chapter 2: intro to cost terms and purposes

cost

a sacrificed or forgone resource to achieve a specific objective

expenditure

outlay of cash; expense and cash at the door

cost object

anything for which managers want a separate measurement of cost

cost accumulation

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

cost assignment

a general term that encompasses all gathering of accumulated costs to a cost object in two ways:

• tracing costs with a direct relationship to the cost object

• allocating accumulated costs with an indirect relationship to a cost object

direct costs

can be conveniently and economically traced/tracked to a cost object

indirect costs

cannot be conveniently and economically traced/tracked to a cost object

• these costs are allocated to a cost object in a rational and systematic manner

cost tracing

used to describe the assignment of direct costs to a particular cost object

• based on material requisition document

service companies

sell their time, skill, and knowledge

• revenue from doing things for customers

merchandising companies

resell products they previously bought from suppliers

• revenue from selling goods to customers

manufacturing companies

use labor, equipment, supplies, and facilities to convert raw materials into finished products

• revenue from making goods and then selling to customers

raw materials inventory

includes unprocessed materials used to make a product

• debit RM inventory and credit AP

work-in-process inventory

includes goods that are in the manufacturing process but are not yet complete

• debit WIP and credit RM

finished goods inventory

includes completed goods that have not yet been sold

• debit FG and credit WIP

product (inventoriable) costs

include the cost of purchasing and making a product

• = direct materials + direct labor + manufacturing overhead

• capitalized on the balance sheet until units are sold

• expensed on the income statement when units are sold

• used to determine how much to charge for the product

• includes low value items where the cost of tracking isn’t worth it

period costs

non-manufacturing costs (nothing to do with production)

• selling and administrative expenses such as taxes and interest

• directly to the income statement in the current period; not on the balance sheet unless prepaid

• expensed as incurred in the period they are incurred

• ex. office supplies, R&D, the CEO’s salary, etc.

per unit product cost =

total product cost / # of units produced

direct materials

raw materials used in production

direct labor

labor of employees working on the products

manufacturing overhead

the indirect product costs associated with production

• ex. indirect materials, indirect labor, factory costs for rent, utilities, insurance, etc.

prime costs

direct materials + direct labor

conversion costs

direct labor + manufacturing overhead

the smaller the amount of a cost (aka the more immaterial the cost is) the more likely it is to be classified as an…

indirect cost

factors affecting direct/indirect cost classifications

1. the materiality of the cost in question

2. the available information gathering technology

3. design of operations

variable costs

change in total in proportion to changes in the related level of activities or volume of output produced

• constant on a per unit basis = same incremental variable cost

fixed costs

remain unchanged in total for a given time period despite changes in the related level of activity or volume of output produced

• as more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit

mixed costs

have both fixed and variable elements

• ex. fixed monthly base rate and an additional cost for each minute of calling

cost driver

a variable, such as the level of activity or volume that causally effects cost over a given time span

• fixed short run costs have no driver but they might in the long run

relevant range

the brand or range of normal activity level/volume in which there is a specific relationship between the level of activity/volume and the cost in question

• fixed costs are fixed and variable costs are constant within the relevant range

revenue - COGS =

gross profit

gross profit - period costs =

operating income

cost of goods manufactured

the manufacturing costs of the goods that finished the production process in a given accounting period

1. calculate DM used

2. calculate total manufacturing costs incurred during the year

3. calculate COGM

beg. DM + purchases of DM - ending inventory =

DM used

DM used + direct labor + MOH =

total manufacturing costs

beg. WIP inventory + total manufacturing costs - ending WIP inventory =

cost of goods manufactured

beg. FG inventory + COGM - ending FG inventory =

COGS

different product costs for different purposes

• pricing and product-mix decisions

• contracting with government agencies (cost plus contracts)

• preparing financial statements

product cost for financial statements

production costs

product cost for reimbursement under government contracts

R&D, design, and production costs

product cost for pricing and product-mix decisions

R&D, design, production, marketing, distribution, and customer service costs