Cost Terms And Purposes - Cost Accounting

Front 1

Cost

Back 1

A resource sacrificed or forgone to achieve a specific objectiove. A cost is usually measured as the monetary amount that must be paid to acquire goods or services.

Front 2

An Actual Cost

Back 2

is the cost incurred (a historical or past cost)

Front 3

A Budgeted Cost

Back 3

is the predicted or forecasted cost (a future cost)

Front 4

Cost object

Back 4

anything for which a measurement of costs is desired (may be a product (car for BMW), a srvice (hotline for customenrs), Project, customer, activity (setting up machines) or a department)

Front 5

Budgeted vs actual cost

Back 5

Managers almost always want to know bith types of costs when making decisions.

Front 6

Cost system determines the cost of the object in two basic stages

Back 6

1) Accumulation

2) Assignment

Front 7

Cost Accumulation

Back 7

the collection of cost data in some organized way by means of an accounting system

Front 8

Assigning the cost

Back 8

after the cost data is collected the managers assign these accumulated costs to designated cost objects.

Front 9

Cost information is used

Back 9

1) When making decisions

2) For implementing dicisions

Front 10

Direct costs of a cost object

Back 10

are related to the particular cost object and can be traced to it in an economically feasible way. It can be materials which are directly related and used in production of a cost object and it can be the cost of labor used to produce the cost object.

Front 11

Cost tracing

Back 11

assignment of direct costs to a particular cost object.

Front 12

Indirect Costs of a cost object

Back 12

related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way (salaries of plant administrators, plant managers who oversee the production of many types of products at a plant)

Front 13

Cost allocation

Back 13

the assignment of indirecy cost to a particular cost object.

Front 14

Cost assignment

Back 14

1) Tracing costs to a cost object

2) Allocating indirect costs to a cost object

Front 15

Factors taht affect the classification of a cost as direct or indirect:

Back 15

1) The materiality of cost in question.

2) Available information-gathering technology.

3) Design of operations.

Front 16

The materiality of cost in question.

Back 16

The smaller the amount of a cost - the more immaterial it is - the less likely that it is economically feasible to trace that cost to a particular cost object.

Front 17

Available information-gathering technology

Back 17

Improvements in information-gathering technology make it possible to consider more and more costs as direct costs.

Front 18

Design of operations

Back 18

Classifying a cost as direct is easier if a company's facility is ussed exclusively for a specific cost object, such as a specific product or a particular customer.

Front 19

Two basic types of cost-behavior patterns found in many accounting systems

Back 19

1) Variable cost

2) Fixed cost

Front 20

Variable cost

Back 20

changes in total in proportion to changes in the related level of total activity or volume

Front 21

Fixed cost

Back 21

remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume.

Front 22

Variable or Fixed?

Back 22

Costs are defined as variable or fixed with respect to a specific activity and for a given time period.

Front 23

Example of a variable cost

Back 23

If BMW buys a steering wheel at $60 for each of its BMW X5 vehicles, then the total cost of steering wheels is $60 times the number of vehicles produced, as the following table illustrates. 1 BMW = $60 cost of wheels

1,000 BMW's = $60,000 cost of wheels. It varies based on the volume of production.

Front 24

Strictly cariable and Proportionately variable

Back 24

terms used to describe the variable cost that increases or decreases evenly with the increase or decrease in the production volume.

Front 25

Example of Fixed cost

Back 25

Suppose BMW incurs a total cost of $2,000,000 per year for supervisors who work exclusively on the X5 line. These costs are unchanged in total over a designated range of the number of vehicles produced during a given time span. Fixed costs become smaller and smaller on a per unit basis as the number of vehicles assembled increases. It is precisely because total line supervision costs are fixed at $2,000,000 that fixed supervision cost per X5 decreases as the number of X5s produced increases; the same fixed cost is spread over a larger number of X5s. Do not be misled by the change in fixed cost per unit. Just as in the case of variable costs, when considering fixed costs, always focus on total costs.

Front 26

Why are some costs variable and other costs fixed?

Back 26

Total cost of steering wheels is a variable cost because BMW buys the steering wheels only when they are needed. As more X5s are produced, proportionately more steering wheels are acquired and proportionately more costs are incurred. Contrast the description of variable costs with the $2,000,000 of fixed costs per year incurred by BMW for supervision of the X5 assembly line. This level of supervision is acquired and put in place well before BMW uses it to produce X5s and before BMW even knows how many X5s it will produce.

Front 27

Some costs have both fixed and variable elements

Back 27

Such costs are called mixed or semivariable costs (For example, a company’s telephone costs may have a fixed monthly payment and a charge per phone-minute used)

Front 28

Cost driver

Back 28

is a variable, such as the level of activity or volume that causally affects costs over a given time span. An activity is an event, task, or unit of work with a specified purpose - testing products, designing products, setting up machines.

Front 29

Cost driver of a variable cost

Back 29

is the level of activity or volume whose change causes proportionate changes in the variable cost.

Front 30

Cost driver of a variable cost

Back 30

Costs that are fixed in the short run have no sost drivers. In the long run, volume of production is
a cost driver of testing costs.

Front 31

Activity-based costing systems.

Back 31

Costing systems that identify the cost of each activity such as testing, design, or set up.

Front 32

Relevant Range

Back 32

is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. For example, a fixed cost is fixed only in relation to a given wide range of total activity or volume and only for a given time span.

Front 33

Example of relevant range

Back 33

Suppose that BMW contracts with Thomas Transport Company (TTC) to transport X5s to BMW dealers. TTC rents two trucks, and each truck has annual fixed rental costs of $40,000. The maximum annual usage of each truck is 120,000 miles. In the current year (2011), the predicted combined total hauling of the two trucks is 170,000 miles.

Front 34

Costs may simultaneously be as follows:

Back 34

1) Direct and Variable

2) Direct and Fixed

3) Indirect and Variable

4) Indirect and fixed

Front 35

Unit cost (avarage cost)

Back 35

is calculated by dividing total cost be the related number of units. The units might be expressed in various ways (automobiles assembled, packages delivered, or hours worked).

Front 36

Three main sectors of economy:

Back 36

1) Manufacturing-sector companies

2) Merchandising-sector companies

3) Service-sector companies

Front 37

Manufacturing-sector companies

Back 37

purchase materials and components and convert them into various finished goods. Usually have 3 types of inventory: 1) Direct materials inventory 2) Work-in-process inveentory 3) Finished goods inventory

Front 38

Direct materials inventory

Back 38

Direct materials in stock and awaiting use in the manufacturing process (for example, computer chips and components needed to manufacture
cellular phones).

Front 39

Work-in-process inventory

Back 39

Goods partially worked on but not yet completed (for example, cellular phones at various stages of completion in the manufacturing process). This is also called work in progress.

Front 40

Finished goods inventory

Back 40

Goods (for example, cellular phones) comleted but not yet sold.

Front 41

Merchandising-sector companies

Back 41

purchase and then sell tangible products without changing their basic form. This sector includes companies engaged in retailing, distribution or wholesaling. This type of companies hold only one type of inventory, which is products in their original purchased form, called merchandise inventory.

Front 42

Service-sector companies

Back 42

provide only services or intangible products and so do not hold inventories of tangible products.

Front 43

Commonly used classifications of manufacturing costs

Back 43

1) Direct material cost

2) Direct manufacturing labor costs

3) Indirect manufacturing costs ( Manufacturing overhead costs or factory overhead costs)

Front 44

Direct materials costs

Back 44

the acquisition costs of all materials that eventually become part of the cost object and can br traced to the cost object in an economically feasible way. This includes fright-in charges, sales taxes, and custom duties.

Front 45

Direct manufacturing labor costs

Back 45

include the the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Include wages and fringe benefits paid to machine operators and assembly line workers who convert direct materials purchased to finished goods.

Front 46

Indirect manufacturing costs (also called manufacturing overhead cost or factory overhead cost)

Back 46

are all manufacturing costs that are related to the cost object (work in process and then finished goods) in an economically feasible way. Examples include supplies, indirect materials such as lubricants, indirect manufacturing labor such as plant maintanance and cleaning labor, plant rent, plant insurance, property taxes on the plant, plant depreciation, and the compensation of the plant managers.

Front 47

Inventoriable costs

Back 47

are all costs of a prosuct that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold. for manufacturing-sector companies, all all manufacturing costs are inventoriable costs. For merchandising-sector companies, inventoriable costs are the costs of purchasing the goods that are resold in the same form.

Front 48

Period Costs

Back 48

are all the costs in the income statement other than cost of goods sold. Period costs, such as marketing, distribution and customer service costs, are treated as expenses of the accounting period in which they are incurred because they are expected to benefit revenues in that period and are not expected to benefit revenues in the future periods. For manufacturing-sector companies period costs in the income statement are all nonmanufacturing costs.

Front 49

Direct materials used formula:

Back 49

Direct materials (beginning) + Direct materials purchased - Direct materials 9ending) = Direct materials used

Front 50

Cost of Goods Manufactured formula:

Back 50

Work-in-Process (beginning) + Direct manufacturing Labor + Manufacturing Overhead Costs - Work-in-Process (ending) = Cost of Goods Manufactured

Front 51

Operating income formula:

Back 51

1) Revenues - Cost of goods Sold = Gross Margin (Gross Profit)

2) Gross margin (Gross profit) - Operating Costs (period costs) = Operating income

Revenues - COGS - operating cost = Operating Income

Front 52

Prime Costs

Back 52

are all direct manufacturing costs (Direct materials + Direct manufacturing labor)

Front 53

Conversion Costs

Back 53

are all manufacturing costs incurred to convert direct materials into finished goods. (Direct manufacturing labor costs + manufacturing overhead costs)

Front 54

Measuring Labor costs

Back 54

Direct labor that can be traced directly to products. Overhead: Indirect labor (office staff, office security, overtime premium paid, Idle time), managers, department heads, supervisors. Payroll fringe costs (health care premiums and pension costs).

Front 55

Overtime premium and idle time

Back 55

the purpose of classifying costs in detail is to associate an individual cost with a specific cause or reason for why it was incurred.

Front 56

Overtime premium

Back 56

is the wage rate paid to workers (for both direct and indirect labor) in excess of their straight-time wage rates. It is usually considered to be a part of indirect costs or overhead, even if it can be traced to a specific product. The overtime
premium is considered to be attributable to the heavy overall volume of work.

Front 57

Idle time

Back 57

is wages paid for unproductive timecaused by lack of orders, machine or computer breakdowns, work delays, poor scheduling, and the like.

Front 58

Product cost

Back 58

is the sum of the costs assigned to a product for a specific purpose.