Cost Acct: Ch 2 intro to cost
Chapter 2: An Introduction to Cost Terms and Purposes
Learning Objectives
Cost Object: Define and illustrate what constitutes a cost object.
Direct vs. Indirect Costs: Distinguish between these two types of costs.
Variable vs. Fixed Costs: Explain the differences and behavior of these costs.
Unit Costs: Caution regarding the interpretation of unit costs.
Financial Accounting Concepts: Distinguish inventoriable costs from period costs.
Cost Flow: Illustrate the flow of costs in financial accounting.
Product Cost Computation: Explain why different computations exist for varying purposes.
Cost Accounting Framework: Describe a framework for effective cost accounting and management.
Basic Cost Terminology
Cost: Refers to a resource that has been sacrificed or forgone to achieve a specific objective.
Actual Cost: The cost that has already occurred.
Budgeted Cost: The cost predicted for future operations.
Cost Object: Anything for which measuring costs is desired, such as a product or project.
Cost Object Examples at Tesla
Product: A Tesla Model 3 vehicle.
Service: Telephone hotline for Tesla assistance.
Project: R&D for an electric truck.
Customer: Dubai RTA for electric taxis.
Activity: Setting up production machinery.
Department: Worker health and safety department.
Cost Accumulation and Assignment
Cost Accumulation: The organized collection of cost data through accounting systems.
Cost Assignment: Gathering costs to a cost object via tracing or allocating costs.
Tracing: Relates to direct, conveniently tracked costs.
Allocating: Applied to indirect costs in a rational manner.
Direct vs. Indirect Costs
Direct Costs: Easily traceable to a cost object, such as materials and labor specifically tied to production.
Indirect Costs: Not conveniently traceable; allocated cost via systematic methods, including utilities, rent, and administrative expenses.
Challenges in Cost Allocation
Examples of Direct Costs include steel, tires, and wages of assembly-line workers.
Examples of Indirect Costs include electricity, rent, and property taxes that support various projects or services.
Factors Affecting Cost Classifications
Materiality(the importance) of the cost, availability of information-gathering technology, and operational design.
Notably, a cost can serve as a direct cost to one object while indirect to another depending on context.
Cost Behavior Patterns: Fixed Costs and Variable Costs
Variable Costs: Change in total with variations in activity levels (e.g., materials used scales with production).
Fixed Costs: Remain unchanged in total over a specific time frame despite activity level changes.
Cost behavior can be analyzed per activity or time period, which is crucial in cost management.
Summary of Cost Behavior
Variable Costs: Change proportionally with output (e.g., additional units incur additional costs).
Fixed Costs: Constant in total but reduce per unit as output increases (cost per unit becomes lower with higher production).
Additional Cost Concepts
Mixed Costs: Contain both fixed and variable components.
Cost Driver: A factor that causally impacts costs based on activity levels.
Relevant Range: A specified range of normal activity where specific relationships between costs and activity hold true.
Understanding Cost Classification Combinations
Costs can be analyzed through multiple lenses:
Direct vs. Indirect and
Variable vs. Fixed
Important combinations include direct-variable, direct-fixed, indirect-variable, and indirect-fixed assignments.
Unit Costs Usage
Although usually applicable for financial reports and decision-making, a cautious approach towards unit costs is advised; total cost perspectives are often more informative.
Economic Sectors
Manufacturing: Firms convert materials into finished goods.
Merchandising: Companies sell products in their existing form.
Service Sector: Organizations that deliver services rather than goods.
Types of Manufacturing Inventory
Direct Materials: In-stock resources for production.
Work-in-Process (WIP): Partially completed goods still in production.
Finished Goods: Completed products awaiting sale.
Type of merchandising- sectors inventory
Only has one type: merchandise inventory
Cost Classifications in Manufacturing
Inventoriable Costs: These include direct materials, direct labor, and indirect manufacturing, which are critical for determining product costs.
Remember direct means traceable.
Inventoriable vs. Period Costs: Differentiation between costs that remain assets on balance sheets until the sale occurs versus those treated as current period expenses.
Inventoriable cost can be expensed as ‘Cost of Goods Sold’ while periodic cost are expensed through other accounts relating to income statement.
Financial Presentation of Costs
Cost Flows: Depiction of how costs move through production towards the income statement, emphasizing flow categories like direct materials and WIP.
Framework for Cost Accounting and Management
Cost accounting serves three essential functions: calculating product and service costs, gathering planning and performance evaluation data, and informing decision analysis.
Key Terms for Review
A selection of terms including actual cost, budgeted cost, cost driver, cost object, direct costs, fixed costs, period costs, and relevant range provides a foundational vocabulary for cost accounting discussions.