Session 2

Cost Tracing

-One of the primary goals of cost accounting is to determine the costs of a particular cost object
-In order to do this, we need to be able to "link" the cost object to its various costs via a cause and effect relationship
-This process is known as
cost t

Direct Costs

-Direct costs can be traced easily and cost effectively (i.e. directly) to their cost object(s)
Examples:
-Cost of Tires ------> Car
-Cost of Wood -----> Desk
-Cost of Flour, Eggs, Sugar and Milk --> Cake
-Salary for the baker -------> Cake

Indirect Costs

-Indirect Costs are
clearly related to their cost object(s) but cannot be traced in a cost-effective manner
Examples:
-Cost of electricity for oven -------> Cake
-Cost of glue -------> Desk
-Cost of manufacturing plant manager ----> Car
-Assume that more

Allocation of Costs

-Indirect costs are assigned by developing some allocation method and then assigning costs on that basis.
-What we came up with is often called "broad averaging" or "peanut butter costing"
-The idea of allocation of costs is one of the most fundamental co

Costs as a Resource

-We said last time that costs are only borne in order to reap benefits
In this sense, we are buying new resources with old ones
-The cost we paid was the old resource, the benefit we obtain is the new resource
-Cost allocation methods aspire to assign the

Factors Influencing In/Direct Costs

-Whether a cost is classified as direct or indirect isn't something set in stone.
Several factors influence the decision:
-Materiality of the cost
e.g. Glue for desks
-Available technology
Better tech usually means more direct tracing
-Firm structure and

Cost Behavior

-It is important, particularly for budgeting and decision making, to know how a particular cost behaves
-By "behaves" we mean how the
TOTAL
cost changes as the number of units the firm produces (i.e. volume) changes
-The variable that's changing is the nu

Fixed Costs

-The first case is that no change in total cost occurs as volume increases
-
Volume changes = total costs do not change
-
As I make more units, fixed costs go down PER UNIT
-Total cost = aggregate cost
-The classic example here is rent or mortgage.
-As th

Variable Costs

-The second case is that total costs increase as volume increases
-
Volume increases TOTAL COST goes up
-For variable, when I produce nothing, I incur NO cost
-
As I make more units, variable costs is constant PER UNIT
-Typical examples are raw materials

Mixed Costs

-As you can see, when 0 units are made, there's still a cost.
-This means it can't be purely variable.
-However, as the number of units produced increases, the total cost increases, so it can't be purely fixed either
-It's a bit of both - it's mixed.

Relevant Range

-When we talk about cost behavior, we always need to specify a relevant range
-
A range of volume over which we are considering the cost
-We can draw different assumptions depending on the relevant range
-This is a specific range of production that we wan

Types of Firms

Manufacturing Firms
Merchandising Firms
Service Firms

Manufacturing Firms

-
These firms make/produce tangible goods
-Examples: Mazda, Boeing, Caterpillar, Apple*, Dow Chemicals, Carnegie Steel, etc.
-This is the most general type of firm - the other two types are "special cases"
-Has three general types of inventory accounts:
1

Merchandising Firms

-
These firms purchased finished goods from another firm and resell them
-Examples: Macy's, Walgreens, Amazon, Target, WalMart, Publix, Kroger
-These firms only have one kind of inventory -
finished goods
-That's why merchandising firms are a special case

Service Firms

-
These firms sell services (not surprisingly)
-Examples: restaurants, dry-cleaners, financial advisers, accountants, lawyers, doctors, mechanics
-One of the basic characteristics of a service is that it must be consumed immediately after its production -

Production Costs

-The costs that
go into manufacturing products
- called production costs - are generally broken into three categories:
1. Direct Materials
2. Direct Labour
3. Overhead

Direct Materials

-Direct materials are tangible components that are
directly traceable to the product or service being produced
Examples:
-Steel in an automobile
-Denim for jeans
-Hardware for an orthopedic operation

Direct Labor

-Direct labor is
directly traceable to the product or service being produced
-Physical observation of labor is key to direct traceability
-Like direct materials, physical observation allows for this ease of traceability
Examples:
-Factory worker salary
-S

Overhead

-Overhead is
everything that's not direct materials or labor but still related to production
1. Indirect Materials
2. Indirect Labor
-
Indirect materials and labor are those materials and labor that cannot be easily traced to their cost objects
Examples:

Non-Production Costs

-Non-production costs are all the
costs that the business incurs that are not directly related to production
-These costs are all
period costs
.
-The production costs we just talked about are all inventoriable costs.
Examples:
1. Marketing costs
2. Sales

Cost Flows

Control Accounts

-When the book writes out inventory account names, it typically refers to things such as "DM Control" or "WIP Control."
-Why is this?
-The point the authors are making is that these accounts typically have subsidiary ledgers - one for each sub-account
-Fo

Manufacturing Overhead Applied

-Astute observers will notice that we created an accounted called "MOH Applied" rather than simply "MOH"
-Applied overhead, which we will discuss in more detail soon,
includes estimates to allow us to track costs as they occur during the period
-Applied M