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Cost object

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This is any item for which a separate measurement of costs is desired. It is something we want to know the cost of to guide a decision.

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Cost accumulation

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Collection of cost data in some organized way by means of an accounting system. Costs can be either direct or indirect with respect to a cost object.

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Direct costs of a cost object

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Costs that are related to the particular cost object and can be traced to it in an economically feasible way.

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Indirect costs of a cost object

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Costs that are related to the particular cost object but cannot be traced to it in an economically feasible way.

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Cost assignment

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A general term that includes both (1) tracing direct costs to a cost object, and (2) allocating indirect costs to a cost object.

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Variable cost

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A cost that changes in total in proportion to changes in the related level of total activity or volume.

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Fixed cost

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A cost that remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume.

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Cost driver:

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Is a variable, such as the level of activity or volume that causally affects costs over a given time frame.

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Manufacturing costs:

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Are the costs associated with making a product.

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Nonmanufacturing costs:

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Are all other costs in the value chain, including R&D, design, marketing, distribution, and customer service costs.

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DM costs

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The acquisition costs of all materials that eventually become part of the cost object and can be traced to the cost object in an economically feasible way.

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DL costs

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(direct manufacturing labor) The compensation costs of all manufacturing labor that can be traced to the cost object in an economically efficient way.

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M-OH costs

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(indirect manufacturing costs) All manufacturing costs that are related to the cost object but cannot be traced to the cost object in an economically feasible way. These are indirect costs with respect to cost objects and include heating, indirect materials, power, plant insurance, plant depreciation, indirect labor costs (possibly including overtime premiums and idle time), manager and supervisory salaries, and sometimes payroll fringe benefits.

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Cost of goods manufactured

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Is the total manufacturing cost assigned to products that were finished in the period regardless of whether the costs were incurred in the current accounting period or in a previous accounting period.

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Manufacturing costs incurred in the period

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Are all manufacturing costs assigned in the period to products that were worked on this period regardless of whether products are completed or not.

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Cost of goods sold

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Is the total manufacturing cost associated with products that were sold in the period regardless of whether the costs were incurred in the current accounting period or in a previous accounting period.

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Direct materials inventory

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Direct materials in stock and awaiting use in the manufacturing process (e.g., computer chips and components for cell phones and laptop computers).

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Work in process inventory

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Goods which have been started but are incomplete with respect to the manufacturing process

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Finished goods inventory

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Goods completed but not yet sold.

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Inventoriable costs

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Costs associated with inventories. For a manufacturing firm these costs include all manufacturing costs (direct material costs, direct labor costs and manufacturing overhead costs). These costs include the costs in the material inventory, work in process inventory, and the finished goods inventory. These costs are initially recorded as an asset and only become expensed as finished products are sold. For a merchandising firm these costs include the costs of purchasing the goods that are resold in their same form. For a service firm, the absence of inventories means there are no inventoriable costs.

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Period costs

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Costs in the income statement other than the cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred. For manufacturing firms, these costs include all nonmanufacturing costs. For a merchandising firm, these costs include all costs not related to the costs of goods purchased for resale. For a service firm, the absence of inventories means that all costs are period costs.

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Product cost:

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Is the sum of the costs assigned to a product for a specific purpose.

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Customer output unit-level costs

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Are costs of activities to sell each unit to a customer (e.g., costs incurred to handle product, sales commissions).

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Customer batch-level costs:

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Are costs of activities that are related to a group of units sold to a customer (e.g., costs incurred to process orders or to make deliveries).

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Customer-sustaining costs:

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Are costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer (e.g., costs of visits to customers or costs of displays at customer sites).

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Distribution-channel costs:

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Are costs of activities related to a particular distribution channel rather than to each unit of product, each batch of product, or specific customers (e.g., salary of the manager of a distribution channel).

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Division-sustaining costs:

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Are costs of division activities that cannot be traced to individual customers or distribution channels (e.g., divisional management salaries).

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Customer-level costs (Customer-level indirect costs):

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Can be defined as the sum of those categories of costs that management believes can be influenced by working with customers. They represent the costs in the first three categories.

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Customer profitability analysis

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is the reporting and analysis of revenues earned from customers and the costs incurred to earn those revenues. Customer-profitability analysis is management accounting's response to the notion that "the customer is priority one" from marketing and management courses.

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ACTIVITY BASED COSTING

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One philosophy underlying activity based costing is that indirect resources exist to allow activities to be performed rather than the past philosophy that costs exist to be allocated.

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Output unit-level costs

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Output unit-level costs are the costs of activities performed on each individual unit of product or service. In other words, these costs are incurred each time a unit of product or service is produced. Example: machining related costs such as energy, machine depreciation, and repairs.

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Batch-level costs

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Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service. In other words the costs are incurred each time a batch is processed. These costs are independent of how many units are in the batch. Example: setup costs and purchase order costs.

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Product-sustaining costs (or service-sustaining costs)

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Product-sustaining costs are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. Costs can be traced to individual product types but are independent of how many units or batches of units of products (services) are produced. Example: engineering costs incurred to change a product's design, costs to design test routines for individual products.

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Facility-sustaining costs

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Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but that support the organization as a whole. In other words, these costs are necessary to provide an organization that can produce products or services but the extent of these costs is unrelated to the volume and mix of individual products or services. Example: administrative costs, such as managing the plant and personnel. Others include landscaping, property taxes, maintenance, security, lighting. If these costs are allocated, they generally are allocated on some arbitrary basis, since they are common costs.

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There are two main benefits associated with using activity based costing.

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1) Activity based costing provides more accurate information on product costs for decisions such as pricing, product mix, which products should be considered for being dropped from the product line, and which products should be outsourced. 2) Cost control is promoted by helping management to focus on how and where to reduce costs.

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JOB COSTING

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Job costing is a method that can be used to assign costs to products or services. Job costing is typically used when a cost object (consisting of either a single unit or a batch of units) is easily identifiable from other cost objects and are not produced continuously (e.g., assembly of individual aircrafts, manufacturing customized furniture, construction of ships, the creation of an advertising campaign, conducting an audit, repair service, sending individual items by mail order, cost of producing a movie).

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M-OH control

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M-OH incurred during accounting period.

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M-OH allocated

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M-OH allocated to WIP this accounting period

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Budgeted M-OH

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amount of M-OH costs expected for the coming accounting period as of the first day of the accounting period.

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M-OH Under vs Over Applied

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If applied M-OH actual M-OH then overhead is overapplied (overallocated)

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Cost-Volume-Profit Analysis

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CVP is one of the most basic planning tools available to management and is a key step in decision making by many firms. CVP analysis involves specifying a model of the interrelationships among selling prices of products, volume or level of activity, unit variable costs, total fixed costs, mix of products sold, and operating income to help managers understand the relation between cost, volume, and profit.

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Total contribution margin:

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Sales less variable costs, which is the amount that sales contributes toward covering fixed costs and then toward operating income.

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Unit contribution margin:

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The sales price per unit less unit variable costs. The unit contribution margin remains constant so long as the selling price and the unit variable cost do not change. The contribution margin per unit tells you how much total contribution margin will change by for each unit change in sales. If it is assumed that there is no change in total fixed costs, then the contribution margin per unit tells you how much net operating income will change by for each unit change in sales.

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Contribution margin ratio (percentage):

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Total contribution margin as a percentage of total sales; or unit contribution margin as a percentage of the unit selling price. The contribution margin ratio tells you what percentage of each additional sales dollar is contributed toward total contribution margin or what amount of contribution margin is obtained from each additional dollar of sales. If it is assumed that there is no change in total fixed costs, then the contribution margin ratio tells you what percentage of each additional sales dollar is contributed toward net operating income or what amount of net operating income is obtained from each additional dollar of sales.

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Margin of safety

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Is the excess of budgeted (or actual) sales over the break-even sales.

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Margin of safety percentage

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Is the margin of safety divided by budgeted (or actual) sales.

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Operating leverage

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Describes the effect that a percentage change in sales has on operating income

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The degree of operating leverage

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Total contribution margin divided by operating income.

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Product:

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Any output that has a positive total sales value (or an output that enables a company to avoid incurring costs, such as an intermediate product used as an input in another process).

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Joint Product Production

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When two or more products are produced simultaneously from the same process.

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Joint costs:

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Are the costs of a production process that yields two or more products simultaneously. The costs can also be defined as all costs incurred up to the splitoff point.

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Splitoff point:

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That juncture in the production process where two or more products become separately identifiable.

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Separable costs:

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All costs incurred after the splitoff point that are assignable to each of the specific products identified at the splitoff point.

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Joint products:

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When two or more products have a relatively high sales value compared to the sales value of other products from the joint production process, those products are referred to as joint products.

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Main product:

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When there is only one product that has a relatively high sales value compared to the sales value of other products from the joint production process, that product is referred to as the main product.

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Byproduct:

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A product that has a relatively low sales value compared with the sales value of a joint product or main product.

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NRV (Net realizable value )

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is equal to the final sales value in the ordinary course of business minus the expected separable costs

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