Chapter 1 Flashcards
(18 cards)
Purposes of cost classification
Assigning costs to cost objects
Accounting for costs in manufacturing companies
Preparing financial statements
Predicting cost behavior in response to changes in activity
Making decisions
Direct costs
Costs that can be easily and conveniently traced to a unit of product or other cost object.
Ex : direct materials and direct labor
Indirect cost
Costs that cannot be easily and confidently tracked to a unit of product or other cost object
Ex : manufacturing overhead
Direct materials
Raw materials that become an integral part of the product and that can be conveniently traced directly to it
Ex : seat installed in an aircraft
Direct labor
Labor costs that can be easily tracked to individual units of product
Ex: wages payed to automobile assembly workers
Manufacturing overhead
All manufacturing costs except direct materials and direct labor
Includes indirect materials and indirect labor
Ex: depreciation of manufacturing equipment, utility cost, property taxes, insurance premiums to operate manufacturing facility
Prime / conversion cost
Prime - direct materials and direct labor
Conversion - direct labor and manufacturing overhead
Nonmanufacturing cost
Selling cost - cost necessary to secure the order and deliver the product. Can be direct or indirect cost.
Administrative cost - all executive organizational and clerical costs. Can be direct or indirect cost
Product cost
Include all costs involved in acquiring or making a product
Product costs include
Raw materials
Work in progress
Finished goods
Direct labor, direct materials and manufacturing overhead are all product costs
Period costs
Include all selling costs and administrative costs
Variable cost
Cost that varies in total, in direct proportion to changes in the level of activity. Variable cost per unit is constant
Fixed cost
Cost that remains constant in total, regardless of changes in the level of the activity. Average fixed costs per unit varies in change of activity
Types of fixed costs
Committed - can’t be significantly reduced in short term
Discretionary - may be altered in the short term by managerial decisions
Mixed costs
Contains both variable and fixed units. Example would be utility costs. Can be expressed by the equation Y = a + bX
Differential costs (or incremental costs)
Differential revenue
Difference In costs between any two alternatives
Difference in revenue between two alternatives is called differential revenue
Opportunity cost
Potential benefit that is given up when one alternative is selected over another
Sunk cost
Costs that have already been incorrect and Connor he changed now or in the future
