Chapter 2 Flashcards
Resource sacrifice or forgone to achieve a specific object.
Cost
Usually measured as the monetary amount that must be paid to acquire goods/services.
Cost
A cost the has occurred
Actual cost
The cost incurred ( a historical /past cost)
Actual Cost
A predicted or forecasted cost (a future cost)
Budgeted cost
Putting a price on a particular thing
Cost Object
Anything for which a cost measurement is desired.
Cost Object
2 stages on how cost system determine the cost of various cost object.
- Cost Accumulation
- Cost Assignment
The collection of a cost data in an organized way by means of an accounting system.
Cost Accumulation
A general term that encompasses the gathering of accumulated costs to a cost object.
Cost Assignment
2 ways of gathering the accumulated costs to a costs object
- Tracing cost with direct relationship to the cost object
- Allocating accumulated cost with an indirect relationship to a cost object.
Can be conveniently and economically traced (tracked) to a cost object.
Direct Costs of a Cost Object
Cannot be conveniently or economically traced (tracked) to a cost object.
Instead of being traced, these cost are allocated to a cost object in a rational and systematic manner
Indirect Costs of a Cost Object
2 Classification of Cost
- Direct cost of a cost object
- Indirect cost of a cost object
2 Cost Assignment
- Cost Tracing
- Cost Allocation
Used to describe the assignment of direct costs to a particular cost object
Cost Tracing
Used to describe the assignment of indirect costs to a particular cost object.
Cost Allocation
Direct Costs
Direct Materials
Direct Labor
Examples of Indirect costs
Electricity, Rent, Property Taxes, Plant Administration Expenses
Factors Affecting Direct/ Indirect Cost Classifications
- The materiality of the cost in question
- Available information-gathering technology
- Design of Operations
The smaller the amount of a cost - that is , the more immaterial the cost is- the less likely it is economically feasible to trace it to a particular cost object.
The materiality of the cost in question
Improvements in information- gathering technology make it possible to consider more and more costs as direct costs.
Available information-gathering technology
Classifying a cost as direct is easier if a company’s facility is used exclusively for a specific cost object, such as a specific product or a particular customer.
Design of Operations
True/False?
A specific cost may be both a direct cost of one cost object and an indirect cost of another cost object.
True
True/False?
The direct/ indirect classification depends on the choice of the cost object.
True
2 Cost Behavior Patterns
- Variable Costs
- Fixed Costs
It changes in total in proportion to changes in the related level of activity or volume of output produced.
Variable Costs
Remains unchanged in total for a given time period, despite changes in the related level of activity or volume of output produced.
Fixed cost
Costs are fixed or variable for a specific activity and/or for a given time period. T/F?
T
(Total Dollars)
Change in proportion with output (more output= more cost)
Variable Costs
(Cost Per Unit)
Unchanged in relation to output
Variable Costs
(Total Dollars)
Unchanged in the relation to output (within the relevant range)
Fixed Costs
(Cost per Unit)
Change inversely with output (more output= lower cost per unit)
Fixed Costs
Have both fixed and variable elements
Mixed/ Semivariable Costs
A variable, such as the level of activity or volume, that casually affects costs over a given time span.
Cost Driver
Is an event, task or unit of work with a specified purpose
Activity
The level of activity/ volume whose change causes proportionate changes in the variable cost.
Cost Driver of Variable Costs
Costing systems that identify the cost of each activity such as testing, design/setup.
Activity -based costing systems
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 the cost in question.
Relevant Range
Fixed costs are considered fixed only within the relevant range. T/F?
T
Cost may be classified as:
- Direct/ Indirect
- Variable/ Fixed
Multiple classifications give rise to important cost combinations:
- Direct and Variable
- Direct and Fixed
- Indirect and Variable
- Indirect and Fixed
Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for many decisions. T/ F?
T
Also called an average cost
Calculated by dividing the total cost by the related number of units produced.
Unit Cost
Formula of Unit Cost
Total manufacturing cost/ No. of units manufactured= unit cost
Different Types of Firms
- Manufacturing- sector companies
- Merchandising- sector companies
- Service-sector companies
Purchase materials and components and convert them into various finished goodsm
Manufacturing- sector companies
Purchase and then sell tangible products without changing their basic form.
Merchandising- sector companies
Provide services ( intangible products) like legal advice/ audits
Service-sector companies
Types of Inventory
- Direct Materials Inventory
- Work- In- Process (or progress) Inventory
- Finished Goods Inventory
Resources in-stock and available for use.
Direct Materials (Inventory)
Goods partially worked on but not yet completed, often abbreviated as WIP
Work-In- Process Inventory
Goods completed but not yet sold.
Finished Goods Inventory
Merchandising-sector companies hold only one type of inventory: merchandise inventory. True/ False?
True
Commonly Used Classifications of Manufacturing Costs
- Direct Materials
- Direct Labor
- Indirect Manufacturing
Also known as inventoriable costs.
- Direct Materials
- Direct Labor
- Indirect Manufacturing
Acquisition costs of all material that will become part of the cost object.
Direct Materials
Compensation of all manufacturing labor that can be traced to the cost object.
Direct Labor
All manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way.
Indirect Manufacturing
Are all costs of a product that are considered assets in a company’s balance sheet when the cost are incurred and that are expensed as cost of goods sold only when the product is sold.
Inventoriable costs
True/False?
All manufacturing costs are inventoriable costs
True
Are all cost in the income statement other than cost of goods sold.
They are treated as expenses of the accounting period in which they are incurred.
Period Costs
The cost of goods manufactured and the costs of goods sold section of the income statement are accounting representations of the actual flow of costs through a production system. T/F?
True
Other Cost Considerations
- Prime Cost
- Conversion Cost
- Overtime Premium
- Idle Time
A term referring to all direct manufacturing costs ( materials and labor)
Prime Cost
A term referring to direct labor and indirect manufacturing costs.
Conversion Cost
Considered as part of indirect overhead costs.
The wage rate paid to workers in excess of their straight- time wage rates.
Overtime Premium
It refers to wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, poor scheduling.
Idle Time
It includes employer payments for employee benefits such as SSS, insurance and pension.
Payroll Fringe Costs
The sum of the costs assigned to a product for a specific purpose.
Product Cost
Making decisions about pricing, promoting products, maximizing profits.
Pricing and Product- Mix Decisions
Very specific definitions of allowable cost for “cost plus profit” contracts.
Reimbursement under government contracts
Used for services and development contracts
Cost-plus agreement
GAAP- driven product costs only
Preparing FS for external reporting under GAAP
A Framework for Cost Accounting and Cost Management (3 features of cost& management accounting - help managers make decisions)
- Calculating the cost of products, services and other cost object
- Obtaining information for planning and control and performance evaluation
- Analyzing the relevant information for making decisions.
