Monetary measure of resources given up to attain an objective (such as acquiring a good or service) – Barfield, Raiborn, Kinney
At the time of acquisition, the cost incurred is for present or future benefits. When these benefits are utilized, the costs become expenses. An expense is defined as a cost that has given a benefit and is now expired. Unexpired costs that give future benefits are classified as assets. – Polimeni, Fabozzi, Adelberg
Cost Categories } } Relevant, differential, sunk, opportunity Direct, indirect Controllable, noncontrollable Impact on decision making Unexpired, expired Product, period Prime, Conversion Classification on the F/S Variable, fixed, Mixed, step Reaction to changes in activity Historical, replacement, budgeted Time of incidence
all direct manufacturing costs. (would comprise direct material costs and direct manufacturing labor costs) As information-gathering technology improves, companies may add additional direct-cost categories.
all manufacturing costs other than direct materials costs. These costs are for transforming direct materials into finished goods. (would comprise direct manufacturing labor costs and indirect manufacturing costs)
Direct Costs Direct labor Direct materials Overhead Costs Indirect labor Indirect materials Depreciation Traced directly Traced using allocation base, e.g. direct labor hrs, machine hrs From: ocw.mit.edu
Direct Costs Direct labor Direct materials Overhead Costs Indirect labor Indirect materials Depreciation Activities that drive overhead From: ocw.mit.edu
Movement of Expenditures into F/S Expenditure Cost Deferred Balance Sheet Expired Income Statement Expense Loss
no future use
incl. period costs
Service Company Input Output Retail Company Production Center add labor and overhead Manufacturer Purchase supplies Use supplies, labor, overhead to provide service Sell to customer Purchase products for resale Sell to customer Warehouse and/or display Purchase raw materials and supplies Sell to customer Finished Product
Cost Accumulation in a Manufacturing Company Cost of Goods Sold Balance Sheet Income Statement Materials Inventory Work in Process Inventory Finished Goods Inventory
Indirect costs based on the actual indirect-cost rates times the actual activity consumption
Normal Costing – allocates:
Indirect costs based on the budgeted indirect-cost rates times the actual activity consumption
Both methods allocate Direct costs to a cost object the same way : by using actual direct-cost rates times actual consumption.
Cost System and Cost Accumulation Procedure ACTUAL NORMAL STANDARD JOB ORDER PROCESS Actual direct materials Actual direct labor Actual OH assigned to jobs after end of period Actual direct materials Actual direct labor Actual overhead costs assigned to process at end of period using FIFO or wtd. ave. cost flow Actual direct materials Actual direct labor OH applied at completion of job or end of period (predetermined rate x actual input) Actual direct materials Actual direct labor Predetermined OH applied at the end of the process using FIFO or wtd ave. cost flow Standard direct materials Standard direct labor OH applied at completion of job or end of period (predetermined rate x standard input) Standard direct materials Standard direct labor Standard overhead applied using FIFO cost flow
Cost Objects – including responsibility centers, departments, customers, products, etc.
Direct costs and Tracing – materials and labor
Indirect Costs and Allocation – overhead
Cost Pool – any logical grouping of related cost objects
Cost-allocation Base – a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs
For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver