CHAPTER 02
COST ACCOUNTING AND CONTROL |
Introduction to Cost Terms and Concepts
LLOFILAN | ACTG 22A | 2024
COST
WHAT IS COST?
— Monet ry me sure of the resources
s cri iced or forgone to chieve speci ic
go l.
— A preceding term must be dded to cl rify
wh t underlies cost me surement.
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WHAT IS COST OBJECT?
— Any ctivity for which me surement of
costs is desired
— The cost of …
— Something where then cost of resources to
m ke/produce is me sured
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COST COLLECTION SYSTEM
Accumul te > Cl ssify to c tegories > Assign
to cost objects
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MANUFACTURING,
MERCHANDISING AND
SERVICE ORGANIZATIONS
COST TYPES
Direct and Indirect
Criteri to identify direct costs:
— Speci ic lly nd exclusive identi ied
— C n be physic lly observed
— Cost c n be directly ch rged to them
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Things to consider:
— Is it cost e ective to tr ce costs directly
to the cost object?
— Is it m teri l to the cost object?
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Overhead
— Commonly used term to refer to indirect costs
— C tegorized further s either m nuf cturing,
m rketing, dministr tive
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Assigning direct and indirect costs
to cost object
Direct Cost — str ightforw rd; speci ic lly
identi ied
Indirect Cost — estim ted through cost
lloc tions; surrog te lloc tions or thru cost
drivers; further discussed in Ch pter 4
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Period and Product Costs
Criteri to identify Product Cost:
— Costs identi ied with the goods produced,
purch sed, or services rendered
— Included in inventory v lu tion
— Expensed on the period they re sold
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Period and Product Costs
Period Cost
— Not speci ic lly identi ied with the goods
produced, purch sed, or services rendered
— Not included in inventory v lu tion
— Expensed on the period they re incurred
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Things to consider:
— Wh t is the timing of recognition?
— Is it gu r nteed to gener te future
revenues?
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COST BEHAVIOR
What is Cost Driver?
— F ctor th t directly in luences or determines the
cost of speci ic ctivity, product, or service
— used to identify wh t c uses costs to incre se
or decre se
— unit of me sure
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Variable Cost
— v ries in direct proportion to volume of
ctivity
— line r in terms of unit cost
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Fixed Cost
— line r in terms of tot l cost
— not ected by ch nges in level of ctivity
— decre ses in terms of unit cost
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Things to consider:
— It is better to work with tot l FC r ther
th n unit FC
— Time period, over time, ll costs becomes
v ri ble (m y ch nge)
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Semi-Fixed / Step-Fixed Cost
— ixed within given time period nd speci ic
ctivity levels
— m y ch nge in respective to ch nges (in
const nt mount) t di erent ctivity levels
— m y ch nge due to other f ctors
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Semi-Variable or Mixed Cost
— h s both ixed nd v ri ble components
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Relevant and Irrelevant Costs and
Revenue
— de ls with future costs nd revenues th t
will be ch nged by decision
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Avoidable and Unavoidable
Costs
— Avoid ble costs re costs th t c n be
s ved by not going for n ltern tive
— Un void ble costs re costs th t c nnot
be s ved by going for ny ltern tive, they
re irrelev nt in terms of decision m king
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Sunk Cost
— cost th t h s lre dy been incurred nd c nnot be
recovered or ch nged, reg rdless of wh t you do in
the future
— irrelev nt in decision m king
— will not in luence your future choices
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Opportunity Cost
— v lue of the other ltern tive th t you give up
when you m ke choice
— wh t you lose by choosing one option over
nother
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Incremental and Marginal Costs
— both rel ted to the ddition l costs incurred when
production or ctivity incre ses
Increment l cost is the tot l ddition l cost incurred when
it incre ses production or t kes on new ctivity. It is the cost
di erence between two levels of output or oper tions.
M rgin l cost is the cost of producing one ddition l unit.
It’s more speci ic th n increment l cost bec use it focuses on
the cost of incre sing production by just one unit t time.
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