Module 1 Flashcards
Introduction to cost accounting (24 cards)
Cost accounting provides information for…
Control, planning, monitoring, and documentation
Which 3 important elements make up the general accounting system of a company?
- Financial accounting including balance-sheet acounting and cash-flow statements
- Capital budgeting - process businesses use to decide which long-term investments, like new equipment or facilities, are worth pursuing
- Management accounting together with cost accounting
key difference between management accounting and financial accounting
- the existence of externally specified accounting principles in financial accounting (US-GAAP, HGB, IFRS)
Why has it been questioned whether it is necessary to separate management and financial accounting
- there are considerable costs involved in setting up two separate accounting systems
- it can be confusing for both internal and external parties if there are large differences between (say) the profit reported by management and financial accounting
Definition of Costs
Costs are valuated CONSUMPTION of resources (not cash outflow!)
Definition of Revenues
Revenues are valuated production of goods
Three defining elements of costs and revenues
- Objective orientation (The desire of a company to produce a certain product, the desire of yourself to (end being hungry))
- Valuation (assign a price tag to this cost)
- Consumption of resources or production of goods
Total costs definition
Costs that relate to all goods produced within a given period
Unit costs definition
Costs of a single unit of a particular good
Direct costs definition
Costs that can be traced directly to a cost object (caused by one cost object) ex: a car (steel can be directly traced to an individual car)
Indirect costs definition
Costs that cannot be assigned directly to a cost object (caused jointly by several cost objects) ex: salary of ceo
Artificial indirect cost definition
Costs that could in principal be traced directly to a cost object. However, comparing costs and benefits, companies do not trace them to cost objects
Variable costs definition
Costs that change when the quantity of a cost driver changes ex: if you manufacture a car, you need the steel, so you have the cost. If you don’t, you don’t need the steel, and you don’t have the cost
Fixed costs
Costs that remain constant when the quantity of a cost driver changes. Ex: salary of the ceo which doesn’t change no matter the performance
Relationship to total costs for fixed costs and variable costs
Typically linear relationship starting at a certain level of fixed costs.
C(total)= C(fix) + C(var)*Q
average unit costs
- To obtain the average unit costs, we divide total costs by the total output quantity
- Average unit costs decrease when the total output quantity increases. Fixed costs are allocated over a larger number of units as the output quantity increases
- decreasing convex function
Inventoriable costs
Costs assigned to a particular product unit (steel for the car would be considered inventoriable until the car is sold)
Periodic costs
Costs that cannot be capitalized. i.e., they cannot be considered an asset in the balance sheet e.g. costs for your accounting department
Opportunity costs
Contributions to a company’s profit that is foregone by choosing a decision alternative over the next-best alternative
Sunk costs
Costs that were caused in the past and can no longer be changed by current decisions
Levalized Product Cost
How expensive a product over the entire life cycle really is. E.g. levelized cost of electricity
Three sub-systems of cost accounting
- Cost-type accounting: Which costs have been incurred? Gives you an overview of how much of your costs are labor, material, etc.
- Cost-center accounting: Where have costs been incurred? Was it in Brazil or China, manufacturing department or sales department.
- Product and service costing: For which product have the costs been incurred?
Absorption costing
A costing system where all the product units are valued at full costs (All costs assigned to one individual product, in a car for example, you would include research and development costs as well)
Variable costing
A costing system where all the product units are valued at variable costs (only take into consideration the costs that are directly related to producing a car for example, not the research and development costs)
