CostAccountingSeventeenthEdition,GlobalEditionChapter2AnIntroductiontoCostTermsandPurposesCopyright?2021PearsonEducationLtd.LearningObjectives(1of2)2.1Defineandillustrateacostobject2.2

Distinguishbetweendirectcostsandindirectcosts2.3Explainvariablecostsandfixedcosts2.4

Interpretunitcostscautiously2.5

Distinguishthefinancialaccountingconcepts,inventoriablecosts,andperiodcostsLearningObjectives(2of2)2.6

Illustratetheflowofinventoriableandperiodcostsinfinancialaccounting2.7Explainwhyproductcostsarecomputedindifferentwaysfordifferentpurposes2.8Describeaframeworkforcostaccountingandcostmanagement.BasicCostTerminology(1of2)Cost—asacrificedorforgoneresourcetoachieveaspecificobjectiveActualcost—acostthathasoccurredBudgetedcost—apredictedcostCostobject—anythingforwhichacostmeasurementisdesiredCostObjectExamplesatTeslaExhibit2.1ExamplesofCostObjectsatTeslaCostObjectIllustrationProductATeslaModel3vehicleServiceTelephonehotlineprovidinginformationandassistancetoTeslastoresandgalleriesProjectR&DprojectonanelectricTeslatruckCustomerTheDubaiRoadandTransportAuthority(RTA),whichisbuildingalargefleetofelectrictaxisinthecityActivitySettingupmachinesforproductionormaintainingproductionequipmentDepartmentWorkerhealthandsafetydepartmentBasicCostTerminology(2of2)CostAccumulation—thecollectionofcostdatainanorganizedwaybymeansofanaccountingsystemCostAssignment—ageneraltermthatencompassesthegatheringofaccumulatedcoststoacostobjectintwoways:TracingcostswithadirectrelationshiptothecostobjectAllocatingaccumulatedcostswithanindirectrelationshiptoacostobjectDirectandIndirectCostsDirectcostscanbeconvenientlyandeconomicallytraced(tracked)toacostobject.Indirectcostscannotbeconvenientlyoreconomicallytraced(tracked)toacostobject.Insteadofbeingtraced,thesecostsareallocatedtoacostobjectinarationalandsystematicmanner.CostAssignmenttoaCostObject(TeslaExample)Exhibit2.2

CostAssignmenttoaCostObjectCostAllocationChallengesDirectCostsMaterial(steelortiresforacar,asanexample)Labor(assembly-lineworkerwages)IndirectCostsElectricityRentPropertytaxesPlantadministrationexpensesFactorsAffectingDirect/IndirectCostClassificationsThematerialityofthecostinquestionTheavailableinformation-gatheringtechnologyDesignofoperationsNOTE:aspecificcostmaybebothadirectcostofonecostobjectandanindirectcostofanothercostobject.Thedirect/indirectclassificationdependsonthecostobjectthatoneistryingtodeterminethecostof.CostBehaviorPatterns:VariableCostsandFixedCosts(1of2)Variablecostschange,intotal,inproportiontochangesintherelatedlevelofactivityorvolumeofoutputproduced.Fixedcostsremainunchanged,intotal,foragiventimeperiod,despitechangesintherelatedlevelofactivityorvolumeofoutputproduced.Costsarefixedorvariableforaspecificactivityand/orforagiventimeperiod.CostBehaviorPatterns:VariableCostsandFixedCosts(2of2)Variablecostsareconstantonaper-unitbasis.Thatis,ifaproducttakes5poundsofmaterialeach,itstaysthesameperunitregardlessifone,ten,orathousandunitsareproduced.Fixedcostsperunitchangeinverselywiththelevelofproduction.Asmoreunitsareproduced,thesamefixedcostisspreadovermoreandmoreunits,reducingthecostperunit.CostBehaviorSummarizedCOSTSTOTALDOLLARSCOSTPERUNITVARIABLECOSTSChangeinproportionwithoutput(moreoutput=morecost)UnchangedinrelationtooutputFIXEDCOSTSUnchangedinrelationtooutput(withintherelevantrange)Changeinverselywithoutput(moreoutput=lowercostperunit)GraphsofVariableandFixedCostsExhibit2.3

GraphsofVariableandFixedCostsOtherCostConceptsMixedcostshavebothfixedandvariableelements.Costdriver—avariable,suchasthelevelofactivityorvolume,thatcausallyaffectscostsoveragiventimespanRelevantrange—thebandorrangeofnormalactivitylevel(orvolume)inwhichthereisaspecificrelationshipbetweenthelevelofactivity(orvolume)andthecostinquestionFixedcostsareconsideredfixedonlywithintherelevantrange.IllustrationofFixedCostWithinRelevantRangeExhibit2.4ThomasTransportCompanyMultipleClassificationsofCostsCostsmaybeclassifiedasDirect/Indirectand Variable/Fixed.Thesemultipleclassificationsgiverisetoimportantcostcombinations:DirectandvariableDirectandfixedIndirectandvariableIndirectandfixedExamplesoftheMultipleClassificationsofCostsExhibit2.5ExamplesofCostsinCombinationsoftheDirect/IndirectandVariable/FixedCostClassificationsforaCarManufacturerUseUnitCostsCautiouslyAlthoughunitcostsareregularlyusedinfinancialreportsandformakingproductmixandpricingdecisions,managersshouldthinkintermsoftotalcostsratherthanunitcostsformanydecisions.TheThreeDifferentSectorsofEconomyManufacturing-sectorcompaniespurchasematerialsandcomponentsandconvertthemintovariousfinishedgoods.Merchandising-sectorcompaniespurchaseandthenselltangibleproductswithoutchangingtheirbasicform.Service-sectorcompaniesprovideservices(intangibleproducts)likelegaladviceoraudits.TypesofInventoryinManufacturingDirectmaterials—resourcesin-stockandavailableforuseWork-in-process(orprogress)—goodspartiallyworkedonbutnotyetcompleted,oftenabbreviatedasWIPFinishedgoods—goodscompletedbutnotyetsoldNote:Merchandising-sectorcompaniesholdonlyonetypeofinventory:MerchandiseInventoryCommonlyUsedClassificationsofManufacturingCostsAlsoknownasinventoriablecosts:Directmaterials—acquisitioncostsofallmaterialthatwillbecomepartofthecostobjectDirectlabor—compensationofallmanufacturinglaborthatcanbetracedtothecostobjectIndirectmanufacturing—allmanufacturingcoststhatarerelatedtothecostobjectbutcannotbetracedtothatcostobjectinaneconomicallyfeasiblewayInventoriableCostsVersusPeriodCostsInventoriablecostsareallcostsofaproductthatareconsideredassetsinacompany’sbalancesheetwhenthecostsareincurredandthatareexpensedascostofgoodssoldonlywhentheproductissold.Formanufacturingcompanies,allmanufacturingcostsareinventoriablecosts.Periodcostsareallcostsintheincomestatementotherthancostofgoodssold.Theyaretreatedasexpensesoftheaccountingperiodinwhichtheyareincurred.CostFlowsTheCostofGoodsManufacturedandtheCostofGoodsSoldsectionoftheincomestatementareaccountingrepresentationsoftheactualflowofcoststhroughaproductionsystem.Note:Inventoriablecostsgothroughthebalancesheetaccountsofdirectmaterials,work-in-process,andfinishedgoodsinventorybeforeenteringthecostofgoodsoldintheincomestatement.CostFlowsIllustratedExhibit2.7FlowofRevenueandCostsforaManufacturing-SectorCompany,CellularProducts(inthousands)Multiple-StepIncomeStatement

(1of2)Exhibit2.8IncomeStatementandScheduleofCostofGoodsManufacturedofaManufacturing-SectorCompany,CellularProductsMultiple-StepIncomeStatement

(2of2)Exhibit2.8IncomeStatementandScheduleofCostofGoodsManufacturedofaManufacturing-SectorCompany,CellularProductsFlowofRevenuesandCostsforaMerchandisingCompanyExhibit2.10FlowofRevenuesandCostsforaMerchandisingCompany(RetailerorWholesaler)OtherCostConsiderationsPrimecostisatermreferringtoalldirectmanufacturingcosts(materialsandlabor).Conversioncostisatermreferringtodirectlaborandindirectmanufacturingcosts.Overtimepremiumlaborcostsareconsideredpartofindirectoverheadcosts.Idletimereferstothewagespaidforunproductivetimecausedbylackoforders,machineorcomputerbreakdown,workdelays,poorscheduling,andthelike.MeasuringCostsRequiresJudgmentBecausemanagementcandefineandclassifycostsinmultipleways,judgmentisrequired.Managers,accountants,suppliers,andothersshouldagreeontheclassificationsandmeaningofthecosttermsintroducedinthischapterandthroughoutthebook.DifferentProductCostsforDifferentPurposes(1of2)Pricingandproduct-mixdecisions—decisionaboutpricingandmaximizingprofitsContractingwithgovernmentagencies—veryspecificdefinitionsofallowablecostsfor“costplusprofit”contractsPreparingexternal-usefinancialstatements—GAAP-drivenproductcostsonlyDifferentProductCostsforDifferentPurposes(2of2)Exhibit2.11DifferentProductCostsforDifferentPurposesAFrameworkforCostAccountingandCostManagementThefollowingthreefeaturesofcostaccountingandcostmanageme