Chapter 15 Accounting for Costs

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Chapter 15Accounting for Costs
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Accounting for Costs

• Cost a measurement, in monetary terms, of
  amount of resources used for some purpose.
• Variable cost is a cost that varies in total in
  direct proportion to changes in activity.
• Fixed cost is a cost that remains constant in
  total within the wide range of activity.
• Mixed cost is a cost that has both variable and
  fixed components.

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cost/volume

• Average costs total cost/volume.
• Average cost behaves differently than total cost.
• As volume goes up ?
• Total fixed cost remains constant, total variable
  costs goes up, per unit variable costs stays the
  same, per unit fixed cost goes down, per unit
  total cost goes down.
• As volume increases without limit, unit cost
  approaches variable unit cost and fixed cost per
  unit approaches zero.

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Fixed and Variable Costs

• Fixed costs
• Non-variable costs items of cost that, in
  total, do not vary with volume.
• e.g. Building rent, property taxes, management
  salaries.
• Fixed costs are fixed for a range of activity and
  a limited period of time.
• Fixed costs may change for reasons such as a
  deliberate management decision to change them.

• Variable costs
• Items of cost that vary, in total, directly and
  proportionately with volume.
• Volume refers to activity level.
• e.g. Material costs varies with units sold.
• Electricity costs varies with production hours.
• Stationery and postage costs varies with number
  of letters written.

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Direct and Indirect Costs

• Direct costs
• Costs that can beeasily and conveniently traced
  to a unit of product or other cost object.
• Examples direct material and direct labor
• E.g. Wood to make furniture, hours worked on
  project, flour to make cake.

• Indirect costs
• Costs that cannot be easily and conveniently
  traced to a unit of product or other cost object.
  
• Example manufacturing overhead
• E.g. rent of a factory that make cars/furniture,
  managers salary.

• Terms direct and indirect are only meaningful in
  context of a specific cost object.

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Can we control costs?

• Item of cost assigned to a specific
  responsibility center that is significantly
  influenced by actions of manager.
• Direct Costs may be controllable (e.g. supplies
  usage) or non-controllable (e.g. depreciation on
  equipment or buildings purchased in previous
  periods).
• all indirect costs are non-controllable.

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Manufacturing Costs (Product cost)
The Product
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Non-manufacturing Costs (Period cost)
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Activity-Based Costing
Direct Cost Materials labor
Indirect Cost Overhead Costs
First-Stage Allocation
Order Size
Customer Orders
Product Design
Customer Relations
Other
Second-Stage Allocations
/MH
/Order
/Design
/Customer
Cost Objects Products, Customer Orders, Customers
Unallocated