Cost Accounting Chapter 2

Front 1

budgeted cost

Back 1

Predicted or forecasted cost. A future cost.

Front 2

Actual cost

Back 2

the cost incurred. (a historical or past cost)

Front 3

How do budgeters evaluate how well they did and learn about how they can do better in the future?

Back 3

By comparing budgeted costs to actual costs.

Front 4

Cost accumulation

Back 4

The collection of cost data in come organized way by means of an accounting system.

Front 5

How do managers use cost info?

Back 5

For 2 main purposes. To make decisions such as what price to charge for a particular product, and to implement decisions by influencing and motivating employees to act and learn.

Front 6

Direct costs of a cost object.

Back 6

Related to a particular cost object and can be traced to it in an economically feasible (cost-effective) way. For example the cost of steel or tires can easily be traced to a BMW. The cost of labor on a plant car can also easily be traced.

Front 7

Cost tracing

Back 7

The assignment of direct labor costs to a particular cost object.

Front 8

Indirect costs of a cost object

Back 8

related to particular cost object but cannot be directly traced to it in an economically feasible (cost-effective) way. Example salaries of plant manager who oversees production. Plant administration costs. Impossible to trace how much went to each. So what do we do? We allocate a certain amount.

Front 9

Cost allocation

Back 9

describes the assignment of indirect costs to a particular cost object.

Front 10

cost assignment

Back 10

General term that encompasses both 1. tracing direct costs to a cost object and 2. allocating indirect costs to a cost object.

Front 11

Managers want to assign costs accurately because:

Back 11

incorrect product costs will mislead managers about the profitability of diff products. They might unknowingly promote unprofitable products while deemphasizing profitable products.

Front 12

Factors that affect direct/indirect costs

Back 12

1. The materiality of the cost in question
2. Available info gathering technology.
3. Design of operations

Front 13

Materiality of the cost in question

Back 13

Affects direct/indirect cost. The smaller the amount of a cost, the less likely that it is economically feasible to trace that cost to a particular cost object.

Front 14

Available info gathering technology

Back 14

Factor that affects direct/indirect cost. Improvements in tech. allow us to consider more and more costs direct costs. Example barcodes allow manuf. plants to classify low cost materials, such as screws and clips, which were previously indirect costs, as direct costs because they can directly track them.

Front 15

Design of operations

Back 15

Affects direct/indirect costs. Classifying as direct is easier if a co.'s facility is used exclusively for a specific cost object, such as a specific product.

Front 16

Variable cost

Back 16

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

Front 17

Fixed cost

Back 17

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

Front 18

How do fixed costs look on a graph?
How do variable costs look on a graph?

Back 18

Fixed costs appear as a straight line on the graph because they do not change related to the number produced.
Variable costs increase as units produced increase. therefore they appear as a positive slope.

Front 19

A particular cost item could be variable with respect to one level of activity and fixed with respect to another.

Back 19

okay

Front 20

Cost driver

Back 20

a variable that causally affects costs over a given time span. There is a cause and effect relationship between a change in the level of activity or volume and a change in the level of total costs. The cost driver of a varaible cost is the level of activity or volume whose change causes a proportionate change in the variable cost. Costs that are fixed in the short term have no cost driver in the short run but may have one in the long run.

Front 21

Relevant range

Back 21

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 equation. For example. a fixed cost is fixed only in relation to a given wide range of total activity or volume only for a given time span. The basic assumption applies to variable costs as well. That is, outside the relevant range, variable costs may not change proportionately with changes in production volume. For example, above a certain volume, D.M. costs may increase at a slower rate because of price discounts on purchases larger than a certain quantity.

Front 22

Costs may be 4 types:

Back 22

direct and variable
Direct and fixed
indirect and variable
indirect and fixed

Front 23

Unit cost computed

Back 23

by dividing total cost by number of units.

Front 24

Unit costs help managers:

Back 24

they calculate the unit cost and determine the profitability of each product or service. They use this info to decide which products they should invest more resources in, such as R & D and marketing, and the prices they should charge.

Front 25

Be wary of unit costs

Back 25

Managers should think in terms of total costs rather than unit costs for many decisions. Managers should think in terms of total variable costs, total fixed costs, and total costs rather than unit cost or they could run short on cashflow. As a general rule, first calculate total costs, then compute unit cost if it is needed for a particular decision.

Front 26

Manufacturing sector companies

Back 26

purchase materials and components and convert them into various finished goods. Examples: automotive companies, cell phone producers, food processing co. and textile co.

Front 27

Merchandising-sector companies

Back 27

purchase and then sell tangible products without changing their basic form. This sector includes co. engaged in retailing (such as dept. stores), distribution, or wholesaling.

Front 28

Service-sector companies

Back 28

provide services (intangible products) such as legal advice or audits to their clients.

Front 29

Direct materials inventory

Back 29

Direct materials in stock and awaiting use in the manufacturing process.

Front 30

Work in Process inventory

Back 30

Goods partially worked on but not yet completed. Also called work in progress.

Front 31

Finished goods inventory

Back 31

Goods completed but not yet sold.

Front 32

Direct materials costs

Back 32

Acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. Include freight-in charges, sales taxes, and custom duties.

Front 33

Direct manufacturing labor costs

Back 33

Include 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 ways. Examples: wages and fringe benefits paid to machine operators and assembly line workers who convert direct materials purchased into finished goods.

Front 34

Indirect manufacturing costs.

Back 34

All manufacturing costs that are related to the cost object *work in process and then finished goods* but cannot be traced to that cost object in an economically feasible way. Examples include: supplies, indirect matierials such as lubricants, indirect manufacturing labor such as plant maintenance and cleaning labor, plant rent, plant insurance, property taxes on the plant, plant depreciation, and compensation of plant managers. Also known as Manufacturing overhead.

Front 35

Manufacturing overhead

Back 35

All manufacturing costs that are related to the cost object *work in process and then finished goods* but cannot be traced to that cost object in an economically feasible way. Examples include: supplies, indirect matierials such as lubricants, indirect manufacturing labor such as plant maintenance and cleaning labor, plant rent, plant insurance, property taxes on the plant, plant depreciation, and compensation of plant managers. Also known as Manufacturing overhead.

Front 36

inventoriable costs

Back 36

All costs of a product that are considered an asset in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold. For manufacturing co. all costs are inventoriable. For merch companies the inventoriable costs are cost of purchasing goods that are resold in the same form. These costs include the cost of the goods themselves, plus incoming freight, insurance, and handling costs for these goods.

Front 37

Period costs

Back 37

All costs in the income statement other than COGS. Expenses in the period in which they are incurred because they are expected to benefit revenue in that period. For manufacturing companies, period costs are all non-manufacturing costs like: design cost and distribution cost. For merch companies it's : all costs not related to purchase of goods. Example: labor costs of sales floor people and advertising costs.

Front 38

Calculate direct materials used

Back 38

Beginning inventory
+purchases of D.M.
-Ending inventory of D.M.
=Direct Materials Used

Front 39

Calculate total manufacturing costs incurred.

Back 39

D.M. used
+ direct manufacturing labor
+ manufacturing overhead costs
= total manufacturing costs incurred

Front 40

Compute cost of goods manufactured

Back 40

Beginning W.I.P. inventory
+ total manufacturing costs incurred
= Total manufacturing costs to account for
- ending W.I.P. inventory
=COGM

Front 41

Calculate COGS

Back 41

Beginning F.G. inventory
+ COGM
- Ending Inventory F.G.
=COGS

Front 42

Operating income

Back 42

Total revenue from ops. - COGS and operating costs. Excludes interest and income tax. EBIT basically.

Front 43

All non manufacturing costs are what type of costs?

Back 43

period costs. Examples are R&D and design.

Front 44

What are prime costs?

Back 44

Prime costs are all direct manufacturing costs. Calculated by
Prime costs = D.M. costs + Direct Labor costs.
The greater the proportion of prme costs the more confident managers can be about the accuracy of the costs of products.

Front 45

Prime cost equation

Back 45

Prime costs = D.M. Costs + Direct manufacturing labor costs

Front 46

Conversion costs

Back 46

All manufacturing costs other than direct materials costs. Represent all manufacturing costs incurred to convert direct materials into finished goods.
Conversion costs = Direct manufacturing labor costs + manufacturing overhead costs.

Front 47

Overhead labor costs

Back 47

1. indirect labor: examples: forklift truck operators (internal materials handler), plant janitors, plant guards, rework labor (time spent by direct laborers redoing defective work), overtime premium pd. to plant workers, idle time
2. Managers', department heads', and supervisors salaries
3. payroll fringe costs (healthcare premiums, and pension costs.)

Front 48

Product Cost

Back 48

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

Front 49

Product costs 6 types

Back 49

1. R&D costs
2. Design costs
3. Production costs
4. Marketing costs
5. Distribution costs
6. Customer service costs

Front 50

Pricing and product mix decisions

Back 50

for the purpose of making these decisions, the manager is interested in the overall profitability of different products and assigns costs incurred in all business functions of the value chain to different products.

Front 51

Contracting with government agencies

Back 51

often reimburse contractors on the basis of the "cost of a product" plus a prespecified margin of profit. Because of the cost/plus prfit margin nature of the contract govt. agencies will often provide detailed guidelines on the cost items they will allow and disallow when calculating the cost of a product. Some exclude marketing, distribution, and cust. service costs.

Front 52

Preparing financial statements for external reporting under GAAP

Back 52

under GAAP only manufacturing costs can be assigned to inventories in the financial statements. For the purposes of calculating inventory costs, product costs include only inventoriable (manufacturing) costs.

Front 53

Budgeting

Back 53

Commonly used tool for planning and control. Forces managers to look ahead, to translate strategy into plans, to coordinate and communicate within the organization, and to provide a benchmark for evaluating performance. Often plays a major role in affecting behavior and decisions because managers strive to meet budget targets. At the end of the period, they compare actual results to planned performance. Their job is to understand why differences between actual and planned occur and to use this feedback to promote learning and future improvement. Also use it to control and evaluate performance of individual departments, divisions, and managers.