An Introduction to Cost Terms and Purposes

Июль 30, 2022

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An Introduction to Cost Terms and Purposes

Содержание

2. Basic Cost Terminology Cost – sacrificed resource to achieve a specific objective Actual Cost – a
3. Basic Cost Terminology Cost Accumulation – a collection of cost data in an organized manner Cost
4. Direct and Indirect Costs Direct Costs – can be conveniently and economically traced (tracked) to a
5. Cost Examples Direct Costs Parts Assembly line wages Indirect Costs Electricity Rent Property taxes
6. Factors Affecting Direct/Indirect Cost Classification Cost Materiality Availability of Information-gathering Technology Operational Design
7. Cost Behavior Variable Costs – changes in total in proportion to changes in the related level
8. Cost Behavior, continued Variable costs – are constant on a per-unit basis. If a product takes
9. Cost Behavior Summarized Total Dollars Cost per Unit Variable Costs Change in proportion with output More
10. Other Cost Concepts Cost Driver – a variable that causally affects costs over a given time
11. A Cost Caveat Unit costs should be used cautiously. Since unit costs change with a different
12. Different Types of Firms Manufacturing-sector companies – create and sell their own products Merchandising-sector companies –
13. Types of Inventories Direct Materials – resources instock and available for use Work-in-Process (or progress) –
14. Types of Product Costs Direct Materials Direct Labor Indirect Manufacturing – factory costs that are not
15. Distinctions Between Costs Inventoriable Costs – product manufacturing costs. These costs are capitalized as assets (inventory)
16. Cost Flows The Cost of Goods Manufactured and the Cost of Goods Sold section of the
17. Cost of Goods Manufactured Calculates the cost of Direct Materials Used Accumulates the three product costs
18. Income Statement Figure carries forward from the Schedule of Cost of Goods Manufactured Period Costs are
19. Cost Flowchart
20. Other Cost Considerations Prime cost is a term referring to all direct manufacturing costs (labor and
21. Different Definitions of Cost for Different Applications Pricing and product-mix decisions – may use a “super”
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Basic Cost Terminology
Cost – sacrificed resource to achieve a specific objective
Actual

Cost – a cost that has occurred
Budgeted Cost – a predicted cost
Cost Object – anything of interest for which a cost is desired

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Basic Cost Terminology
Cost Accumulation – a collection of cost data in

an organized manner
Cost Assignment – a general term that includes gathering accumulated costs to a cost object. This includes:
Tracing accumulated costs with a direct relationship to the cost object and
Allocating accumulated costs with an indirect relationship to a cost object

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Direct and Indirect Costs
Direct Costs – can be conveniently and economically

traced (tracked) to a cost object
Indirect Costs – cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner

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Cost Examples
Direct Costs
Parts
Assembly line wages
Indirect Costs
Electricity
Rent
Property taxes

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Factors Affecting Direct/Indirect Cost Classification
Cost Materiality
Availability of Information-gathering Technology
Operational Design

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Cost Behavior
Variable Costs – changes in total in proportion to changes

in the related level of activity or volume
Fixed Costs – remain unchanged in total regardless of changes in the related level of activity or volume
Costs are fixed or variable only with respect to a specific activity or a given time period

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Cost Behavior, continued
Variable costs – are constant on a per-unit basis.

If a product takes 5 pounds of materials each, it stays the same per unit regardless of whether one, ten, or a thousand units are produced
Fixed costs – 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

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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

Change inversely with output
More output = lower cost per unit

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Other Cost Concepts
Cost Driver – a variable that causally affects costs

over a given time span
Relevant Range – the band of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and a given cost
For example, fixed costs are fixed only within the relevant range.

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A Cost Caveat
Unit costs should be used cautiously. Since unit costs

change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis.

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Different Types of Firms
Manufacturing-sector companies – create and sell their own

products
Merchandising-sector companies – product resellers
Service-sector companies

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Types of Inventories
Direct Materials – resources instock and available for use
Work-in-Process

(or progress) – products started but not yet completed. Often abbreviated as WIP
Finished Goods – products completed and ready for sale

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Types of Product Costs
Direct Materials
Direct Labor
Indirect Manufacturing – factory costs that

are not traceable to the product. Also known as Manufacturing Overhead costs or Factory Overhead costs

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Distinctions Between Costs
Inventoriable Costs – product manufacturing costs. These costs are

capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold
Period Costs – have no future value and are expensed as incurred

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Cost Flows
The Cost of Goods Manufactured and the Cost of Goods

Sold section of the income statement are accounting representations of the actual flow of costs through a production system.
Note the importance of inventory accounts in the following accounting reports, and in the cost flow chart

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Cost of Goods Manufactured
Calculates the cost of Direct Materials Used
Accumulates the

three product costs for the current period

Adjusts the current period manufacturing costs to account for units actually completed

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Income Statement
Figure carries forward from the Schedule of Cost of Goods

Manufactured

Period Costs are expensed as incurred

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Cost Flowchart

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Other Cost Considerations
Prime cost is a term referring to all direct

manufacturing costs (labor and materials)
Conversion cost is a term referring to direct labor and factory overhead costs, collectively
Overtime labor costs are considered part of overhead

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Different Definitions of Cost for Different Applications
Pricing and product-mix decisions –

may use a “super” cost approach (comprehensive)
Contracting with government agencies – very specific definitions of cost for “cost plus profit” contracts
Preparing external-use financial statements – GAAP-driven product costs only

An Introduction to Cost Terms and Purposes

Содержание

Basic Cost TerminologyCost – sacrificed resource to achieve a specific objectiveActual

Basic Cost TerminologyCost Accumulation – a collection of cost data in

Direct and Indirect CostsDirect Costs – can be conveniently and economically

Cost ExamplesDirect CostsPartsAssembly line wagesIndirect CostsElectricityRentProperty taxes

Factors Affecting Direct/Indirect Cost ClassificationCost MaterialityAvailability of Information-gathering TechnologyOperational Design

Cost BehaviorVariable Costs – changes in total in proportion to changes

Cost Behavior, continuedVariable costs – are constant on a per-unit basis.

Cost Behavior SummarizedTotal DollarsCost per UnitVariable CostsChange in proportion with outputMore

Other Cost ConceptsCost Driver – a variable that causally affects costs

A Cost CaveatUnit costs should be used cautiously. Since unit costs

Different Types of FirmsManufacturing-sector companies – create and sell their own

Types of InventoriesDirect Materials – resources instock and available for useWork-in-Process

Types of Product CostsDirect MaterialsDirect LaborIndirect Manufacturing – factory costs that

Distinctions Between CostsInventoriable Costs – product manufacturing costs. These costs are

Cost FlowsThe Cost of Goods Manufactured and the Cost of Goods

Cost of Goods ManufacturedCalculates the cost of Direct Materials UsedAccumulates the

Income StatementFigure carries forward from the Schedule of Cost of Goods