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Class Notes For Chapter 2

The document summarizes key cost accounting terminology and concepts discussed in Chapter 2 of the class notes. It defines cost, direct and indirect costs, cost objects, cost drivers, variable and fixed costs. It also discusses relevant range, unit costs, types of inventory including direct materials, work-in-process, and finished goods. Additionally, it covers classification of manufacturing costs, inventoriable costs, and period costs.

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Amir Contreras
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© © All Rights Reserved
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24 views

Class Notes For Chapter 2

The document summarizes key cost accounting terminology and concepts discussed in Chapter 2 of the class notes. It defines cost, direct and indirect costs, cost objects, cost drivers, variable and fixed costs. It also discusses relevant range, unit costs, types of inventory including direct materials, work-in-process, and finished goods. Additionally, it covers classification of manufacturing costs, inventoriable costs, and period costs.

Uploaded by

Amir Contreras
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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ACCT-312: Chapter 2 Class Notes:

Cost Terminology:
Accountants define cost as a resource sacrificed or forgone to achieve a specific objective.
A cost (such as direct materials or advertising) is usually measured as the monetary amount that must be
paid to acquire goods or services (Page 27)

An actual cost is the cost incurred (a historical or past cost), as distinguished from a budgeted cost, which is
a predicted or forecasted cost (a future cost).

A Cost Object - is anything for which a measurement of costs is desired.

Cost accumulation is the collection of cost data in some organized way by means of an accounting system

Direct & Indirect Costs (Page 28-29):


Direct costs of a cost object are related to the particular cost object and can be traced to it in an
economically feasible (cost-effective) way.

Indirect costs of a cost object are related to the particular cost object but cannot be traced to it in an
economically feasible (cost-effective) way.

Example of Cost Allocation (from page 29):

Factors Affecting Direct/Indirect Cost Allocation (Page 29-30):


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The materiality of the cost in question. The smaller the amount of a cost—that is, the more immaterial the
cost is—the less likely that it is economically feasible to trace that cost to a particular cost object.

Available information-gathering technology. Improvements in information-gathering technology make it


possible to consider more and more costs as direct costs. Bar codes, for example, allow manufacturing
plants to treat certain low-cost materials such as clips and screws, which were previously classified as
indirect costs, as direct costs of products.

Design of operations. Classifying a cost as direct is easier if a company’s facility (or some part of it) is used
exclusively for a specific cost object, such as a specific product or a particular customer.

Cost-Behavior Patterns: Variable Costs and Fixed Costs (page 30):

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

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

Graphical Illustration of Variable & Fixed Costs (page 31):

Do not assume that individual cost items are inherently variable or fixed. Consider labor costs. Labor costs
can be purely variable with respect to units produced when workers are paid on a piece-unit (piece-rate)
basis. For example, some garment workers are paid on a per-shirt-sewed basis. In contrast, labor costs at a
plant in the coming year are sometimes appropriately classified as fixed.

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For instance, a labor union agreement might set annual salaries and conditions, contain a no-layoff clause,
and severely restrict a company’s flexibility to assign workers to any other plant that has demand for labor.
Japanese companies have for a long time had a policy of lifetime employment for their workers.

A particular cost item could be variable with respect to one level of activity and fixed with respect to
another. Consider annual registration and license costs for a fleet of planes owned by an airline company.
Registration and license costs would be a variable cost with respect to the number of planes owned. But
registration and license costs for a particular plane are fixed with respect to the miles flown by that plane
during a year.

COST Drivers (Page 32):


A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time
span. An activity is an event, task, or unit of work with a specified purpose—for example, designing
products, setting up machines, or testing products.

The level of activity or volume is a cost driver if there is a cause-and-effect relationship between a change in
the level of activity or volume and a change in the level of total costs. For example, if product-design costs
change with the number of parts in a product, the number of parts is a cost driver of product-design costs.

Relevant range is the band of normal activity level or volume in which there is a specific relationship
between the level of activity or volume and the cost in question. For example, a fixed cost is fixed only in
relation to a given wide range of total activity or volume (at which the company is expected to operate) and
only for a given time span (usually a particular budget period). Below is an example of Fixed Cost in the
Relevant Range for a transport company (Exhibit 2-4):

Types and Costs and Relationships (exhibit 2-5):

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Total Costs & Unit Cost:

Accounting systems typically report both total-cost amounts and average-cost-per unit amounts. A unit cost, also
called an average cost, is calculated by dividing total cost by the related number of units. The units might be
expressed in various ways.

Examples are automobiles assembled, packages delivered, or hours worked.

Illustration:
Suppose that, in 2011, its first year of operations, $40,000,000 of manufacturing costs are incurred to produce
500,000 speaker systems at the Memphis plant of Tennessee Products. Then the unit cost is $80:

If 480,000 units are sold and 20,000 units remain in ending inventory, the unit-cost concept helps in the
determination of total costs in the income statement and balance sheet and, hence, the financial results reported by
Tennessee Products to shareholders, banks, and the government.

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Types of Inventory (Page 37):
Manufacturing-sector companies purchase materials and components and convert them into various
finished goods. These companies typically have one or more of the following three types of inventory:

1. Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing
process (for example, computer chips and components needed to manufacture cellular phones).

2. Work-in-process inventory. Goods partially worked on but not yet completed (for example, cellular
phones at various stages of completion in the manufacturing process). This is also called work in progress.

3. Finished goods inventory. Goods (for example, cellular phones) completed but not yet sold.

Merchandising-sector companies purchase tangible products and then sell them without changing their
basic form. They hold only one type of inventory, which is products in their original purchased form, called
merchandise inventory. Service-sector companies provide only services or intangible products and so do
not hold inventories of tangible products.

The following additional topics will be covered by reference to the textbook:

 Classification of manufacturing costs (page 37)


 Inventoriable Costs (Page 37)
 Period Costs (Page 38)
 Coprehensive Illustration showing flow of Period Costs and Inventoriable Costs
 Refer to Exhibits 2-7 & 2-8; 2-9 & 2-10 for further illustration of cost flow example (Pages 39-42).
 Prime Costs and Conversion Costs
 Measuring Labor Costs (Page 44)

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