Cost Accounting Chapter 2

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