Cost
sacrifice of resources
- when we buy one thing, we give up (sacrifice) the ability to use these resources (typically cash or a line of credit) to buy something else
Expense
cost that is charged against revenue in an accounting period
outlay cost
past, present, or future cash outflow
opportunity cost
forgone benefit from the best (forgone) alternative course of action
operating profit
excess of operating revenues over the operating costs necessary to generate those revenues
cost of goods sold
expense assigned to products sold during a period
product costs
costs assigned to the manufacture of products and recognized for financial reporting when sold
period costs
costs recognized for financial reporting when incurred
direct manufacturing costs
product costs that can be feasibly identified with units of production
indirect manufacturing costs
all other products costs, except direct costs
direct material
materials that can be feasibly identified directly, at relatively low cost, with the product
direct labor
labor that can be identified directly, at reasonably cost, with the product
manufacturing overhead
all production costs except those for direct labor and direct materials
prime costs
sum of direct materials and direct labor
conversion costs
sum of direct labor and manufacturing overhead
marketing costs
costs required to obtain customer orders and provide customers with finished products, including advertising, sales commissions, and shipping costs
administrative costs
costs required to manage the organization and provide staff support, including executive salaries; costs of data processing, and legal costs
cost allocation
process of assigning indirect costs to products, services, people, business units, etc
cost object
any end to which a cost is assigned
cost pool
collection of costs to be assigned to the cost objects
cost allocation rule
method used to assign costs in the cost pool to the cost objects
cost flow diagram
diagram or flowchart illustrating the cost allocation process
direct cost
any cost that can be directly (unambiguously) related to a cost object at reasonable cost
indirect cost
any cost that cannot be directly related to a cost object
work in process
product in the production process but not yet complete
finished goods
product fully completed but not yet sold
inventoriable costs
costs added to inventory accounts
fixed costs
costs that are unchanged as volume changes within the relevant range of activity
variable costs
costs that change in direct proportion with a chance in volume within the relevant range of activity
relevant range
activity levels within which a given total fixed cost or unit variable cost will be unchanged
semivariable costs
cost that has both fixed and variable components; also called mixed cost
step cost
cost that increases with volume in steps; also called semifixed cost
full cost
sum of all costs of manufacturing and selling a unit of product (includes both fixed and variable costs)
full absorption cost
all variable and fixed manufacturing costs; used to compute a product's inventory value under GAAP
gross margin
revenue-cost of goods sold on income statements. per unit, the gross margin equals sales price-full absorption cost per unit
contribution margin
sales price-variable costs per unit
Explain the basic concept of "cost
-cost is a sacrifice of resources
- outlay cost--past, present, or future cash outflow
- opportunity cost- forgone benefit from the best alternative course of action
- expense--cost charged against revenue in an accounting period
explain how costs are represented in financial statements
Income statement--the numbers are the cost of billable hours
- revenues
- cost of goods sold
- gross margin
-marketing and administrative cost
-operating profit
presentation of costs in financial statements
- cost incurred to manufacture the product sold
explain the process of cost allocation
- assigning indirect costs to products, services, business units, etc.
1. define the cost pool-the collection of costs to be assigned to cost objects
2. determine the cost allocation rule- the method used to assign costs in the cost pool to cost objects
3
understand how material, labor and overhead costs are added to a product at each stage of the production process
product costs are recorded in inventory when costs are incurred
1. raw materials inventory-materials purchased to make a process
2. work-in-process inventory-products currently in the production process, but not yet completed
3. finished goods inventory-c
define basic cost behaviors, including fixed, variable, semivariable and step costs
cost behavior-how costs respond to a change in activity level within the relevant range
relevant range-activity levels within which a total given fixed cost or unit variable cost will be unchanged
fixed costs-remain unchanged as volume changes with the re
identify the components of a product's cost
full cost-the sum of all costs of manufacturing and selling a unit of the product
full absorption cost-the sum of all variable and fixed costs of manufacturing a unit of the product
variable cost- the sum of all variable costs of manufacturing and selling
understand the distinction between financial and contribution margin income statements
full absorption costing- required by GAAP, used for financial purposes and external reporting
variable costing-managerial purposes, internal decision making
Variable cost per unit
Direct materials + direct labor + variable manufacturing overhead+variable marketing and administrative
variable manufacturing cost per unit
direct materials+direct labor+variable manufacturing overhead
full absorption cost per unit
direct materials+direct labor+variable manufacturing overhead+fixed manufacturing overhead
profit margin per unit
sales price-full cost
gross margin per unit
sales price - full absorption cost per unit
contribution margin unit
sales price - variable costs per unit