Cost Accounting Concepts

Normal vs. Actual Costing

• Normal costing allocates indirect costs using budgeted indirect cost rates multiplied by actual activity consumption.
• Direct costs are based on actual figures, while manufacturing overhead costs are budgeted.
• Examples of overhead costs include electricity, rent, and water.
• Actual costing relies on actual indirect cost rates for overhead, with both direct and manufacturing overhead costs based on actual amounts.

Job Costing

• Job costing tracks costs for each cost object, such as products, batches, or projects.
• Pricing varies for custom products or services due to differing processes and levels of work involved.

Process Costing

• Suitable for mass production of identical or similar items using multiple processes.
• Each item produced is treated the same.

Simple Costing Systems (Traditional Costing)

• Overhead costs are allocated using a single volume-based cost driver, like labor hours or machine hours.
• This method can lead to over or under-costing products as it applies overhead uniformly across all items.

Activity Based Costing (ABC)

• ABC allocates costs based on various activities that drive overhead expenses.
• It identifies specific activities in production and assigns costs based on actual consumption, enhancing accuracy with multiple cost drivers.

Linear Cost Function

• Represents the relationship between total cost and activity level using the formula: Y = A + BX.
• Y signifies total cost, A denotes fixed costs, B indicates variable cost per unit, and X represents the cost driver.

Cost Assignment

• Gathering costs to specific cost objects includes tracing and allocating expenses.
• Tracing involves direct costs (e.g., materials and labor for a product), while allocating pertains to indirect costs.

Fixed vs. Variable Costs

• Fixed costs do not change with activity level but can change due to external factors (e.g., rent increases).
• Variable cost per unit remains constant regardless of quantity produced (e.g., material cost remains $1 per kg).

Relevant Range

• Defines the range of activity levels over which fixed costs remain constant.

Conversion Costs and Prime Costs

• Conversion costs are linked to changing raw materials into finished products.
• Prime costs encompass all direct costs, including materials and labor.

Inventoriable Costs vs. Period Costs

• Inventoriable costs include direct materials, direct labor, and manufacturing overhead, capitalized as assets until sold.
• Period costs are expensed immediately when incurred.

Equivalent Costs

• Express partially complete units in terms of fully complete units for accurate cost allocation.

Sensitivity Analysis

• Understanding how changes in costs or volumes affect profit through contribution margin and sales prices.

Contribution Margin

• Reflects the amount available to cover fixed costs from each unit sold.

Break Even Point (BEP)

• The sales level at which revenues equal costs, resulting in zero profit.
• Calculated using fixed costs divided by contribution margin per unit or contribution margin ratio.

Weighted Average Process-Costing Method

• Determines the cost per equivalent unit for all work completed to date and assigns this to completed and incomplete units.

Operating Leverage

• Represents the ratio of fixed to variable costs.
• Higher operating leverage suggests greater fluctuation in profit with changes in sales volume.

Incremental Revenue and Costs

• Incremental revenue refers to additional revenue from an activity, while incremental costs refer to additional costs incurred.

Differential Revenue and Costs

• Differential revenue assesses the revenue difference between two options, and differential cost assesses the cost difference.

Over and Under Costing

• Over costing occurs when low-resource-intensive products receive inflated cost allocations.
• Under costing applies when resource-heavy products are assigned low costs.

Value Chain Components

• Research and Development: Aligns research with business activities and enhances products.
• Design: Involves product design, delivery, and manufacturing considerations.
• Production: Includes materials, labor, and manufacturing processes.
• Marketing: Focuses on customer preferences and advertising strategies.
• Distribution: Covers the costs of delivering products to customers.
• Customer Service: Involves responses to customer inquiries post-sale.