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Chapter 2:

Cost Terminology andCost Behaviors

Cost Accounting:

Foundations & Evolutions, 8e

$inney and Raiborn

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Learning Objectives %hy are costs associated with a cost ob&ect'

%hat assu"ptions do accountants "a(e about costbehavior, and why are such assu"ptions necessary'

)ow are costs classi!ied on !inancial state"ents, andwhy are such classi!ications use!ul'

)ow does the conversion process occur in"anu!acturing and service co"panies' %hat are the product cost categories, and what ite"s

co"prise those categories' )ow and why does overhead need to be allocated to

products' )ow is cost o! goods "anu!actured calculated and

used in preparing an inco"e state"ent'

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Cost Categories

Association with cost ob&ect Cost ob&ect is anything !or which "anage"ent wants to collect

or accu"ulate costs

Reaction to changes in activity

Classi!ication on the !inancial state"ents

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Cost Categories

Association with cost ob&ect *irect+traceable to a cost ob&ect

ndirect+not conveniently or practically

traceable to a cost ob&ect treated as overhead

allocated

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Cost Categories

Association with cost ob&ect Reaction to changes in activity

-ariable

ied Mied

/tep

Relevant Range+normal operating range

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Total and Unit CostBehavior

Varies in directproportion to

changes in activity

Remains constant

throughoutthe relevant range

Remains constantthroughout the

relevant range

Varies inversely

with changes inactivity throughoutthe relevant range

Variable

Cost

Fixed

Cost

Total Cost Unit Cost

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Cost Categories

Classi!ication on the !inancial state"ents nepired+balance sheet assets

pired+inco"e state"ent epenses

roduct+inventoriable costs ri"e+direct "aterial and direct labor

Conversion+direct labor and overhead

roduct costs are unepired be!ore sale

roduct costs are epired when sold eriod+epensed in period incurred

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Product Costs

*irect "aterial Measurable part o! a product

*irect labor

Labor used to "anu!acture a product orper!or" a service

3verhead

ndirect production cost

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Period Costs

/elling and ad"inistrative costs

*istribution costs Cost to warehouse, transport, and4or deliver a

product or service Ma&or i"pact on "anagerial decision "a(ing

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urchase

raw "aterials

or supplies

nput

roduct or

/ervice

3utput

CONVERSION

Conversion ProcessChange Inputs into Outputs

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Materialsnventory

%or( in rocess

nventory

inished

5oodsnventory

Cost o!

5oods

/old

6alance /heetnco"e

/tate"ent

Cost Accumulation in aManufacturing Compan

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Product Cost ! "irect

*irect Material Conveniently and econo"ically traced

to cost ob&ect

*irect Labor to "anu!acture a product or per!or" a service

includes wages paid to direct labor e"ployees,

production bonuses, and payroll taes

"ay include holiday and vacation pay,

insurance, and retire"ent bene!its

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Product Cost ! Indirect

3verhead+indirect production costs ringe bene!its, i! cannot be easily traced to

product

3verti"e, i! due to rando" scheduling

Cost o! 7uality revention costs

Appraisal costs ailure costs

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Overhead Cost Allocation

Assign indirect costs to one or "ore cost ob&ects

8o deter"ine !ull absorption cost 95AA:

8o "otivate "anage"ent

8o co"pare alternative courses o! action !orplanning, controlling, and decision "a(ing

Allocation process should be rationaland syste"atic

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Produt Cost

*irect Materials

*irect Labor

3verhead

!tual Cost

System

Actual

Actual

Actual

Normal Cost

System

Actual

Actual

redeter"ined

3verhead Rate

Allocating Overhead

Actual vs# $ormal

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Predetermined Overhead

%ate Allows overhead to be assigned

during the period

Co"pensates !or !luctuations that are not related to activity level

in activity level that do not a!!ect !ied

overhead

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&uestions

%hat is the di!!erence between a !ied and

variable cost'

%hat are the three co"ponents o! product

cost'

%hat are the three inventory accounts !or a

"anu!acturing co"pany'

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'thical Issues

pired costs+not on the balance sheet

eriod costs+not inventory

roduct costs+not selling or ad"inistrative

costs

*irect labor+not overstated

nding inventory+not overstated