Cost Accounting Chapter 1 Flashcards

Study Notes

Cost Concepts

Cost Object: Any item for which cost data is sought, such as products, departments, or customers. Costs are categorized as direct or indirect.
Direct Cost: Easily traced to a specific cost object (e.g., paper used for brochures in a printing company).
Indirect Cost: Cannot be directly traced to a cost object (e.g., factory manager's salary for a specific soup variety in a Campbell Soup factory).
Common Cost: Indirect costs that support multiple cost objects but cannot be individually traced.

Types of Costs

Raw Materials: Inputs that become part of the finished product.
Manufacturing Costs: Divide into direct materials and direct labor (direct costs) and manufacturing overhead (indirect cost).
Direct Materials: Raw materials integral to a finished product, easily traced (e.g., electronic components in cell phones).
Direct Labor: Labor that can be conveniently traced to specific products (e.g., assembly-line workers).
Prime Cost: The sum of direct materials and direct labor costs.

Manufacturing Overhead

Manufacturing Overhead: Indirect manufacturing costs excluding direct materials and labor, such as utilities and depreciation, along with indirect materials and labor costs.
Indirect Materials: Raw materials not easily traced to finished products.
Indirect Labor: Labor costs for employees essential for operations but not directly involved in production (e.g., janitors, supervisors).

Cost Classifications

Conversion Cost: The sum of direct labor and manufacturing overhead.
Nonmanufacturing Costs: Include selling costs and administrative costs.

Cost Specifics

Selling Costs: All expenses incurred to secure orders and deliver products to customers, can be direct or indirect (e.g., shipping, advertising).
Administrative Costs: Expenses related to the general management of an organization (e.g., executive compensation, accounting).
Product Costs: All costs involved in making a product, including direct materials, direct labor, and manufacturing overhead. Flows through Raw Materials, Work in Process, and Finished Goods on the balance sheet.

Inventory Types

Work in Process: Partially completed goods not yet ready for sale.
Finished Goods: Completed products that have not been sold.

Cost Provisions

Period Costs: Costs not associated with product costs, including selling and administrative expenses.

Cost Behavior

Cost Behavior: How costs change with activity levels; costs can rise, fall, or remain constant.
Cost Structure: The proportion of variable, fixed, or mixed costs in an organization.
Variable Cost: Costs that vary in total with changes in activity levels (e.g., cost of goods sold, direct labor).

Fixed Costs

Fixed Cost: Remains the same regardless of activity level, often classified as committed or discretionary.
Committed Fixed Costs: Long-term investments that cannot be reduced without significant changes (e.g., facility investments).
Discretionary Fixed Costs: Annual spending decisions by management (e.g., advertising).

Mixed Costs

Mixed Cost: Contains both variable and fixed components.
Mixed Cost Equation: Y = a + bX (Y = total cost, a = fixed cost, b = variable cost per unit, X = activity level).

Cost Equations

Product Cost Equation: Direct materials + direct labor + manufacturing overhead.
Period Cost Equation: Selling expense + administrative expense.
Conversion Cost Equation: Direct labor + manufacturing overhead.
Prime Cost Equation: Direct materials + direct labor.
Variable Manufacturing Cost Equation: Direct materials + direct labor + variable manufacturing overhead.
Total Fixed Cost Equation: Fixed manufacturing overhead + fixed selling expense + fixed administrative expense.

Cost and Revenue Concepts

Differential Cost: Cost difference between two alternatives; relevant for decision-making.
Differential Revenue: Revenue difference between two alternatives.
Opportunity Cost: Cost of the next best alternative foregone.
Sunk Cost: Costs that cannot be recovered or changed.

Income Statement Formats

Traditional Format: Categorizes costs as cost of goods sold and selling and administrative expenses, featuring gross margin and net operating income.
Contribution Format: Organizes costs by behavior, separating variable and fixed costs.

Other Key Terms

Contribution Margin: Remaining revenue after deducting variable expenses, contributes to covering fixed costs and profits.

Description

This quiz features flashcards from Cost Accounting Chapter 1, focusing on key terms such as 'Cost Object' and 'Direct Cost'. Test your understanding of these important concepts that are essential for effective cost management in various business contexts.