Cost Concepts Flashcards
What is Cost?
Is the sacrifice made by an entity in order to earn revenue
What are Manufacturing Costs?
(Cost based on functional areas)
Cost that is incurred in the entity’s operations on producing products and services
> > Direct Materials
Direct Labor
Manufacturing Overhead
What are Non-Manufacturing Costs?
(Cost based on functional areas)
Costs incurred on making the product known, sellong them, and other administrative expenses
> > Operating expsense such as advertising, marketing, adminstrative and selling expenses
Product Costs
(Cost based on timing of matching with revenues)
Cost assigned to products (Asset) until they are sold (Revenue)
> > Work in Process inventory
Finished Goods invenetory
Cost of Goods sold
Period Costs
(Cost based on timing of matching with revenues)
Costs incurred and recognized based on time periods (Expense)
> > Operating expense like rent, salaries, and other administrative and general expenses
Cost Traceability
> > Direct Costs- Cost that are traceable to a particular product line, segment, department, division, or branch
> > Indirect Costs- Cost that are NOT traceable to a particular product line, segment, department, division, or branch
Cost Controllability
> > Controllable cost- CAN be influenced by the manager on how it will be incurred and can be altered in the SHORT RUN
> > Uncontrollable cost- CANNOT be influenced by the manager on how it will be incurred and can only be altered in the LONG RUN
Opportunity Costs (Decision Making)
Benefits forgone in choosing one alternative over the other
Differential Costs (Decision Making)
The difference of costs under alternative actions or decisions
Relevant Costing (Decision Making)
Cost incurred in one alternative that will not be encountered in the other alternative
Marginal Costs (Decision Making)
Additional cost incurred when one additional unit is produced. It determines the quantity most efficient to produce
Marginal Cost= Change in Cost / Change in Quantity
Average Cost per unit (Decision Making)
Total Cost to produce divided by the total number of units manufactured
Sunk Costs (Decision Making)
Cost that has already been incurred that will not affect future costs since they are already paid for or incurred and cannot be changed by any future costs
Relevant Range
The level of activity where all where all of the cost relationships are valid
Cost Behaviors
> > Variable Costs- costs that change as quantity of goods produced changes
> > Fixed Costs- costs that do not change at whatever level of production within the relevant range
Cost Equation
y= a + bx
Where:
y = total costs (dependent variable)
a= fixed costs
b= variable costs
x= activity (independent variable)
Mixed Costs
Referes to costs that has both variable and fixed components
Step Cost
Cost that are constant on a certain level of activity, but increases on another certain level of activity
Methods to employed in separating mixed Costs
> > High-Low Method
Least Squares Regression Method
Scatter Diagram
High-Low Method
- Determine the highest and lowest activity and costs associated
- Obtain the Variable Costs per unit by dividing the change in cost over the change in activity
- Obtain the total fixed cost by removing the variable cost component in the total costs
Least Squares Regression Method
- Prepare a table calculating x (activity), y (total costs), xy, and x² and compute for the sum of each
- Substiture the computed amount in the equations to get b (variable cost per unit)
y= a + bx
»_space; ∑y= na + b∑X
»_space; ∑xy= ∑xa + b∑X²
Compute: linear equation with 2 unknowns - Substitute b to any equation to get a (fixed cost)
Scatter Diagram
A graphical technique of separating fixed and variable components by plotting activity level along x-axis and corresponding total costs (i.e. mixed cost) along the y-axis
