Chapter 1 Cost Classifications for Assigning Costs to Cost Objects

A company purchased a 12 month insurance policy on Oct 1 for $1200. On December 31 annual financial statements,

$300 is reported as an expense and $900 is reported as an asset

Product Costs

1. Attach to units of product as they are purchased for resale or produced 2. Are also called inventoriable costs

differential cost

1. Difference in cost between two alternatives 2. Also know as incremental cost

Manufacturing cost include

1. Direct Labor 2. Direct Materials 3. Manufacturing Overhead

Other names for manufacturing overhead include

1. Factory burden 2. Factory overhead 3. Indirect manufacturing costs

Other names for manufacturing overhead include

1. Factory overhead 2. Factory burden 3. Indirect manufacturing costs

step-variable costs

1. May include total salaried employee expense 2. Can be adjusted quickly as conditions change

activity base

1. Measures whatever causes costs to vary 2. Is sometimes called a cost driver

cost behavior

1. Refers to how a cost will change as activity level changes 2. Categorizes costs as fixed, mixed and variable

Matching Principle

Accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized.

cost behavior

Categorizes costs as fixed, mixed and variable

variable costs

Changes in total, in direct proportion to changes in activity level

Finished goods consists of

Completed, unsold goods

The relative proportion of each type of cost in an organization is known as the company's

Cost structure

Indirect Cost

Costs that cannot be easily and conveniently traced to a unit of product or other cost object

As the level of activity increases, fixed cost per unit

Decreases

Conversion Cost

Direct Labor + Manufacturing Overhead

Manufacturing Costs

Direct materials and direct labor are both

Fixed costs that usually arise from annual spending decisions by management are called _______ or managed fixed costs.

Discretionary

Completed unites that have not yet been sold are found in _____ _____ inventory.

Finished goods

When manufactured products are sold, their costs are transferred out of _________ ________

Finished goods

Product costs flow through the inventory accounts until the goods are sold, at which time they are matched against sales on the ______.

Income statement

Factory burden is a synonym for ______ ______

Manufacturing Overhead

Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Product cost _____ recorded as expenses on the income statement in the period in which they are incurred.

May or may not be

Product costs _______ recorded as expenses on the income statement in the period in which they are incurred.

May or may not be

Indirect Materials

Raw materials that do not physically become part of the finished product or for which it is impractical to trace to the finished product because their physical association with the finished product is too small.

Within the relative range,

Step fixed costs should be treated as entirely fixed

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Costs of goods sold for a merchandising company, direct materials and commissions are examples of ______ costs.

Variable

variable costs

Varies in total, in direct proportion to changes in the level of activity

Variable costs

Vary in total and Remain consistent per unit

Units of product that are only partially complete are contained in _____ ____ _____inventory

Work in Process

Y=a+bX

Y=the total mixed cost a=the total fixed cost (Vertical intercept of the line) b=the variable cost per unit of activity (the slope of the line) X= the level of activity

Direct cost

a cost that can be easily and conveniently traced to a specified cost object

Mixed cost

a cost that contains both variable and fixed cost elements

Common Cost

a cost that is incurred to support a number of cost objects but that cannot be traced to them individually. A common cost is a type of indirect cost.

activity base

a measure of whatever causes the incurrence of a variable cost

Administrative Costs

all costs associated with the general management of an organization rather than with manufacturing or selling

Selling Costs

all costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer

Period Costs

all costs that are not product costs

Manufacturing overhead

all manufacturing costs except direct materials and direct labor

Touch Labor

another name for direct labor

Raw materials

any materials that go into the final product

Cost Object

anything for which cost data are desired - including products, customers, plants, office locations, and departments

How individual costs react to changes in activity level is referred to as cost

behavior

Fixed costs that cannot easily be changed and often lock a company into a multi-year decision are called _______ fixed costs.

committed

Product Costs

direct materials, direct labor, manufacturing overhead

Selling and administrative costs are ______ costs

direct or indirect

Administrative costs include

executive compensation and public relations costs

Indirect labor costs include

factory security guard wages, assembly-line supervisor salary

Costs that remain constant in total are _____ costs

fixed

As the level of activity moves outside of the relevant range, fixed costs

increase or decrease in discrete steps

Salaries of factory supervisors and factory maintenance personnel are examples of ______ labor costs.

indirect

Direct Labor

labor costs that can be easily traced to individual units of product

Common activity bases include:

machine hours, units sold, and direct labor hours

Discretionary fixed costs include

management training programs and advertising

Factory materials, such as cleaning supplies, that are not components of finished products are classified as ______.

manufacturing overhead

Indirect materials include

nails, glue, and thread

Direct materials, direct labor, and manufacturing overhead are all _____ costs

product

Prior to being recorded on the income statement, manufacturers' product costs flow through ______.

raw materials, work in progress, finished goods

committed fixed costs include

real estate taxes, top management salaries

The assumption that cost behavior is strictly linear is reasonably valid within the _____ _____ of activity

relevant range

Nonmanufacturing costs include

selling costs and administrative costs

SG&A costs

selling, general, and administrative costs

Cost Structure

the relative proportion of each type of cost in an organization

Prime Cost

the sum of direct materials cost and direct labor cost

Period costs are always expensed on the income statement in the period in which ______.

they are incurred

Costs of partially completed units are accounted for in ______.

work in process

Units of product that are only partially complete are contained in _____ _____ _____ inventory

work in process