Chapter 1 Flashcards
Cost Object
Anything for which cost data are desired including products, customers, jobs, organizational subunits, etc.
Direct Cost
Costs that can be easily and conveniently traced to a specified cost object. Ex: Inventory
Indirect Cost
Costs that cannot be easily and conveniently traced to a specified cost object. Ex: Managerial salary
Common Costs
Indirect costs incurred to support a number of cost objects. These costs cannot be traced to an individual cost object.
Product Cost
Includes all costs required to purchase or manufacture inventories.
- Retailer: purchasing inventory
- Manufacturer: manufacturing inventory
Manufacturing Costs
Direct Material + Direct Labor + Manufacturing OH
Raw Material
The term raw material refers to any materials that go into the final product and includes both direct and indirect materials
Direct Labor
Labor costs that can be easily traced to individual units of product.
Manufacturing OH
Includes all manufacturing costs except direct material and direct labor.
- Indirect Material Costs
- Indirect Labor
- Maintenance, rent, insurance on MANUFACTURING FACILITIES
Treatment of Product Costs
Assign to inventory as incurred; expense through COGS when inventory is sold (matching principle)
Period Costs “Selling & Administrative Costs”
Includes:
- Selling costs
- Administrative costs
- Expenses on SELLING & ADMIN FACILITIES
Treatment of Period Costs
Expensed in the period incurred
Cost Structure
Refers to the relative proportion of each type of cost in an organization
- variable costs vs. fixed costs
Cost Behavior
Refers to how a cost will react to changes in the level of activity.
- 3 classifications
Activity base (also called a cost driver)
A measure of what causes variable costs to change. Ex: units produced, units sold, labor hours, number of customers, etc.
Relevant Range
The operating range over which a firm finds it practical to operate in the short-run.
- the relevant range of activity pertains to fixed costs as well as variable costs
3 Classifications of Costs
- Variable cost (VC) - cost that varies, directly and proportionally, to changes in level of activity
- Fixed cost (FC) - cost that remains constant, regardless of changes in the level of activity
- Mixed cost - “Semi-variable costs”
Types of Fixed costs
- Committed fixed costs - cannot be easily adjusted in the short term
- executive salaries, manager salaries, rent, insurance, taxes - Discretionary fixed costs - can be easily reduced in the short term
- training programs, R&D, advertising
Total cost equation (mixed cost)
Total cost = [VC/unit of activity * activity] + total FC
4 Methods for Analyzing Cost Behavior
- Account analysis
- Scattergraph method
- High-low method
- The Least-Squares/Regression method (OMIT)
Account Analysis
Each account under consideration is classified as variable or fixed based on the analyst’s prior knowledge about how costs behave- limited in value
The Scattergraph Method
Plot historical observations for cost and activity; then fit a line to the points so as to minimize deviations
The high-low method “Two-Point Method”
- Calculate the VC per unit of activity
= (High cost - low cost)/(High activity - low activity) - Use the total cost equation to determine total FC
= Total Cost = (VC/unit * # units) + Total FC
use high cost and high activity OR use low cost and low activity
Traditional Income Statement
Sales
Less: COGS (Product Costs)
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