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Unformatted text preview: CHAPTER 2 BASIC MANAGEMENT ACCOUNTING CONCEPTS DISCUSSION QUESTIONS 1. A cost object is something for which you want to know the cost. For example, a cost object may be the human resources department of a company. The costs related to that cost object might include salaries of employees of that department, telephone costs for that depart- ment, and depreciation on office equipment. Another example is a customer group of a company. Atlantic City and Las Vegas casinos routinely treat heavy gamblers to free rooms, food, and drink. The casinos know the bene- fits yielded by these high rollers and need to know the costs of keeping them happy, such as the opportunity cost of lost revenue from the rooms, the cost of the food, and so on. 2. Accumulating costs is the way that costs are measured and tracked. Assigning costs is link- ing costs to some cost object. For example, a company accumulates or tracks costs by en- tering them into the chart of accounts. Direct materials would be entered into the materials account; direct labor would be entered into the direct labor account. Then, these costs are assigned to units of product. 3. A direct cost is one that can be traced to the cost object, typically by physical observation. An indirect cost cannot be traced to the cost object. The same cost can be direct for one purpose and indirect for another. For example, the salaries paid to purchasing department employees in a factory are a direct cost to the purchasing department but an indirect cost (overhead) to units of product. 4. The cost of goods manufactured is the sum of direct materials, direct labor, and overhead used in producing the units completed in a factory. 5. Prime cost is the sum of direct materials and direct labor. Conversion cost is the sum of dir- ect labor and overhead. Total product cost consists of direct materials, direct labor, and overhead. This is not equal to the sum of prime cost and conversion cost because then direct labor would be double counted. 6. A tangible product is one you can see, feel, and take with you. It is a product, such as a tube of toothpaste, a car, or an orange. An in- tangible product is a service. For example, the dental hygienist who cleans your teeth provides a service. 7. Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization. An expense is an expired cost; the benefit has been used up. 8. A period cost is one that is expensed immedi- ately, rather than being inventoried like a product cost. 9. Allocation means that an indirect cost is as- signed to a cost object using a reasonable and convenient method. Since no causal rela- tionship exists, allocating indirect costs is based on convenience or some assumed link- age....
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- Fall '07