5.1 COST MANAGEMENT TERMINOLOGY Flashcards
Cost accounting
Cost accounting supports both financial and management accounting. Information about
the cost of resources acquired and consumed by an organization underlies effective
reporting for both internal and external users.
A cost is defined by the IMA in two senses:
1) “In management accounting, a measurement in monetary terms of the amount of resources used for some purpose. The term by itself is not operational. It becomes operational when modified by a term that defines the purpose, such as acquisition cost, incremental cost, or fixed cost.”
2) “In financial accounting, the sacrifice measured by the price paid or required to be paid to acquire goods or services. The term ‘cost’ is often used when referring to the valuation of a good or service acquired. When ‘cost’ is used in this sense, a cost is an asset. When the benefits of the acquisition (the goods or services) expire, the cost becomes an expense or loss.”
A Cost Object
is any object to which costs can be attached. #Examples are products, processes, employees, departments, and facilities #Costs are allocated to objects to assist management decision making on a variety of matters, including whether to expand a department, discontinue a product line, and make or buy a good.
A cost driver
is the basis used to assign costs to a cost object.
# Cost driver is defined by the IMA as “a measure of activity, such as direct labor hours, machine hours, beds occupied, computer time used, flight hours, miles driven, or contracts, that is a causal factor in the incurrence of cost to an entity.”
# The key aspect of a cost driver is the existence of a direct cause-and-effect relationship between the quantity of the driver consumed and the amount of total
cost. In other words, a cost driver is some event that causes costs to occur.
Costs can be classified by how they are assigned to cost objects. [Name the two Classifications]
1) Direct costs are ones that can be associated with a particular cost object in an economically feasible way, i.e., they can be traced to that object.
2) Indirect costs are ones that cannot be associated with a particular cost object in an economically feasible way and thus must be allocated to that object.
Direct costs Examples
a) Examples are the direct materials and direct labor inputs to a manufacturing
In direct costs Examples
Examples are the indirect materials and indirect labor inputs to a manufacturing
Regarding to Indirect costs and and to simplifies the allocation process , indirect costs are often what?
indirect costs are often collected in cost pools, to simplify the allocation process.
A cost pool
is an account into which a variety of similar cost elements with a common cause are accumulated.
i) It is preferable for all the costs in a cost pool to have the same cost driver.
ii) Manufacturing overhead is a commonly used cost pool into which various untraceable costs of the manufacturing process are accumulated prior to being allocated.
Common costs
are another notable type of indirect cost. A common cost is a cost incurred for the benefit of more than one cost object.
a) The key to common costs is that, since they cannot be directly traced to a single
cost object, they must be allocated using some systematic and rational basis.
b) An example is depreciation or rent on the headquarters building. This is a direct cost when treating the building as a whole, but is a common cost of the departments located in the building, and thus must be allocated when treating the individual departments.
