Introduction to Cost Terms

Question 1

Cost

Answer 1

sacrificed or forgone resource to achieve a specific object

Question 2

Budgeted Cost

Answer 2

a predicted cost

Question 3

Actual Cost

Answer 3

a cost that has occurred

Question 4

Cost object

Answer 4

anything for which a cost measurement is desired

Question 5

Cost Object BMW Example

Answer 5

Product: BMW Car

Service: Telephone hotline providing info and assistance to BMW dealers

Project: R&D project on GPS systems for cars

Customer: South Motors, a dealer

Activity: Setting up machines for production or maintaining production equipment

Department: Assembly, Quality Control, Customer service

Question 6

Cost accumulation

Answer 6

collection of data in an organized way by means of an accounting system

Examples: Raw materials + Production + Quality check + Packaging = accumulated cost

Question 7

Cost assignment

Answer 7

General term that encompasses the gathering of accumulated costs to cost an object in two ways

• Tracing accumulated costs with direct relationship to the cost object
• Allocating costs with indirect relationship

Question 8

Direct Costs

Answer 8

Can be conveniently and economically traced to a cost object. These expenses go into directly producing goods/providing services

Ex: Direct Labor, Direct materials, manufacturing supplies

Question 9

Indirect Costs

Answer 9

Cannot be traced easily, instead requires judgement . General business expenses that keep you operating

Ex: Rent, Utilities, General office expenses

Question 10

Factors that affect Direct/Indirect Costs

Answer 10

• Materiality of the cost
• Available info-gathering technology
• Design of operations

Electricity is direct for whole factory while it’s also indirect for each department

Question 11

Cost driver

Answer 11

variable, such as level of activity or volume, that casually affects cost at a given time span

of miles, # of units, square feet that increases costs

Question 12

Variable costs

Answer 12

change in total proportion to changes in the related level of activity or volume of output produced
More output = more costs

Question 13

Fixed costs

Answer 13

remain unchanged in total, for a given time period, despite changes in the related level of activity of output produced
More output = lower cost per unit

Question 14

Variable/ Direct (Making X6s)

Answer 14

Tires used on automobiles

Question 15

Variable/Indirect (Making X6s)

Answer 15

Power costs at plants. Power usage is metered only to the plant, where multiple products are assembled

Question 16

Fixed/Direct (Making X6s)

Answer 16

Salary of supervisor working on X6 assembly

Question 17

Fixed/Indirect (Making X6s)

Answer 17

Annual lease costs at plant. Lease if for whole plant, where multiple products are assembled

Question 18

Merchandising companies

Answer 18

purchase and sell tangible products without changing basic form
- merchandise inventory

Question 19

Manufacturing companies

Answer 19

purchase materials and components and convert them to finished products

• Raw materials
• Work in Process
• Finished goods

Question 20

Service companies

Answer 20

provide services (intangible) like legal advice or audits

Question 21

Raw materials

Answer 21

resources in-stock and available for use

Question 22

Work-in-process (WIP)

Answer 22

Products started but not let completed

Question 23

Finished goods

Answer 23

products ready for sale

Question 24

Direct Materials

Answer 24

acquisition costs of all materials that will become part of the cost object

Question 25

Direct Labor

Answer 25

Compensation of all manufacturing labor that can be traced to cost objects

Question 26

Overhead Costs

Answer 26

factory costs that are not traceable to the product in an economically feasible way
Includes lubricants, indirect manufacturing labor, utilities, and supplies

Question 27

Inventoriable Costs

Answer 27

Costs of a product that are considered assets in a company’s balance sheet when costs are incurred and that are expensed as cost of goods sold only when the product is sold

All manufacturing costs are inventoriable costs for manufacturing companies

Question 28

Period Costs

Answer 28

All costs in the income statement other than COGS. Treated as expenses of the accounting period that they occurred

Question 29

Used Inventory Formula

Answer 29

Beginning Inventory + New Inventory - Ending Inventory

Question 30

Prime Costs Formula

Answer 30

Direct Materials + Direct Labor

Question 31

Conversion Costs

Answer 31

Direct Labor + Overhead

Question 32

Overtime Labor

Answer 32

Considered part of indirect overhead costs

Question 33

Costs of Goods Sold Formula (Other)

Answer 33

Beg Inv + Purchases + Freight-In Costs - End Inv

Question 34

Direct Materials Inventory Formula

Answer 34

DM Beg + DM Purch - DM Used

Question 35

Fixed Over Head Costs Formula

Answer 35

Total MO - Var MO

Question 36

WIP Formula

Answer 36

Beg WIP + Total MO Incurred - Cost of Goods Manuf