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An Introduction to Cost Terms and Purposes

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Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount that must be paid to acquire goods ... – PowerPoint PPT presentation

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Title: An Introduction to Cost Terms and Purposes


1
An Introduction to Cost Terms and Purposes
  • Chapter 2

2
Cost and Cost Terminology
  • Cost is a resource sacrificed or forgone to
    achieve a specific objective.
  • It is usually measured as the monetary amount
    that must be paid to acquire goods and services.
  • An actual cost is the cost incurred (a historical
    cost) as distinguished from budgeted costs.

3
Cost and Cost Terminology
  • A cost object is anything for which a separate
    measurement of costs is desired.

4
Cost and Cost Terminology
  • There are two basic stages of accounting for
    costs
  • Cost accumulation
  • Cost assignment to various cost objects

5
Cost and Cost Terminology





Cost Object
Cost Accumulation
Cost Object
Cost Object
Cost Assignment
6
Cost and Cost Terminology
  • Cost accumulation is the collection of cost data
    in some organized way by means of an accounting
    system.
  • Cost assignment is a general term that
    encompasses...
  • tracing accumulated costs to a cost object, and
  • allocating accumulated costs to a cost object.

7
Direct Costs
  • Direct costs of a cost object are those that
    are related to a given cost object (product,
    department, etc.) and that can be traced to
    it in an economically feasible way.

8
Direct Costs
  • Cost-Tracing describes the assignment of direct
    costs to the particular cost object.

9
Indirect Costs...
  • are related to the particular cost object but
    cannot be traced to it in an economically
    feasible way.

10
Cost Behavior Patterns
  • Variable costs change in total in proportion to
    changes in the related level of total activity or
    volume.
  • Fixed costs do not change in total for a given
    time period despite wide changes in the related
    level of total activity or volume.

11
Cost Drivers
  • A cost driver is a factor, such as the level of
    activity or volume, that causally affects costs
    (over a given time span).
  • The cost driver of variable costs is the level
    of activity or volume whose change causes the
    (variable) costs to change proportionately.
  • The number of bicycles assembled is a cost driver
    of the cost of handlebars.

12
Relevant Range...
  • is the band of the level of activity or volume
    in which a specific relationship between the
    level of activity or volume and the cost in
    question is valid.
  • Assume that fixed (leasing) costs are 94,500 for
    a year and that they remain the same for a
    certain volume range (1,000 to 5,000 bicycles).
  • 1,000 to 5,000 bicycles is the relevant range.

13
Manufacturing
  • Manufacturing-sector companies purchase materials
    and components and convert them into finished
    goods.
  • A manufacturing company must also develop,
    design, market, and distribute its products.

14
Merchandising
  • Merchandising-sector companies purchase and then
    sell tangible products without changing their
    basic form.

15
Service Companies...
  • provide services or intangible products to
    their customers.
  • Labor is the most significant cost category.

16
Types of Inventory
  • Manufacturing-sector companies typically have one
    or more of the following three types of
    inventories
  • Direct materials inventory
  • Work-in-process inventory (work in progress)
  • Finished goods inventory

17
Types of Inventory
  • Merchandising-sector companies hold only one type
    of inventory the product in its original
    purchased form.
  • Service-sector companies do not hold inventories
    of tangible products.

18
Classification of Manufacturing Costs
  • Direct materials costs
  • Direct manufacturing labor costs
  • Indirect manufacturing costs

19
Inventoriable Costs
  • Inventoriable costs are all costs of a product
    that are regarded as an asset when they are
    incurred and then become cost of goods sold when
    the product is sold.
  • For manufacturing-sector companies, all
    manufacturing costs are inventoriable costs.

20
Inventoriable Costs
  • Inventoriable costs (direct materials, direct
    labor and indirect manufacturing costs) are
    included in work-in-process and finished goods
    inventory.
  • Inventoriable costs flow to the income statement
    as cost of the goods sold.

21
Inventoriable Costs
  • For merchandising-sector companies, inventoriable
    costs are the costs of purchasing the goods which
    are resold in their same form.
  • For service-sector companies, the absence of
    inventories means there are no inventoriable
    costs.

22
Period Costs
  • Period costs are all costs in the income
    statement other than cost of goods sold.
  • Period costs are recorded as expenses of the
    accounting period in which they are incurred.

23
Period Costs
  • For manufacturing-sector companies, period costs
    include all non-manufacturing costs (research and
    development, distribution, etc.).
  • For merchandising-sector companies, period costs
    include all costs not related to the cost of
    goods purchased for resale.
  • For service-sector companies, all of their costs
    are period costs.

24
Prime Costs and Conversion Costs
  • Prime costs are all direct manufacturing costs.
  • Prime costs direct materials and direct labor
  • Conversion costs are all manufacturing costs
    other than direct materials
  • Conversion costs direct labor and manufacturing
    overhead

25
End of Chapter 2
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