Cost management Chapter 2

Indirect costs

cannot be traced easily and accurately to a cost
object.

Direct costs

can be traced easily and accurately to a cost object.

Direct tracing:

relies on physical observance of causal relationships to
assign costs to cost objects (i.e. pair of jeans)

Driver tracing

relies on drivers as causal factors to assign costs to
cost objects. Drivers cause changes in resource usage, activity usage,
costs, and revenues. (i.e. cost of electricity for the jeans manufacturing
plant - driver: "machine hours")

� Direct materials:

those materials directly
traceable to the goods or services being
produced.
-Example: The cost of wood in furniture.

� Direct labor:

labor that is directly traceable to
the goods or services being produced.
-Example: Wages of assembly-line workers.

Overhead:

all other manufacturing costs.
-Example: Plant depreciation, utilities, property
taxes, indirect materials, indirect labor, etc.

Prime costs

Direct Materials + Direct labor

Conversion Costs

Direct Labor + overhead costs

Production or Manufacturing costs

Direct materials, direct labor, overhead

Nonproduction or Operating Costs

R&D Expense, Marketing (Selling) Expense, Administrative Expense

value chain

set of activities required to design, develop, produce, market, deliver, and provide post-sales service for the products and services sold to customers

cost

the cash of cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization

expense

an expired cost or a cost used up in the production of revenues

loss

cost that expires without producing any revenue benefits

cost object

any item for which costs are measured and assigned

activity

a basic unit of work performed within an organization

traceability

the ability to assign a cost to a cost object in an economically feasible way by means of a causal relationship

tracing

is the process of assigning costs to a cost object using an observable measure of the resources consumed by the cost object

allocation

is the least accurate cost assignment method. no causal relationship exists between the cost and the basis used to assign the cost to the cost object

difference between products and services

intangibility, perishability, inseparability

selling costs

cost necessary to market, distribute, and service a product of service

administrative costs

the costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either marketing or production

marketing and admin costs

are period costs and are deducted as an expense on the income stmt in the period incurred. do no appear on the balance sheet

measurement costs

costs assoc. with the measurements required by the cost mgmt system

error costs

costs assoc. with making poor decisions based on bad cost information