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Define Financial Accounting

Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.


Define Managerial Accounting

Managerial accounting is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.


What is the purpose of Cost Classification?

- Assigning costs to cost objects
- Accounting for costs in manufacturing companies
- Preparing financial statements
- Predicting cost behavior in response to changes in activity
- Making decisions


What are Direct Costs?

- Costs that can beeasily and conveniently traced to a unit of product or other cost object.
- Examples: direct material and direct labor


What are Indirect Costs?

- Costs that cannot be easily and conveniently traced to a unit of product or other cost object.
- Example: manufacturing overhead


What are Common Costs?

Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.


What are the 3 basic Manufacturing cost categories?

1) Direct Materials
2) Direct Labor
3) Manufacturing Overhead


What is Direct Labor?

Direct labor costs are those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers


What is Manufacturing Overhead?

Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products.

Includes indirect materials and indirect labor costs that cannot be easily or conveniently traced to specific units of product.


What is Prime cost?

The sum of direct materials and direct labor cost.


What is Conversion cost?

The sum of direct labor and manufacturing overhead.


What are the two categories of non-manufacturing costs?

Selling costs - Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs.

Administrative costs - All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.


What are product costs?

Product costs includes all the costs that are involved in acquiring or making a product.

Product costs “attach” to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.


What are Manufacturing product costs?

For manufacturing companies, product costs
- Raw materials: includes any materials that go into the final product.
- Work in process: consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer.
- Finished goods costs: consists of completed units of product that have not yet been sold to customers.


What are the 3 Cost Classifications

Variable costs
Fixed costs
Mixed costs


What is a variable cost?

A cost that varies, in total, in direct proportion to changes in the level of activity.

A variable cost per unit is constant.


What is an Activity Base?

A measure of what causes the incurrence of a variable cost
ex.) units produced, machine hours, labor hours, miles driven


What is a Fixed cost?

A cost that remains constant, in total, regardless of changes in the level of the activity.

If expressed on a per unit basis, the average fixed cost per unit varies inversely with changes in activity.


What are the types of Fixed costs?

Committed: Long-term, cannot be significantly reduced in the short term

Discretionary: May be altered in the short-term by current managerial decisions


What is the relevant range?

The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat.


What are Differential costs?

Differential costs (or incremental costs) are the difference in cost between any two alternatives.

A difference in revenue between two alternatives is called differential revenue.

Both are always relevant to decisions.
Differential costs can be either fixed or variable.


What are Sunk costs?

Sunk costs have already been incurred and cannot be changed now or in the future.

These costs should be ignored when making decisions.


What are Opportunity costs?

The potential benefit that is given up when one alternative is selected over another.

These costs are not usually found in
accounting records but must be explicitly considered in every decision.