ACC 315 Chapter 2

Baille, Creighton University

cost

the monetary value of resources used to achieve a purpose

cost object

any item that a cost measurement is desired for

direct costs

directly related to a cost object; can be easily traced

cost tracing

the assignment of direct costs to a cost object

indirect costs

related to the cost object; cannot be easily traced

cost allocation

process of assigning indirect costs to a cost object

factors impacting cost classification

• materiality of the cost

• availability of information gathering technology

• design of operations

variable cost

a cost that changes in its total level in proportion to changes in the volume of the cost object (higher volume = higher cost); unit cost remains constant

fixed cost

a cost that remains unchanged in its total level for a given period of time despite changes in the volume of the cost object; unit cost decreases as volume increases

fixed cost per unit is ______ proportional to activity

inversely

cost driver

an activity or cost that causally affects the level of a cost over a given time span

relevant range

the level of activity/volume where there is a relationship between the cost and cost driver (normal operating level)

unit cost

total cost divided by units; helps determine price

manufacturing-sector companies

purchase materials and components and convert them into finished goods

merchandising-sector companies

purchase and sell tangible products without changing their basic form

service-sector companies

provide services (intangible products) to their customers

inventory types for manufacturing-sector companies

• direct materials inventory

• work-in-process inventory

• finished goods inventory

direct materials inventory

direct materials in stock that will be used in the manufacturing process

work-in-process inventory

goods partially worked on but not yet completed; also called work in progress

finished goods inventory

goods completed but not yet sold

inventory types for merchandising-sector companies

• merchandise inventory

do service-sector companies hold inventory?

no

direct materials costs

the acquisition costs of all materials that eventually become part of the cost object; easily and unambiguously traced to the cost object

direct manufacturing labor costs

compensation of all manufacturing labor that can be easily and unambiguously traced to the cost object

indirect materials costs

all manufacturing costs that are related to the cost object but are not easily and unambiguously traced to the cost object; also called manufacturing overhead

inventoriable costs

all costs of a product that are considered assets in a company’s balance sheet when incurred; expensed as COGS only when the product is sold

how does the total cost of a variable cost change relative to changes in volume?

increases as volume increases

how does the unit cost of a variable cost change relative to changes in volume?

remains constant as volume increases

how does the total cost of a fixed cost change relative to changes in volume?

remains constant as volume increases

how does the unit cost of a fixed cost change relative to changes in volume?

decreases as volume increases

period costs

related to selling and administrative functions; expensed when incurred

mixed costs

costs with both variable and fixed elements; usually have a fixed base rate with a variable addition

how are costs determined for cost objects?

1. cost accumulation

2. costs are assigned to cost objects

cost accumulation

the collection of cost data by an accounting system

managers use cost information to…

make and implement decisions

cost assignment

the process of tracing direct costs and allocating indirect costs

what is the impact of inaccurate product costs?

managers will be misled about the profitability of different products