Chapter 2- Product costing concepts and systems Flashcards
What is a cost?
A cost is the sacrifice made, measured by the value of the resources given up, to achieve a particular purpose
A cost is not the same as an expense!!
Total cost =
Direct costs + indirect costs
Direct costs
Costs that can be traced easily and conveniently to a product or department
Example: Cost of paint in the paint department of an automobile assembly plant
Indirect costs
Costs that need to be allocated before they can be assigned to a product or department
Example: Cost of national advertising for an airline is indirect to a given flight or route
A cost is not..
A revenue is not..
- Not an expense
- Not a receipt
A loan is..
a receipt, but not a revenue
A stocks raising is..
a revenue, but not a receipts (richer, but no money)
A stocks drop is..
a cost, but not an expense
Opportunity costs
The potential benefit that is given up when one alternative is selected over another
Cash/ out-of-pocket cost
The incremental cost paid by cash or credit to achieve a particular purpose
- this is an expense
Accrual cost
Total cost of resources used during an extended time period (for example a year) divided by a measure of the resources used to pick up orders
- typical the cost in your profit and loss statement
- includes amortization, depreciation ++
(in a task example it was the total variable manufacturing costs + the fixed manufacturing overhead)
Sunk costs
Past payments for resources that cannot be changed by any current or future decisions
- should not be considered in decisions
Example:
You bought a car for € 12,000 two years ago. Whatever you do with the car in the future, you cannot nullify the original transaction. If it has a trade-in value, that value would become an opportunity cost in your future decisions.
Variable costs
Vary in direct proportion to the production values
Committed costs
Committed costs are incurred because of policies or contractual obligations
Fixed costs
Costs that do not change within a defined range of underlying productive activity
Cost behavior
How a cost will react to changes in the level of business activity.
Total variable costs: change when activity level changes
Total fixed costs: remains unchanged when activity level changes
Product costs
- related to the purchase or manufacture of goods for resale
- assigned to inventory and cost of goods sold
Period costs
- related to selling and administrative operations
- recognized as expenses in the same time period
Gross margin ratio
Gross margin / sales turnover
(Sales turnover- cost of sales) sales turnover
Operating income
Gross margin - period expenses
Return on sales ratio
Operating income / sales
Service firms
- provide a service that is consumed when produced
- have no inventories
Retailers
- buy finished goods
- sell finished goods
Manufacturers
- buy raw materials
- produce and sell finished goods
The 3 major categories of manufacturing costs
- Direct materials
- Direct labor
- Manufacturing overhead
Direct materials
raw materials, components, and other parts that can be traced to a specific products
Direct labor
Payments and benefits for those employees who convert direct materials into finished products
Manufacturing overhead
- indirect material
- indirect labor
- other overhead
Prime costs
direct materials and direct labor
Conversion costs
Direct labor and manufacturing overhead
Stages of production and the flow of costs
Raw materials:
Beginning inventory
+ Purchases
= Raw materials available for production
- Raw materials transferred to production
= ending inventory
Work in progress:
Beginning inventory
+ Raw materials transferred in
+ direct labor
+ manufacturing overhead
= total manufacturing costs incurred
- cost of goods completed and transferred to finished goods
= ending WIP inventory
Finished goods:
Beginning inventory
+ cost of goods completed and transferred from WIP
= goods available for sale
- cost of goods sold
= ending inventory
Profit margin
sales price - all costs
Gross margin
Sales price- cost of goods sold (manufacturing costs)
