Introduction To Cost Terms And Concepts Chap 2 Flashcards
Cost
A monetary measure of the resources, sacrifice, or forgone to achieve a specific objective, such as acquiring a good or service
Cost object
If the users of accounting information want to know the cost of something it’s called cost object
Different types of organisations classify different costs based on their activities
- Manufacturing organisation
- Merchandising organisation
- Service organisation
Manufacturing organisation
- raw material
- work in progress inventory
- finished goods
Merchandising organisation
Only finished goods in inventory
Service organisation
- services cannot be stored for future use
- still firms have work in progress inventory, when a service is not finished at the end of the financial period
Direct cost
Direct material costs and direct labour costs
Direct material cost
Représent those material costs that can be specifically and exclusively measured and identified with a particular cost object
-> wood used in manufacturing of different types of furniture can be directly identified with each specific type of furniture such as chairs, tables and bookcases
Direct labour cost
Labour cost that can be specifically and exclusively identified with a particular cost object
-> a personal trainer in a gym can be specifically identified with an individual client or with a specific instance of service
Indirect cost
Cannot identified specifically and exclusively with a given cost object
-> overheads manufacturing, administration, or marketing
-> cost of material used to repair machinery cannot be indent with a specific product and can therefore be classified as indirect material costs
Manufacturing costs
- Direct materials
- Direct labour
- Manufacturing overhead
Non manufacturing costs
- Administrative overhead
- Marketing overhead
Prime cost
Direct materials + direct labour
Conversion cost
Direct labour + manufacturing overhead
Cost allocation
The process of assigning costs when a direct measure does not exist for the quantity of resources consumed by a particular cost object
Product cost
Costs that are identified with goods purchased or produced for resale
Period costs
Costs that are not specifically related to manufacturing or purchasing a product or providing a service that generates revenues
Variable costs
Vary in direct proportion of the volume of activity
-> doubling the level of activity will double the total variable cost
-> total variable costs are linear and unit variable costs is constant
Fixed costs
Remain constant over wide ranges of activitiy for a specified time period. They are not affected by changes in activity
Semi-fixed or step-fixed costs
Wi thin a given time periods costs are fixed within specified activity level, but they are eventually subject to step increases or decreases by a constant amount at various critical activity levals
Semi-variable or mixed costs
Include both a fixed and a variable component
Sunk cost
Cost that have been created by a decision made in the past and that cannot be changed by any decision that will be made now or in the future
Opportunity cost
The opportunity (or benefit) that is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up
Incremental or differential cost
The difference between the costs of each alternative action that is being considered