Chapter 2: An Introduction to Cost Terms and Purposes

Cost

A resource sacrificed or foregone to achieve a specific objective.

Cost Driver

A variable, such as the level of activity or volume that causally affects costs over a given time span. (An activity is an event, task, or unit of work with a specified purpose- ex. design product, set up machine, test product.)

Direct Material Costs

Acquisition costs of all materials that eventually become part of the cost object ( work-in-process and then finished goods) in an economically feasible way.

Conversion Costs

All Manufacturing costs OTHER THAN direct materials costs. Note that direct labor costs are a part of both prime costs and conversion costs.

Period Costs

All costs in the income statement other than cost of goods sold. Ex: R&D, marketing, distribution, and customer service costs

Inventoriable Costs

All costs of a product that are considered assets in a company's balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold.

Cost Object

Anything for which a measurement of costs is desired.

Design of Operations

Classifying a cost as direct is easier if a company's facility (or some part of it) is used exclusively for a specific cost object, such as a specific product or a particular customer.

Unit Cost aka Average Cost

Cost computed by dividing total costs by the number of units.

Actual Cost

Cost incurred (a historical or past cost), as distinguished from a budgeted or forecast cost.

Variable Cost

Cost that changes (in total) in proportion to changes in the related level of total activity or volume.

Indirect costs of a cost object

Costs related to the particular cost object but CANNOT be traced to that object in an economically feasible way (cost-effective) way.

Direct Costs of a Cost Object

Costs related to the particular cost object that can be traced to that object in an economically feasible (cost-effective) way.

Fixed Cost

Costs that remains unchanged (in total) for a given time period, despite wide changes in related level of total activity or volume.

Cost Tracing

Describes the assignment of DIRECT costs to a particular cost object.

Cost Allocation

Describes the assignment of INDIRECT costs to a particular cost object.

Direct Materials Inventory

Direct materials in stock and awaiting use in the manufacturing process.

Cost Assignment

General term that encompasses both (1) tracing accumulated costs that have a direct relationship to a cost object and (2) allocating accumulated costs that have an indirect relationship to a cost object.

Work-In-Process Inventory (WIP)

Goods partially worked on, but not yet completed.

Available Information-Gathering Technology

Improvements in information-gathering technology make it possible to consider more and more costs as direct costs.

Direct Manufacturing Labor Costs

Include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way.

Indirect Manufacturing Costs aka Manufacturing Overhead Costs

Manufacturing costs that are related to the cost object (work in process and then finished goods) but CANNOT be traced to that cost object in an economically feasible way. Also called MOH costs and factory overhead costs.

Budgeted Cost

Predicted or forecasted cost (future cost) as distinguished from an actual or historical cost.

Service-sector Companies

Provides services (intangible products)- for example, legal advice or audits- to their customers.

Merchandising-sector Companies

Purchase and then sell (tangible) products without changing their basic form.

Manufacturing- sector Companies

Purchase materials and components and convert them into various finished goods.

Prime Costs

Refers to direct material and direct labor costs. Excludes Indirect manufacturing costs.

Relevant Range

The band or range of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question.

Cost Accumulation

The collection of cost data in some organized way by means of an accounting system.

Cost of Goods Manufactured

The cost of goods brought to completion, whether they were started before or during the current accounting period.

The Materiality Of The Cost In Question

The smaller the amount of a cost- that is, the more immaterial the cost is- the less likely it is economically feasible to trace it to a particular cost object.

Product Cost

The sum of the costs assigned to a product for a specific purpose.

Overtime Premium

Wage rate paid to workers (for both direct and indirect labor) in excess of their straight-time wage rates. Considered to be part of indirect or overhead cost.

Idle Time

Wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, poor scheduling, and the like. Considered to be an indirect cost.