Week 2-cost terms and purposes

Week 2-cost terms and purposes - Learning Objectives...

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2 - 1 Introduction to Cost Terms and Purposes Accy211: Management Accounting II Autumn Session 2009 Week 2 1 Define and illustrate a cost object Distinguish between direct costs and indirect costs Distinguish between variable costs and fixed costs Distinguish among manufacturing companies, merchandising companies, and service-sector companies Describe the three categories of inventories commonly found in manufacturing companies Differentiate between inventoriable costs and period costs Explain why product costs are computed in different ways for different purposes Learning Objectives 2 Basic Cost Terminology z Cost – sacrificed resource to achieve a specific objective z Actual Cost – a cost that has occurred z Budgeted Cost – a predicted cost z Cost Object – anything of interest for which a cost is desired 3 Cost Object Examples at BMW Cost Object Illustration Product BMW X 5 sports activity vehicle Service Dealer-support telephone hotline Project R&D project on DVD system enhancement Customer Herb Chambers Motors, a dealer that purchases a broad range of BMW vehicles Activity Setting up production machines Department 4 Cost Accumulation Cost Object 1 Stage (1) (2) Cost Object 2 Cost Object 3 Cost Assignment Through Tracing 5 How to account for costs? Direct and Indirect Costs z Direct Costs – can be conveniently and economically traced (tracked) to a cost object z Indirect Costs – cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner 6
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2 - 2 Cost Examples z Direct Costs Parts Assembly line wages z Indirect Costs Electricity Rent Property taxes 7 Direct Costs Indirect Costs COST OBJECT Example: Sports Illustrated m agazine Cost tracing Cost Allocation Example: Paper on which Sports Illustrated magazine is printed Example: Lease cost for the building housing the senior editors of Sports illustrated and other magazines. 8 Cost Assignment Example: Indirect Costs Assume that lease cost for the building housing the senior editors of Sports illustrated, People and Time magazines amounts to $900,000 per annum. How much is allocated to each magazine ? [Use the total floor space occupied by the staff of each magazine as the allocation base. Assume that each magazine uses same amount of floor space.] 9 Lease $900,000 Sports Illustrated Magazine Time Magazine Example: Indirect Costs 10 People Magazine Product Cost Direct costs xxxx Indirect costs ????? xxxxxx Lease $300,000 ???? xxxxxxx xxxx xxxx Product Cost Direct costs xxxx Indirect costs ????? xxxxxx Lease $300,000 ???? xxxxxxx xxxx xxxx Product Cost Direct costs xxxx Indirect costs ????? xxxxxx Lease $300,000 ???? xxxxxxx xxxx xxxx Factors Affecting Direct/ Indirect Cost Classifications Materiality Information-gathering technology Design of operations 11 COST BEHAVIOUR PATTERENS 12
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2 - 3 Cost Behavior z Variable Costs – changes in total in
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Week 2-cost terms and purposes - Learning Objectives...

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