Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn

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Cost Accounting Foundations and ٌ Evolutions Kinney, Prather, Raiborn 0 000 7 Chapter 2 Cost Terminology and Cost Behaviors 

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ie. ۰ 5 * Explain assumptions about cost ۱۰/۱۱ 4 0 TSLUT hl ola Loy eTS 316 527 * List the cost classifications and explain why the classifications are useful * Describe the conversion process in service and manufacturing companies 

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ie. ۰ 5 * List product cost categories and their components * Calculate the Cost of Goods Manufactured and explain how it is used in the Income Statement 

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* Association with cost object: Lefora) ey (rele ‏یت‎ ‎wants to collect or accumulate costs * Reaction to changes in activity * Classification on the financial statements 

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ie. ۰ 5 * Association with cost object - Direct - traceable to a cost object - Indirect - not conveniently or practically traceable to a cost object * treated as overhead * allocated 

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ie. ۰ 5 * Reaction to changes in activity - Variable - Fixed - Mixed - Step Relevant Range - normal operating range 

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ie. ۰ 5 * Classification on the financial statements - Unexpired - balance sheet assets - Expired - income statement expenses - Product - inventoriable costs + Prime - direct material and direct labor * Conversion - direct labor and overhead - Period - expensed in period incurred 

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ie. ۰ 5 امه‌اهصه 1 للك ‎Measurable part of a product‏ - ‎Direct labor‏ * ‎Labor used to manufacture a product‏ - اك ا ا د ‎Overhead‏ * ‎Indirect production cost‏ - 

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ie. ۰ 5 * Selling and administrative costs * Distribution costs - Cost to warehouse, transport, and/or deliver a product or service - Major impact on managerial decision making 

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Conversion Process Change Inputs into Outputs 4 Output ۳۳ 2 8 

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دای ایا 1۲11۱۸ Significant amount of labor and machinery Tangible output - جك 

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Product Cost - Direct ¢ Direct Material - Conveniently and economically traced to cost object 1 * Direct Labor - to manufacture a product or perform a service - includes wages paid to direct labor employees, production bonuses, payroll 15 - may include holiday and vacation pay, insurance, retirement benefits NY/ 

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0 5 * Overhead - indirect production costs - Fringe benefits, if cannot be easily traced to product - Overtime, if due to random scheduling - Cost of quality * Prevention costs * Appraisal costs 0515 ع1نالتة7 * 

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* Direct Material Variable *Direct Labor Variable * Overhead Variable, fixed, or 0 

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ie. ۰ 5 Assign indirect costs to one 1 ‏ا ل‎ oy Cold * To determine full absorption cost (GAAP) * To motivate management * To compare alternative courses of action for planning, controlling, and decision ۱۱ Allocation process should be rational and systematic 

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0 ‏نرب‎ Actual Materials ‏ات‎ ‎Actual ‎Direct Labor Actual Predetermined Overhead Actual _ Overhead Rate 

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ie. ۰ ‎phe‏ تسب ‎* Allows overhead to be assigned during the period * Compensates for fluctuations ‏چازتتامح 6غ 0م ماع أمم وم اقا‎ 61 - in activity level that do not affect fixed overhead 

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ie. ۰ 5 * What is the difference between a fixed and variable cost? 05 5أتاع 2ه ممدمه عععطة عط عتنه غقطتلا ‎٠‏ ‎product cost?‏ ٠ What are the three inventory accounts for a manufacturing company? 

Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 2 Cost Terminology and Cost Behaviors Learning Objectives (1 of 2) • Explain assumptions about cost behavior and why these assumptions are necessary • List the cost classifications and explain why the classifications are useful • Describe the conversion process in service and manufacturing companies Learning Objectives (2 of 2) • List product cost categories and their components • Calculate the Cost of Goods Manufactured and explain how it is used in the Income Statement Cost Categories • Association with cost object Cost object is anything for which management wants to collect or accumulate costs • Reaction to changes in activity • Classification on the financial statements Cost Categories • Association with cost object – Direct - traceable to a cost object – Indirect - not conveniently or practically traceable to a cost object • treated as overhead • allocated Cost Categories • Reaction to changes in activity – – – – Variable Fixed Mixed Step Relevant Range – normal operating range Total and Unit Cost Behavior Total Cost Variable Cost Fixed Cost Unit Cost Varies in direct proportion to changes in activity Remains constant throughout the relevant range Remains constant throughout the relevant range Varies inversely with changes in activity throughout the relevant range Cost Categories • Classification on the financial statements – Unexpired – balance sheet assets – Expired – income statement expenses – Product – inventoriable costs • Prime – direct material and direct labor • Conversion – direct labor and overhead – Period – expensed in period incurred Product Costs • Direct material – Measurable part of a product • Direct labor – Labor used to manufacture a product or perform a service • Overhead – Indirect production cost Period Costs • Selling and administrative costs • Distribution costs – Cost to warehouse, transport, and/or deliver a product or service – Major impact on managerial decision making Conversion Process Change Inputs into Outputs Input Output Purchase raw materials or supplies Product or Service CONVERSION Manufacturer Significant amount of labor and machinery Tangible output Output Input Purchase raw materials and supplies Finished product Production Center add labor and overhead Sell to customer Cost Accumulation in a Manufacturing Company Materials Inventory Work in Process Inventory Balance Sheet Finished Goods Inventory Cost of Goods Sold Income Statement Product Cost - Direct • Direct Material – Conveniently and economically traced to cost object • Direct Labor – to manufacture a product or perform a service – includes wages paid to direct labor employees, production bonuses, payroll taxes – may include holiday and vacation pay, insurance, retirement benefits Product Cost - Indirect • Overhead - indirect production costs – Fringe benefits, if cannot be easily traced to product – Overtime, if due to random scheduling – Cost of quality • Prevention costs • Appraisal costs • Failure costs Product Cost Behavior • Direct Material Variable • Direct Labor Variable • Overhead mixed Variable, fixed, or Overhead Cost Allocation Assign indirect costs to one or more cost objects • To determine full absorption cost (GAAP) • To motivate management • To compare alternative courses of action for planning, controlling, and decision making Allocation process should be rational and systematic Allocating Overhead Actual vs. Normal Product Cost Direct Materials Actual Cost System Actual Normal Cost System Actual Actual Direct Labor Overhead Actual Actual Predetermined Overhead Rate Predetermined Overhead Rate • Allows overhead to be assigned during the period • Compensates for fluctuations – that are not related to activity level – in activity level that do not affect fixed overhead Questions • What is the difference between a fixed and variable cost? • What are the three components of product cost? • What are the three inventory accounts for a manufacturing company?