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Cost Accounting: Chapter 2

Introduction to Cost Terms and Purposes


I. Definition:
Cost: resource sacrificed or foregone to achieve a specific objective.
usually measured as the monetary amount
Actual cost: the cost incurred (a historical cost).
Budgeted cost = planned (future) cost.
Cost object: anything for which a separate measurement of costs is desired.
Cost accumulation, cost assignment: cost tracing, cost allocation

II. Basic Stages of Accounting for Costs:

III. Direct Vs Indirect Cost of a Cost Object


Direct Costs Indirect Costs (Overhead)
- Cost that are related to a given cost object - Cost related to the particular cost object
(product, department, etc.)
- Can be traced to it in an economically feasible - Cannot be traced to it in an economically
way. feasible way.

Cost-Tracing: the assignment of direct costs to Cost allocation: the assigning of indirect costs
the particular cost object. to the particular cost object.

CHECK: THE COST OBJECT DISAPPEARS

 COSTS DISAPPEARS: …………………………………………………………


 COSTS DO NOT DISAPPEAR: ……………………………………………
 Depends on the choice of the cost object
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IV. Cost Behavior Patterns: FIXED COST vs VARIABLE COST

……………………………….. ……………………………..
Change in total in proportion to changes in Do not change in total for a given time period
the related level of total activity or volume. despite wide changes in the related level of
total activity or volume.

Relevant range: the band of the level of activity or volume on which a specific relationship
between the level of activity or volume and the cost in question is valid.
A cost driver: a factor that causally affects costs (over a given time span).
Ex: The cost driver of variable costs is the level of volume whose change causes the costs to
change proportionately.

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Direct cost Indirect cost
Variable Cost object: Assembled car. Cost object: Assembled car.
= Total Cost
cost
Example: Tires used in Example: Power costs where power
assembly of car. usage is metered only to the plant.

+ Cost object: Assembly line of Cost object: Assembled car.


Fixed that car type.
cost Example: Salary of supervisor Example: Annual lease cost of VW
on VW assembly. plant line.

UNIT COST = TOTAL COST / # UNITS.


V. Capitalised vs Revenue Cost
………………………. = all costs of a product regarded as an asset when incurred and then
become COGS when the product is sold (Material/ Labor cost → COGS)

……………………….. = expenses (R&D; Insurance).

VI. SERVICE, MERCHANDISING AND MANUFACTURING STOCK:


*) …………………… companies:
- Products: Service, intangible.
- Most significant cost category: Labor.
- Inventory in stock at the end of the accounting period: None.
*) ………………………. companies:
- Products: purchased tangible products without changing basic form.
- Stock: tangible products that are purchased but not sold yet.
*) ………………………. companies:
- Products: materials & components → finished goods.
- Stock: direct materials, work in progress, finished goods.
(Direct materials in stock and awaiting use in the manufacturing process → goods partially
worked on but yet not fully completed → goods fully completed but not sold).

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 Manufacturing stock

Manufacturing stock

Direct material → Work in progress → Finished goods

↓ ↓ ↓
Opening direct materials stock. Opening WIP stock. Opening finished goods stock.

+ Purchases of direct materials. + Manufacturing cost incurred. + Costs of goods manufactured.


- Closing direct material stock. - Closing WIP stock. - Closing finished goods stock.
Direct materials used/cost. Costs of goods manufactured. Cost of goods sold.

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Direct: materials Indirect
costs Manufacturing manufacturing
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costs costs
manufacturing overhead
costs/ factory overhead
costs.

Direct
Manufacturing labour
costs.

 Manufacturing Cost
- Direct material costs (costs of all materials that eventually become part of the cost
object).

+ Direct manufacturing labour costs (all manufacturing labour that can be traced to the
cost object in an economically feasible way).
+ Indirect manufacturing costs (manufacturing cost that is part of the cost object, but
that cannot be traced to that cost object in an economically feasible way).

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