Introduction to Cost Terms Flashcards
Cost
sacrificed or forgone resource to achieve a specific object
Budgeted Cost
a predicted cost
Actual Cost
a cost that has occurred
Cost object
anything for which a cost measurement is desired
Cost Object BMW Example
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
Cost accumulation
collection of data in an organized way by means of an accounting system
Examples: Raw materials + Production + Quality check + Packaging = accumulated cost
Cost assignment
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
Direct Costs
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
Indirect Costs
Cannot be traced easily, instead requires judgement . General business expenses that keep you operating
Ex: Rent, Utilities, General office expenses
Factors that affect Direct/Indirect Costs
- 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
Cost driver
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
Variable costs
change in total proportion to changes in the related level of activity or volume of output produced
More output = more costs
Fixed costs
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
Variable/ Direct (Making X6s)
Tires used on automobiles
Variable/Indirect (Making X6s)
Power costs at plants. Power usage is metered only to the plant, where multiple products are assembled
Fixed/Direct (Making X6s)
Salary of supervisor working on X6 assembly
Fixed/Indirect (Making X6s)
Annual lease costs at plant. Lease if for whole plant, where multiple products are assembled
Merchandising companies
purchase and sell tangible products without changing basic form
- merchandise inventory
Manufacturing companies
purchase materials and components and convert them to finished products
- Raw materials
- Work in Process
- Finished goods
Service companies
provide services (intangible) like legal advice or audits
Raw materials
resources in-stock and available for use
Work-in-process (WIP)
Products started but not let completed
Finished goods
products ready for sale
Direct Materials
acquisition costs of all materials that will become part of the cost object
Direct Labor
Compensation of all manufacturing labor that can be traced to cost objects
Overhead Costs
factory costs that are not traceable to the product in an economically feasible way
Includes lubricants, indirect manufacturing labor, utilities, and supplies
Inventoriable Costs
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
Period Costs
All costs in the income statement other than COGS. Treated as expenses of the accounting period that they occurred
Used Inventory Formula
Beginning Inventory + New Inventory - Ending Inventory
Prime Costs Formula
Direct Materials + Direct Labor
Conversion Costs
Direct Labor + Overhead
Overtime Labor
Considered part of indirect overhead costs
Costs of Goods Sold Formula (Other)
Beg Inv + Purchases + Freight-In Costs - End Inv
Direct Materials Inventory Formula
DM Beg + DM Purch - DM Used
Fixed Over Head Costs Formula
Total MO - Var MO
WIP Formula
Beg WIP + Total MO Incurred - Cost of Goods Manuf
