Cost Accounting Flashcards
BAF-ACF2A.1 Accounting and Finance B-cluster Notes
Chapter 2: Introduction to Cost Terms and Purposes (Part 1)
Basic Cost Terminology
Cost: A sacrificed or forgone resource to achieve a specific objective.
Actual Cost: A cost that has occurred.
Budgeted Cost: A predicted cost.
Cost Object: Anything for which a cost measurement is desired.
Cost Object Examples at BMW
Product: A BMW X6 sports activity vehicle.
Service: Telephone hotline providing information and assistance to BMW dealers.
Project: R&D project on DVD system enhancement in BMW cars.
Customer: Herb Chambers Motors, a dealer that purchases a broad range of BMW vehicles.
Activity: Setting up machines for production or maintaining production equipment.
Department: Environmental, Health and Safety department.
Direct and Indirect Costs
Direct Costs: Costs that can be conveniently and economically traced (tracked) to a cost object.
Indirect Costs: Costs that cannot be conveniently or economically traced (tracked) to a cost object. These costs are allocated to a cost object in a rational and systematic manner.
Cost Assignment to a Cost Object (BMW Example)
Direct Costs
Example: Cost of steel and tires for the BMW X6.
Cost Assignment: Cost tracing based on material requisition document.
Indirect Costs
Example: Lease cost for the Spartanburg plant where BMW makes the X6 and other models of cars.
Cost Assignment: Cost allocation (no requisition document).
Cost Allocation Challenges
Direct Costs: Material (steel or tires for a car), Labor (Assembly line wages).
Indirect Costs: Electricity, Rent, Property taxes, Plant administration expenses.
Cost Behavior Patterns: Variable Costs and Fixed Costs
Variable Costs: Change, in total, in proportion to changes in the related level of activity or volume of output produced. They are constant on a per-unit basis.
Example: If a product takes 5 pounds of material each, it stays the same per unit regardless if one, ten or a thousand units are produced.
Fixed Costs: Remain unchanged, in total, for a given time period, despite changes in the related level of activity or volume of output produced. Fixed costs per unit change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit.
Cost Behavior Summarized
TOTAL DOLLARS | COST PER UNIT | |
|---|---|---|
VARIABLE COSTS | Change in proportion with output (more output = more cost) | Unchanged in relation to output |
FIXED COSTS | Unchanged in relation to output (within the relevant range) | Change inversely with output (more output = lower cost per unit) |
Graphs of Variable and Fixed Costs
Panel A: Variable Costs of Steering Wheels at $60 per BMW X6 Assembled
Panel B: Supervision Costs for the BMW X6 Assembly Line (in Millions)
Multiple Classifications of Costs
Costs may be classified as:
Direct/Indirect, and
Variable/Fixed
These multiple classifications give rise to important cost combinations:
Direct and variable
Direct and fixed
Indirect and variable
Indirect and fixed
Examples of the Multiple Classifications Of Costs
Cost-Behavior Pattern | Assignment of Costs to Cost Object | |
|---|---|---|
Direct Costs | Variable Costs | Cost object: BMW X6s produced. Example: Tires used in assembly of automobile |
Fixed Costs | Cost object: BMW X6s produced. Example: Salary of supervisor on BMW X6 assembly line | |
Indirect Costs | Variable Costs | Cost object: BMW X6s produced. Example: Power costs at Spartanburg plant. Power usage is metered only to the plant, where multiple products are assembled. |
Fixed Costs | Cost object: BMW X6s produced. Example: Annual lease costs at Spartanburg plant. Lease is for whole plant, where multiple products are produced |
Use Unit Costs Cautiously
Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for many decisions.