Chapter 2 Managerial Accounting Concepts and Cost Flows Flashcards
product Costing
Product costing
involves gathering and assigning the costs of all inputs in the manufactur-
ing or acquisition process to individual products. The individual products represent a type of
cost object
cost object
may be anything for which business managers must determine a cost.
Hint:
A cost object
is anything to which
costs may be traced.
Examples for Apple
include everything from
an mp3 file to a tablet PC
to a service department.
product costs
Product costs
include all costs necessary to bring a product to completion. For
a manufacturer, product costs include materials
and components, human labor, utilities, and the
use of factory assets. These costs are all recorded
initially in inventory accounts.
period costs
Period costs
are recognized as an expense
on the income statement in the period incurred
and not assigned to products.
Period costs
are recognized as an expense
on the income statement in the period incurred
and not assigned to products. The benefits asso-
ciated with these costs are assumed to expire in
the period incurred rather than in the period in
which the product is sold.
variable costs
period costs
relative to that cost
object.
* Sum the product costs.
* Costs associated with completion of specific
consulting projects, such as consultant labor and
project supplies, would be considered product
costs.
* Costs not directly related to projects but related to
operating the business, such as general liability
insurance premiums, office rent, and marketing
costs, would be considered period costs.
Variable, Fixed, and Mixed Costs
Another way to classify costs that can be helpful to decision-makers is to classify them
based on their behavior (see
Exhibit 2-3
)
.
A
variable cost
is a cost that
varies in total but
is fixed per unit
for a certain period of time and range of activity. In total, variable costs
change proportionately with changes in the volume of activity
FiXed cOSt
A
fixed cost
is
fixed in total but variable
on a per-unit basis
for a particular period o
mixed cost . ( semi-variable costs)
have both fixed and variable
components. A mixed cost changes linearly with changes in activity, but there is still a
positive cost when the activity level is zero, as shown in
Exhibit 2-4
. As an example of a
mixed cost, consider Apple’s utility expense at the factory that produces the iPad. Assume
that even if Apple shuts down production for one month, it still incurs a minimum amount
for utilities, say $200,000. When production resumes, the costs of heating, air condition-
ing, lighting, and water increase with usage as production increases.
direct cost
direct cost is a cost that can be easily
and cost-effectively traced to a specific cost object, such
as a unit of product. In a manufacturing company, two obvious direct costs are the main materials and the labor used
to produce a unit of product. However, other costs may be
directly traced as well. For example, in determining the
cost of an iPad, Apple would attempt to trace as many
costs as possible directly to each iPad unit. Clearly, the
main materials, such as the liquid crystal display (LCD)
screen and the microprocessor, and the labor involved in
assembly would be traced directly to each iPad. However,
in a highly automated process, it is possible that Apple could also trace some robotic assembly costs directly to each iPad.
indirect cost
indirect cost, therefore, is a cost that cannot be easily and cost-effectively traced
to a specific cost object. If Apple were interested in the cost of one of the thousands of
products shipped from one of its warehouses, the depreciation expense for that warehouse
would be an indirect cost because it is not easily traced to any one unit of product that
passes through the warehouse. It would be considered a common cost for all products of the
warehouse. As noted in the previous examples, a particular cost may be considered direct or
indirect, depending on the cost object.
period costs
costs that are expensed in the period the costs are incurred
materials inventory
Factory materials that have been purchased but not yet placed into production
work-in-process inventory
units of product in production, that have not yet been completed
finished goods inventory
all units of a product that have been completed but not yet sold
Factory supplies
consumable items, like cleaning supplies and machinery lubricants, used in the factory but not incorporated into the product
office supplies
used in factory but not incorporated into the product itself. ie. paper clips, copy paper, pens, etc.
