
classify costs as product or period
product costs
costs necessary and integral part of prodcuing finished product
how product cost become expenses
first recorded as inventory and expensed when inventory is sold (COGS)
example of product cost
DM, DL, MOH
period costs
nonmanufacturing costs that are matched with specific time period rather than included as part of a product (usually immediately expensed)
example of period costs
selling and administrative
cost behavior
way a cost reacts to chages in level of business actviity
variable cost
cost that varies in total in direct proportion to changes in level of activity
direct proportion
if activity level doubles then total variable cost also doubles
activity base (cost driver)
whatever causes the vc to increase
vc per unit
total vc go up with increases in level of activity but vc per unit osts remain constamt
fixed cost
cost that remains constant in total regardless of changes in level of activity (ie insurnace or rent)
fc per unit
declines with inc in activity level
committed fixed costs
fixed costs that cannot be reduced to 0 without imparing profit of company
discretionary fixed costs
fixed costs that can be cut for short periods with minimal damage to long term goals for company
example of discretionary fixed costs
caritable donations
cost of dec discretionary fixed costs
may impact companys long run position
is a fixed costs either committed or discretionary
no, most fixed costs have characteristics of both (eg salaries of key personnel can be reduced)
linearity assumption and relevant range
many costs fo not have strictly linear relationship with activity base
approximation
linear relationdhip (straight line) can be use to approximate cost that has curvilinear relationship with volume
relevant range
using straight line to approximate curvilinear relationship is most effective within relevant range
very few costs are completely ____
fixed, most FC will go up or down when pushed outside companys relevant range
relevant range
range of activity for which assumptions about VC and FC are valid
mixed costs
costs w/ elements of both fc & vc
differential costs
difference between two cost alternatives
incremental cost
refers to increases/dec in costs between alternatives
relevant
cost and revenues are ones that change between alternatives (costs that do not change can be ignored)
opportunity cost
potential benefit given up when choice of one action precludes selection of another
make or buy
opportunity cost of making a part, is company caanot launcg a new product with freed up manufacturing space
sunk cost
costs that have already been incurred and will not be changed or avoided by any future decision
COGS for merchandising company is what type of cost
variable
controution margin
sales - VC
merchandising company COGS should be entirely
variable
manufacturing company COGS has both
variable and fixed costs
