Podcast
Questions and Answers
Managers use ______ costs to make decisions about the future.
Managers use ______ costs to make decisions about the future.
estimated
Actual cost data is essential for evaluating ______ performance.
Actual cost data is essential for evaluating ______ performance.
management
Companies use cost estimates to establish ______.
Companies use cost estimates to establish ______.
goals
Managers need reliable cost estimates to price ______, evaluate performance, control operations, and prepare financial statements.
Managers need reliable cost estimates to price ______, evaluate performance, control operations, and prepare financial statements.
The new bonus strategy at ISI is based on departmental sales ______.
The new bonus strategy at ISI is based on departmental sales ______.
The things for which we are trying to determine the cost are commonly called ______.
The things for which we are trying to determine the cost are commonly called ______.
Cost accumulation begins with identifying the ______ objects.
Cost accumulation begins with identifying the ______ objects.
Direct costs can be easily traced to a cost ______.
Direct costs can be easily traced to a cost ______.
Indirect costs are also known as ______ costs.
Indirect costs are also known as ______ costs.
The primary cost object in the promotion is the cost of the ______.
The primary cost object in the promotion is the cost of the ______.
A cost driver is any factor that causes or ______ an activity’s costs.
A cost driver is any factor that causes or ______ an activity’s costs.
Future bonuses at ISI may be based on ______.
Future bonuses at ISI may be based on ______.
Evaluating proposals often relies on both estimated and ______ costs.
Evaluating proposals often relies on both estimated and ______ costs.
The number of ______ is a cost driver for the cost of caps.
The number of ______ is a cost driver for the cost of caps.
The number of labor hours worked is a cost driver for the ______ cost.
The number of labor hours worked is a cost driver for the ______ cost.
The promotion should be run if management expects it to produce additional revenues exceeding ______.
The promotion should be run if management expects it to produce additional revenues exceeding ______.
The total costs to be allocated are divided by the total costs ______ to find the allocation rate.
The total costs to be allocated are divided by the total costs ______ to find the allocation rate.
For rent allocation, the allocation rate was calculated to be $______.
For rent allocation, the allocation rate was calculated to be $______.
To find the allocated cost for the Women's Department, the allocation rate is multiplied by the cost ______.
To find the allocated cost for the Women's Department, the allocation rate is multiplied by the cost ______.
Utilities cost is determined using the formula that involves total costs to be allocated and total costs ______.
Utilities cost is determined using the formula that involves total costs to be allocated and total costs ______.
The utilities allocation rate was calculated to be $______ per square foot.
The utilities allocation rate was calculated to be $______ per square foot.
Companies often group individual costs into a single cost ______ for easier allocation.
Companies often group individual costs into a single cost ______ for easier allocation.
Cost classifications of income statements include direct costs and ______ costs.
Cost classifications of income statements include direct costs and ______ costs.
Selecting the cost ______ is important for establishing a clear cause-and-effect relationship in cost allocation.
Selecting the cost ______ is important for establishing a clear cause-and-effect relationship in cost allocation.
ISI’s cost of shopping bags can be associated with the number of sales transactions and total sales ______.
ISI’s cost of shopping bags can be associated with the number of sales transactions and total sales ______.
Both cost of goods sold and the cost of supplies are considered ______ costs, as they vary relative to sales volume.
Both cost of goods sold and the cost of supplies are considered ______ costs, as they vary relative to sales volume.
The cost of rent is an example of a ______ cost, as it is common to multiple departments.
The cost of rent is an example of a ______ cost, as it is common to multiple departments.
Allocating indirect costs involves dividing a total cost into parts and assigning them to designated ______.
Allocating indirect costs involves dividing a total cost into parts and assigning them to designated ______.
To allocate rent costs, the first step is to compute the ______ rate.
To allocate rent costs, the first step is to compute the ______ rate.
The allocation base, also known as the ______ driver, is the measure used to distribute indirect costs.
The allocation base, also known as the ______ driver, is the measure used to distribute indirect costs.
Fixed costs, such as depreciation, remain ______ relative to sales volume, but their classification can vary.
Fixed costs, such as depreciation, remain ______ relative to sales volume, but their classification can vary.
Departmental managers should be responsible for ______ costs that can be influenced by their decisions.
Departmental managers should be responsible for ______ costs that can be influenced by their decisions.
The total costs to be allocated for rent is ______.
The total costs to be allocated for rent is ______.
The total cost driver for the allocation of rent is ______ bottles produced.
The total cost driver for the allocation of rent is ______ bottles produced.
The allocation rate for rent per bottle is ______.
The allocation rate for rent per bottle is ______.
The total supervisor's salary estimated per year is ______.
The total supervisor's salary estimated per year is ______.
To compute the allocation rate, the total supervisor's salary is divided by ______ production units.
To compute the allocation rate, the total supervisor's salary is divided by ______ production units.
The allocation rate for the supervisor's salary per unit is ______.
The allocation rate for the supervisor's salary per unit is ______.
The allocation for January, with 800 units produced, is ______.
The allocation for January, with 800 units produced, is ______.
Cost allocations significantly affect individuals and may influence managers’ ______.
Cost allocations significantly affect individuals and may influence managers’ ______.
The children’s department uses more shopping bags than the ______ department.
The children’s department uses more shopping bags than the ______ department.
ISI cannot use this allocation base unless it maintains a record of the number of sales ______ per department.
ISI cannot use this allocation base unless it maintains a record of the number of sales ______ per department.
To calculate the allocation rate for supplies, total costs to be allocated is divided by total costs ______.
To calculate the allocation rate for supplies, total costs to be allocated is divided by total costs ______.
For the women's department, $0.0025 was multiplied by $______ to calculate the total allocation.
For the women's department, $0.0025 was multiplied by $______ to calculate the total allocation.
The total advertising costs allocated were $______.
The total advertising costs allocated were $______.
The allocation rate for advertising is calculated as 7200 advertising costs divided by $______.
The allocation rate for advertising is calculated as 7200 advertising costs divided by $______.
The relationship between the store manager’s salary and the departments is found to be ______.
The relationship between the store manager’s salary and the departments is found to be ______.
Allocation for the children’s department was calculated as $0.0025 multiplied by $______.
Allocation for the children’s department was calculated as $0.0025 multiplied by $______.
Flashcards
Estimated Costs
Estimated Costs
Projected costs used for decision-making about future activities.
Actual Costs
Actual Costs
The costs incurred in reality.
Direct Costs
Direct Costs
Costs that can be directly linked to a specific product or activity
Indirect Costs
Indirect Costs
Costs that can't be directly linked to a specific product or activity.
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Cost Objects
Cost Objects
Products, services, or activities to which costs are assigned.
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Cost Tracing
Cost Tracing
Process of assigning direct costs to cost objects.
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Cost Allocation
Cost Allocation
Process of assigning indirect costs to cost objects.
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Overhead Costs
Overhead Costs
Another name for indirect costs.
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Cost Accumulation
Cost Accumulation
The process of gathering costs for a specific cost object.
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Cost Object
Cost Object
Anything for which managers want to know the cost.
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Cost Driver
Cost Driver
A factor that causes or increases the cost of an activity.
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Cost Allocation
Cost Allocation
Distributing costs to cost objects.
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Secondary Cost Object
Secondary Cost Object
Costs of individual parts of the primary cost object.
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Primary Cost Object
Primary Cost Object
The main cost object, the major thing managers want to determine cost of.
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Cost Driver Example
Cost Driver Example
Number of units produced, labor hours worked, machine hours, mileage, etc.
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Why use costing?
Why use costing?
To accurately estimate and understand costs; pricing, performance, control, and financial statements are directly impacted.
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Allocation Rate
Allocation Rate
The amount of cost assigned to a single unit of a cost driver.
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Cost Driver
Cost Driver
A factor that causes a cost to be incurred. For example, square footage for rent or number of transactions for shopping bags.
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Rent Allocation
Rent Allocation
The process of dividing up rental costs among different departments or cost objects based on the area occupied by each.
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Utilities Allocation
Utilities Allocation
The process of distributing utility costs across various departments or cost objects, often using square footage.
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Cost Pool
Cost Pool
A group of similar individual costs that are combined for easier allocation.
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Cost Object
Cost Object
The item or department to which costs are assigned, like departments or products.
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Selecting the Cost Driver
Selecting the Cost Driver
Choosing the variable that best explains the link between costs and a cost object or department.
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Determining Allocation Using Cost Pools
Determining Allocation Using Cost Pools
Combining separate indirect costs into a cost pool before distributing the total to different cost objects.
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Direct Cost
Direct Cost
A cost that can be easily and directly traced to a specific cost object.
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Indirect Cost
Indirect Cost
A cost that cannot be easily traced to a specific cost object.
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Cost Object
Cost Object
A product, department, or project to which a cost is assigned.
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Cost Allocation
Cost Allocation
The process of dividing a total cost into parts and assigning them to specific cost objects.
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Cost Driver
Cost Driver
A factor that causes a change in the amount of a cost.
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Allocation Rate
Allocation Rate
The cost of a cost driver.
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Independent and Context Sensitive Costs
Independent and Context Sensitive Costs
Classification of costs as direct or indirect which are linked to whether it is linked to a cost object, not variable or fixed nature.
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2-Step Cost Allocation Process
2-Step Cost Allocation Process
A method for allocating costs where cost objects that share costs are broken down into allocation rates and then multiplied by the allocation base.
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Fixed Overhead Allocation
Fixed Overhead Allocation
Distributing fixed costs (costs that don't change with production volume) to different products or services.
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Allocation Rate
Allocation Rate
The amount of fixed overhead assigned to each unit of a cost driver (e.g., bottle produced).
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Cost Driver
Cost Driver
An activity or factor that drives or causes a change in the fixed cost (e.g., number of bottles produced).
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Predetermined Overhead Rate (POHR)
Predetermined Overhead Rate (POHR)
An estimated overhead rate used for allocation when actual cost or volume data aren't available.
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Production Volume
Production Volume
Total number of units produced.
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Fixed cost allocation
Fixed cost allocation
The division of fixed costs to specific cost objects, even when production volume fluctuates.
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Supervisor Salary Allocation
Supervisor Salary Allocation
Assigning the supervisor's salary to different products based on production units.
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Monthly Fluctuations
Monthly Fluctuations
Changes in production volume from one month to the next.
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Cost Driver
Cost Driver
A factor that causes costs to change. It is the activity that drives the consumption of resources and the incurrence of costs. Examples include the number of sales and the number of shopping bags used.
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Selecting Best Cost Driver
Selecting Best Cost Driver
Choosing the most appropriate activity (e.g., sales transactions, orders) to allocate costs across different departments within a company.
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Cause-and-Effect Relationship
Cause-and-Effect Relationship
A strong connection between actions and results; in cost allocation, a clear connection between an activity and the costs it generates.
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Supplies Allocation
Supplies Allocation
Distributing costs of supplies to different departments based on a predetermined allocation base, such as sales volume, transaction count, or item count
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Advertising Allocation
Advertising Allocation
Distributing advertising expenses to different departments based on a predetermined allocation base, such as sales volume or customer visits.
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Allocation Rate
Allocation Rate
The amount of cost assigned per unit of a cost driver. (Calculated by dividing total costs by total cost driver)
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Sales Transaction
Sales Transaction
A single transaction, or event, when goods or services are purchased from a business.
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Cost Allocation
Cost Allocation
Distributing costs across different products, services, departments, or customer segments.
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Cost Accumulation, Tracing, and Allocation
- Cost accumulation begins with identifying cost objects.
- The primary cost object is the cost of a promotion, and secondary cost objects would include cap costs, advertising costs, and labor costs.
- These secondary cost objects are combined to determine the primary cost object's cost.
Key Concepts
- Cost Accumulation: Collecting and summarizing costs of a cost object.
- Cost Drivers & Cost Objects: Cost drivers are factors that directly affect costs (e.g., number of caps produced, number of advertisements, employee hours spent on a promotion). Costs objects are the things for which the cost is desired (e.g., a promotion).
- Cost Allocation: Assigning costs that can't be directly traced to a specific object to multiple cost objects.
Why Use Costing?
- Managers need reliable costs to price products and services, evaluate performance, control operations, and prepare financial statements.
- Cost objects are the items for which a cost is determined.
Determine the Cost of Cost Objects
- Accountants use cost accumulation to find out the costs associated with specific items or activities.
- An example is a promotion where free baseball caps are given to attendees.
- Three cost components of this promotion are the caps' cost, advertising cost, and employee work cost.
Cost Allocation Process
- This process involves dividing a cost into parts, then allocating them to specific cost objects (e.g., departments).
- A crucial first step is identifying the cost driver (e.g., store size drives rent cost).
- This helps with a rational allocation of the cost using a two-step process: 1. compute the allocation rate for the cost, and 2. multiply this rate by the amount of the cost driver.
Cost Allocation Template (Examples)
- Rent Allocation: Calculates the allocation rate for rent based on total costs to be allocated and the total square footage. Allocates the rent cost based on the square footage for each department.
- Utilities Allocation: Based on total utilities cost to be allocated divided by total square footage. Allocates the utility costs based on the square footage for each department.
- Supplies Allocation: Calculates the allocation rate of costs based on total supply costs and total sales. Allocates these costs to each department based on sales.
Cost Allocation - Additional Notes
- Companies often group similar costs into cost pools to simplify allocation.
- The best cost driver has the strongest cause-and-effect relationship with the cost being allocated.
- Selecting the right cost driver is critical to getting an allocation that accurately reflects how a cost is used, like linking shopping bags to the number of sales transactions or total sales amounts.
- Availability of information often influences cost driver selection.
Allocating Indirect Costs to Objects
- Common costs support multiple cost objects and are not traceable to any specific object (e.g., rent).
- Allocate common costs to departments to determine manager responsibilities for controllable costs (those easily influenced by managers' decisions).
- Cost/Benefit Considerations: Analyze if allocating a cost is more beneficial than not allocating.
Cost Classifications: Independent and Context Sensitive
- The classification of a cost as direct or indirect isn't dependent on whether it's fixed or variable.
- Costs like goods sold and supplies, while variable based on sales volume, are direct (for goods sold) and indirect (for supplies).
- Rental and depreciation are both fixed relative to sales volume, but rent is indirect, and depreciation is direct (depending on cost objects)
Cause-and-Effect Relationship
- A strong cause-and-effect relationship isn't always immediately obvious, necessitating careful consideration when choosing a cost driver.
Using Cost Allocations in Budgeting Decisions
- Using cost allocations is crucial when making decisions about budgets and management resources.
The Human Factor
- Cost allocations can affect individual's performance evaluations, compensation, and the resources various departments get.
- This impact can create potential issues, like motivating behavior in the wrong direction or introducing perceptions of unfairness.
Using Cost Drivers to Make Allocations
- The number of faculty members can be used as a cost driver for allocating copying costs in a budgeting decision.
Choosing the Best Cost Driver and Controlling Emotions
- Determining the most accurate cost driver involves judgment and careful consideration of the interrelationships.
Cost Drivers for Variable Overhead Costs
- Volume measures (units produced, labor hours, materials used) are crucial for variable overhead cost allocation.
Cost Drivers for Fixed Overhead Costs
- Fixed costs do not commonly relate to the volume of production.
- The objective in allocating fixed costs is to fairly distribute overhead across products.
- Often, a fixed allocation base that distributes costs equally among all products is sufficient if no other cost driver is strongly related.
Allocating Fixed Overhead Costs
- Fixed costs are allocated based on a reasonable cost driver, like the volume of production.
Allocating Fixed Costs When the Volume of Production Varies
- Allocation rates needed will change when production volumes vary, complicating calculations.
Predetermined Overhead Rate
- Predefined rate calculation uses expected costs and production quantities.
Cost Allocation
- Cost allocation signifies dividing total costs into parts and then assigning these parts to cost objects, in this case, departments.
Cost Drivers for Variable Overhead Costs
- A cause-and-effect relationship exists between the variable overhead cost and the volume of production.
- Volume measures, like units produced, labor hours, and materials used, are effective cost drivers.
Using Units as the Cost Driver
- Using the number of units produced as a cost driver enables allocation of indirect materials costs to either desks or chairs.
Using Labor Hours as the Cost Driver
- Direct labor hours are relevant cost drivers for understanding how indirect materials are used (likely higher material use for desks than chairs due to the labor hours required).
Using Direct Hours Labor as the Cost Driver
- Costs are allocated based on the labor hours spent on desks versus on chairs.
Using Direct Materials Dollars as the Cost Driver
- Because material usage likely drives the need for indirect materials allocation, direct materials usage can be a good cost driver.
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