Semester 1 Week 1a PP (An introduction to Cost terms and concepts) Flashcards
What is cost?
Economic Definition: A monetary measure of resources sacrificed or forgone to achieve a specific objective (i.e., acquire a good or service or bring a current or future benefit).
Unfortunately, the term has multiple meanings and different types of cost are used in different situations.
Thus, we need to clarify the assumptions that underlie cost measurement in order to have a thorough understanding of the management accounting systems.
What is a cost object?
Cost Object: An activity for which a separate measurement of cost is desired or required:
Making a product or providing a service.
Cost of a department/sales territory.
What is a cost collection system?
A cost collection system typically accounts for costs in two broad stages:
1. Accumulates (collects) costs by classifying them into certain categories such as by nature of expense (e.g., labour, materials and overheads) or by cost behaviour (such as fixed and variable costs).
2. Assigns costs to cost objects directly or indirectly.
What are some cost terminologies?
Cost Object
Direct and indirect costs
Cost behaviour in relation to volume or profitability (Variables-Fixed Costs)
Relevant and irrelevant costs
Avoidable and unavoidable costs
Sunk costs
Opportunity costs
Incremental and marginal costs
What are different types of inventory by organization?
How do you identify direct and indirect costs?
Direct costs can be specifically and exclusively identified with a particular cost object.
Indirect costs (overheads) cannot be specifically and exclusively identified with a given cost object.
Indirect costs (i.e., overheads) are assigned to cost objects on the basis of cost allocations.
Cost allocation => process of assigning costs to cost objects that involve the use of surrogate, rather than direct measures.
The distinction between direct and indirect costs depends on what is identified as the cost object.
Direct costs can be conveniently and economically traced (tracked) [in full] to a cost object. Indirect costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner.
Desk manufacturing: What components are direct/indirect costs in this process?
Wood is a direct material cost
Wages of operatives whose time can be traced to the specific desk are a direct labour cost
Salaries of factory supervisors cannot be specifically traced to a specific desk -> Indirect (labour) cost.
What is the flow of costs in manufacturing and non-manufacturing costs?
Manufacturing costs:
Direct materials = Prime Costs = Direct Labour = Conversion cost = Manufacturing overhead.
Non-manufacturing costs = Administrative overheads. Marketing overhead (order-getting and order-filling costs).
How do you calculate product cost in total and per unit?
How do you calculate prime cost and conversion cost in total and per unit?
Per-unit Prime cost = Total Prime cost/Number of units produced
Per-unit Conversion cost = Total Conversion cost/Number of units produced
What are the basic equations for inventory accounts and cost of goods sold?
What is the treatment for period and product costs?
What does a traditional cost system accumulating product costs look like?
What do the income statement and schedule of cost of goods sold manufactured look like?
What are the Basic Equations for Inventory Accounts and Cost of Goods Sold: Merchandising Company.
How do you calculate the direct materials used in production?
How to Calculate Cost of Goods Manufactured
How to Calculate Cost of Goods Sold
