cost accounting quiz 1

Direct cost

Cost traced directly to the cost object

Wood used to make chair

Indirect cost

Cost that cannot be traced directly to the cost object

Factory rent, insurance, supervisors salary

Direct vs indirect

Can I trace this one specific cost object

Yes - direct

No - indirect

What determines whether a cost is direct or indirect

The cost object

The same cost can be direct for one cost object and indirect for the other

Variable vs fixed

Cost who’s total changes as activity / units increase

Fixed cost

Total that stays the same within the relevant range regardless of changes in activity

How do I decide variable vs fixed

Will the total cost change when the number of units changes

Yes = variable

No = fixed

What happens when activity increases

Variable = total vc increase, vc per u stays same

Fixed = total fc same, per unit decrease

Product cost

Cost associated with manufacturing a product

Goes straight into inventory

Period cost

Non manufacturing cost,

Expensed as a period cost instead of being apart of product cost

= expense

Product vs period in manufacturing company

Related to manufacturing/factory = product

Outside of manufacturing / factory = period

Advertising, sales salaries, corporate office rent, presidents salary

Dm

The raw materials that can be traced back to the product

Wood used to make cabinets

Dl

Wages earned by production employees who’s labor can be traced to the product

Assembly line workers making cabinets

moh

All other many costs besides dm and dl

Factory insurance/utilites, lubricants, supervisors, janitors, maintenance workers

Everything else IN factory

Factory’s supervisors salary

Indirect + fixed + moh + product

Wood used to make cabinets

Direct + variable + dm + product

Advertising cost

Period cost

Factory machine operator wages

Dl + product cost

Lubricants used for factory machines

Indirect material + moh + product cost

How to classify any cost

1. What’s the cost object : what am I measuring cost for

2. Can I trace it (direct or indirect)

3. Does the total cost change w activity (variable or fixed)

4. is it manufacturing (yes product no period)

5. If manufacturing is it primary material dm, production worker dl, everything else moh.