Chapter 2 (wk2)

# Chapter 2 (wk2) - Cost Terms and Purposes Chapter 2 Accy211...

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2 - 1 Cost Terms and Purposes Chapter 2 Accy211: Management Accounting II Cost and Cost Terminology Cost is a resource sacrificed or forgone to achieve a specific objective. An actual cost is the cost incurred (a historical cost) as distinguished from budgeted costs. A cost object is anything for which a separate measurement of costs is desired. Cost and Cost Terminology Cost Accumulation Cost Object Cost Object Cost Object Cost Assignment Tracing Allocating Direct and Indirect Costs Direct Costs Example: Paper on which Sports Illustrated magazine is printed Indirect Costs Example: Lease cost for Time-Warner building housing the senior editors of its magazine COST OBJECT Example: Sports Illustrated m agazine Direct and Indirect Costs Example Direct Costs: Maintenance Department \$40,000 Personnel Department \$20,600 Assembly Department \$75,000 Finishing Department \$55,000 Assume that Maintenance Department costs are allocated equally among the production departments. How much is allocated to each department? Direct and Indirect Costs Example Allocated \$20,000 Maintenance \$40,000 Assembly Direct Costs \$75,000 Finishing Direct Costs \$55,000 \$20,000

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2 - 2 Cost Behavior Patterns Example Bicycles by the Sea buys a handlebar at \$52 for each of its bicycles. What is the total handlebar cost when 1,000 bicycles are assembled? Cost Behavior Patterns Example 1,000 units × \$52 = \$52,000 What is the total handlebar cost when 3,500 bicycles are assembled? 3,500 units × \$52 = \$182,000 Cost Behavior Patterns Example Bicycles by the Sea incurred \$94,500 in a given year for the leasing of its plant. This is an example of fixed costs with respect to the number of bicycles assembled. Cost Behavior Patterns Example What is the leasing (fixed) cost per bicycle when Bicycles assembles 1,000 bicycles? \$94,500 ÷ 1,000 = \$94.50 What is the leasing (fixed) cost per bicycle when Bicycles assembles 3,500 bicycles? \$94,500 ÷ 3,500 = \$27 Cost Drivers The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately. The number of bicycles assembled is a
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## This note was uploaded on 06/16/2010 for the course ACC 211 taught by Professor Aerad during the Spring '08 term at Uni. West.

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Chapter 2 (wk2) - Cost Terms and Purposes Chapter 2 Accy211...

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