Cost objects
- resources or activities that serve as the basis for management decision
- require separate cost measurement and may be products. product lines, departments etc
Product cost
Direct materials
Direct labor
Manufacturing overhead
Prime costs
Direct materials
Direct labor
Conversion costs
Direct labor
Manufacturing overhead
Product costs
inventoriable
become cost of goods sold when sold
Period costs
Expensed in the period incurred
Traditional overhead rate
Budgeted manufacturing overhead costs / Estimated cost driver
Relevant range
The relevant range is the range of volume for which the assumptions of the cost driver are valid and in which the actual value of the cost driver exists
Costs incurred before the split off point
Costs incurred before the split off point are sunk costs, not relevant to further processing decisions.
Joint costs are allocated using one of the following methods.
Use % of product to total based on a ratio of:
- relative sales value
- net realizable value
- physical units
Cost of goods manufactured
WIP beginning Add: Direct materials Direct labor Manufacturing overhead Less: WIP ending
Cost of goods sold
Finished goods (beginning)
Add: Cost of goods manufactured or Purchased
Less: Finished goods (ending)
Cost of goods sold
Job costing
with job costing, each unit is unique and easily identifiable costs are determined by each job
Process costing
with process costing, mass produced identical units are manufactured, and costs are determined by activity/process/department
Equivalent unit
used in process costing, equivalent units are fully completed and partially completed units during the period.
In applying costs, determine the units, then costs, then apply the cost flow assumption for cost per unit and allocation of costs
Equivalent units - FIFO
Equivalent units
Beginning WIP x % to be completed
Add: Units started and completed
Add: Ending WIP x % completed
Total costs = cost incurred during the current period
Equivalent units - weighted average
Equivalent units
Units completed
Add: Ending WIP x % completed
Total costs = costs in beginning WIP + costs incurred during the current period
Abnormal Spoilage
charge to income of the current period
Normal spoilage
increase the cost of the product produced
Activity based costing
ABC is a costing theory that assumes that resource consuming activities cause costs and that costs should be assigned to benefiting products based on the activities performed and the resources consumed.
ABC system often divide costs into multiple activity centers and identify the activities that drive the costs in each cost center. Costs are then assigned based on the volume of cost drivers at the determined rate per cost driver
