Cost Accounting: Chapter 2

LO3: How are costs classified on the financial statements and why are such classifications useful?

*The balance sheet is a statement of unexpired costs (assets) and liabilities and owner's capital whereas the income statement is a statement of revenues and expired costs (expenses and losses). *The matching concept provides a basis for deciding when an unexpired cost becomes an expired cost and is moved from an asset category to an expense or loss category. *When the product is specified as the cost object, all costs can be classified as either production or period costs.

LO2: What assumptions do accountants make about cost behavior, and why are these assumptions necessary?

*Variable costs are constant per unit and will change in total in direct proportion to changes in activity. *Fixed costs are constant in total and will vary verily on a per-unit basis with changes in activity. *Mixed costs fluctuate in total with changes in activity and con be separated into their variable and fixed components. *Step costs are either variable or fixed, depending on the size of the changes (width of the steps) in costs that occur with changes in activity.

LO1: Why are costs associated with a cost object?

Collecting costs in different ways can help management make decisions regarding the efficiency of operations and cost management effectiveness.

Manufacturer

A company engaged in a high degree of conversion that results in a tangible output.

Product Costs

A cost associated with making or acquiring inventory.

Distribution Cost

A cost incurred to warehouse, transport, or deliver a product or service.

Period Costs

A cost other than one associated with making or acquiring inventory.

Indirect Costs

A cost that cannot be traced explicitly to a particular cost object; a common cost; a cost that must be allocated or assigned to products or services because of its non-traceability.

Mixed Cost

A cost that has both a variable and a fixed component; varies, but not proportionately, with changes in activity. Example: *An electric bill has a flat charge for basic service (fixed cost) plus a stated rate for each kilowatt hour of usage (the variable cost).

Step Cost

A cost that increases in distinct amounts because of increased activity.

Direct Costs

A cost that is distinctly traceable to a particular cost object.

Fixed Cost

A cost that remains constant in total within the relevant range of activity; cost varies inversely on a per-unit basis with changes in the level of activity. Examples: *Salaries (as opposed to hourly wages) *Depreciation (computed using the straight-line method) *Insurance

Variable Cost

A cost that varies in total in direct proportion to changes in activity; is constant on a per-unit basis.

Cost Driver

A factor that has a direct cause-effect relationship to a cost; an activity creating a cost.

Service Company

A firm engaged in a high or moderate degree of conversion that results in service output.

Direct Material

A readily identifiable input or component of a product; the cost of such an input or component.

Cost Management System (CMS)

A set of formal methods developed for planning and controlling an organization's cost-generating activities relative to its goals and objectives

Predictor

An activity measure that, when changed, is accompanied by consistent, observable changes in another item.

Unexpired Cost

An asset.

Expired Cost

An expense or a loss.

Overhead

Any factory or production cost that is indirect to the product or service; does not include direct material or direct labor; any production cost that cannot be directly traced to the product or service.

Cost Object

Anything to which costs attach or are related.

LO4: How does the conversion process occur in manufacturing and service companies?

Manufacturers - any company engaged in a high degree of conversion of raw material input into a tangible output using people and machines. Service Company - A for-profit business or not-for-profit organization that uses a significant amount of labor to engage in a high or moderate degree of conversion, whose outputs can be tangible (e.g. architectural drawing) or intangible (e.g., insurance protection).

Conversion Cost

The sum of direct labor and overhead cost; the cost necessary to transform direct material into a finished good or service.

Inventoriable Costs

Same as Product Cost.

Prime Cost

The total cost of direct material and direct labor for a product.

LO5: What are product cost categories, and what items comprise those categories?

Three components to product cost: 1. Direct Material 2. Direct Labor 3. Production Overhead Direct Material: *

Cost

The cost or cash equivalent value necessary to attain an objective such as acquiring goods and services, complying with a contract, performing a function, or producing and distributing a product.

Direct Labor

The individuals who work specifically on manufacturing a product or performing service; the time of individuals who work specifically on manufacturing a product or performing a service; the cost of the time of such individuals.

Relevant Range

The specified range of activity over which a variable cost per unit remains constant or a fixed cost remains fixed in total; is generally assumed to be the normal operating range of the organization.

Raw Material

The stage in production or conversion process where work has not yet been started.

Work in Process

The stage in the production or conversion process here work has been started but not yet completed.

Finished Goods

The stage in the production or conversion process where units are fully completed and ready for sale to customers.