Cost Measurement Methods And Techniques

Front 1

Note

Back 1

Cost objects (or cost objectives) are defined as resources or activities that serve as the basis for management decisions.

Front 2

What are the objectives of cost measurement?

Back 2

1-Valuation of product or inventory
2-Cost Control
3-Income determination

Front 3

Note

Back 3

DL + DM USED= Prime Cost

Front 4

Note

Back 4

DL + Factory OH = Conversion cost

Front 5

Note

Back 5

Product costs are all costs related to the manufacturing of the product.

Front 6

Note

Back 6

Product costs consist of:
1-DM
2-DL
3-Manufacturing OH

Front 7

Note

Back 7

Period costs are expensed in the period in which they are incurred and are not inventoriable.

Front 8

Note

Back 8

Period costs consist of:
1-Selling & Administrative Expenses
2-Interest Expenses

Front 9

Note

Back 9

Manufacturing costs are all costs associated with the manufacture of a product.

Front 10

Note

Back 10

Manufacturing costs are specifically capitalized to the cost of the manufactured product, according to various available and appropriate methods.

Front 11

Note

Back 11

Manufacturing costs consist of both direct and indirect costs

Front 12

Note

Back 12

Non manufacturing costs are period costs

Front 13

Note

Back 13

A direct cost can be easily traced to a cost pool or object, as the cost directly relates to that item.

Front 14

Note

Back 14

Direct costs include Direct Raw Materials & Direct Labor

Front 15

Note

Back 15

Direct raw materials are the costs of materials purchased to be used in production (including freight-in net of any applicable purchase discounts) plus a reasonable amount for normal scrap created by the process.

Front 16

Note

Back 16

Direct labor is the cost of the labor that is directly related to the production of the product or the performance of a service plus a reasonable amount of expected "down time" for the labor (e.g., breaks, setup, training, etc.).

Front 17

Note

Back 17

Indirect costs are known as overhead.

Front 18

Note

Back 18

If the indirect costs are related to the factory so it’s a product cost, but if related to the office building it’s a period cost

Front 19

Note

Back 19

Indirect materials are the cost of materials that were not used specifically or could not be traced to the completed product with ease.

Front 20

Note

Back 20

Indirect labor is the cost of labor that is not easily traceable to a particular product, service, etc. Most often, this type of labor supports the manufacturing process but does not work directly on the specific job, etc.

Front 21

Note

Back 21

Other indirect costs are indirect costs other than those for materials or labor, like depreciation, rent, maintenance, property taxes insurance, utilities, etc.

Front 22

Note

Back 22

4

Front 23

Note

Back 23

Variable cost per unit remains constant within a relevant range, while the "total" amount is the one that is varies according to production

Front 24

Note

Back 24

The relevant range is the range of production over which cost behavior assumptions are valid

Front 25

Note

Back 25

The short-run and long-run impacts of variable costs are the same within relevant ranges

Front 26

Note

Back 26

Fixed cost per unit is variable, it depends on production volume

Front 27

Note

Back 27

Given enough time (and a long enough relevant range), any cost can be considered variable, even total fixed cost.

Front 28

Note

Back 28

Manufacturing OH is an example on Semi-variable costs

Front 29

What are the known Cost Accumulation systems?

Back 29

1-Job-Order costing
2-Process costing
3-Operations costing
4-Backflush costing
5-Life-cycle costing

Front 30

Note

Back 30

Job-Order costing is the cost accumulation system that is used if the cost object is a custom order

Front 31

Note

Back 31

Process costing is the cost accumulation system that is used if the cost object is a mass-produced homogeneous product (e.g. Steel)

Front 32

Note

Back 32

Operations costing uses components of both job-order costing and process costing.

Front 33

Note

Back 33

Backflush costing accounts for certain costs at the end of the process in circumstances where there is little need for in-process inventory valuation.

Front 34

Note

Back 34

Life-cycle costing seeks to monitor costs throughout the product's life cycle and expand on the traditional costing systems that focus only on the manufacturing phase of a product's life.

Front 35

Note

Back 35

Cost of Goods Manufactured this period= Beginning WIP + Manufacturing costs incurred during the year - Ending WIP

Front 36

Note

Back 36

Cost of goods manufactured during the year = DM USED + DL + Manufacturing OH APPLIED

Front 37

Note

Back 37

DM USED = Beg RM + Net purchases - Ending RM

Front 38

Note

Back 38

Cost of Goods Sold = Beginning finished goods + cost of goods manufactured (or Net Purchases for "Retailer") - Ending finished goods

Front 39

Note

Back 39

Job-order costing (or job costing) is the method of product costing that identifies the job (or individual units or batches) as the cost objective and is used when there are relatively few units produced and when each unit is unique or easily identifiable.

Front 40

Note

Back 40

Process costing is a method of product costing that averages costs and applies them to a large number of homogeneous items.

Front 41

Note

Back 41

Computation of how each segment of the process should compute cost of goods transferred out and the cost of goods remaining in work-in-process is the central product costing issue in process costing environments.

Front 42

What are the steps to compute the Cost of goods transferred out & Cost of goods remaining through the process costing environment?

Back 42

1-Summarize the flow of physical units.
2-Calculate "equivalent unit" output.
3-Accumulate the total costs to be accounted for (Production Report).
4-Calculate the unit costs based on total costs and equivalent units.
5-Apply the average costs to the units completed and the units remaining in ending work-in-process inventory.

Front 43

Note

Back 43

5

Front 44

Note

Back 44

An equivalent unit of direct material , direct labor, or conversion costs is equal to the amount of direct material, direct labor, or conversion
costs necessary to complete one unit of production.

Front 45

Note

Back 45

The FIFO equivalent units are composed of three separate elements:
1-Completion of units on hand at the beginning of the period
2-Units started and completed during the period (Units completed - Beginning WIP)
3-Units partially complete at the end of the period

Front 46

Note

Back 46

The Weighted-Average equivalent units are composed of two elements:
1-Units completed during the month (regardless of when the work was done)
2-Units partially complete at the end of the period

Front 47

Note

Back 47

6

Front 48

Note

Back 48

7

Front 49

Note

Back 49

8

Front 50

Note

Back 50

Normal spoilage is included in the standard cost of the manufactured product.

Front 51

Note

Back 51

For normal spoilage (or shrinkage), per unit cost is automatically increased as a result of spoilage because actual costs are spread over fewer equivalent good units rather than actual units produced.

Front 52

Note

Back 52

Normal spoilage is capitalized as part of inventory cost.

Front 53

Note

Back 53

Abnormal spoilage should not occur under normal operating conditions and is not included in the standard cost of a manufactured product.

Front 54

Note

Back 54

The cost of abnormal spoilage is normally expensed separately on the income statement as a period expense.

Front 55

Note

Back 55

Traditional costing systems assign overhead as a single cost pool with a single plant wide overhead application rate using a single allocation base.

Front 56

Note

Back 56

ABC assumes that the best way to assign indirect costs to products (cost objects) is based on the product's demand for resource-consuming activities (i.e., costs are assigned based on the consumption of resources).

Front 57

Note

Back 57

A cost driver is a factor that has the ability to change total costs. Cost drivers (including nonfinancial, statistical measurements of activities such as sales or production volume) are identified by ABC and are related to one of multiple cost pools for cost allocation.

Front 58

Note

Back 58

A resource cost driver is the amount of resources that will be used by an activity.

Front 59

Note

Back 59

An activity cost driver is the amount of activity that a cost object will use, and it is used to assign the costs to the cost objects.

Front 60

Note

Back 60

An operation necessary to produce a product is called an activity center.

Front 61

Note

Back 61

A cost pool is a group of costs or a specially identified cost center in which costs are grouped, assigned, or collected (Costs incurred in one department only)

Front 62

Note

Back 62

ABC can be part of a job order system or a process cost system.

Front 63

Note

Back 63

ABC can be used for manufacturing or service businesses.

Front 64

Note

Back 64

ABC takes a long-term viewpoint and treats production costs as variable.

Front 65

Note

Back 65

The ABC cost driver is often a nonfinancial variable.

Front 66

Note

Back 66

Activity-based costing (ABC) is also referred to as transaction-based costing.

Front 67

Note

Back 67

The split-off point is that point in the production process where the joint products can be recognized as individual products.

Front 68

Note

Back 68

Joint product costs are costs incurred in producing products up to the split-off point.

Front 69

Note

Back 69

Separable costs are costs incurred on a product after the split-off point.

Front 70

Note

Back 70

As a general rule, joint product costs are only allocated to the main product. By-products do not receive an allocation of joint costs.

Front 71

What are the 3 methods to allocate the Joint cost through the Joint products?

Back 71

1-By Unit Volume Relationships
2-By Sales price available at split-off
3-By NRV (Sales Price-Separable cost)

Front 72

Note

Back 72

By-products represent outputs of relatively minor value that are incidental to a manufacturing process.

Front 73

Note

Back 73

By-products have relatively low sale values

Front 74

Note

Back 74

By-products can be accounted for in two ways:
1-Joint cost reduction
2-Miscellaneous income

Front 75

Note

Back 75

Decisions regarding whether to use by-product costing or joint costing are practical ones, and they depend on relative sales demand.