ch02sol - CHAPTER 2 AN INTRODUCTION TO COST TERMS AND...

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Unformatted text preview: CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 2- 1 A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department. 2- 2 Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are allocated to a cost object. Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost- effective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost- effective) way. 2- 3 Managers believe that costs that are traced to a particular cost object are more accurately assigned to that cost object than are allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions. 2.4 Factors affecting the classification of a cost as direct or indirect include: the materiality of the cost in question, available information- gathering technology, design of operations, and contractual arrangements. 2.5 Manufacturing- sector companies purchase materials and components and convert them into various finished goods. Merchandising- sector companies purchase and then sell tangible products without changing their basic form. Service- sector companies provide services or intangible products to their customers, for example, legal advice or audits. 2.6 A cost driver is a variable, such as the level of activity or volume, that causally affects costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, number of vehicles assembled is a driver of the costs of steering wheels on a motor- vehicle assembly line. 2.7 A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is a sales commission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year). 2 - 1 2.8 The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range....
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This note was uploaded on 11/09/2010 for the course ACC 3313 taught by Professor Ann during the Spring '10 term at Nanyang Technological University.

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ch02sol - CHAPTER 2 AN INTRODUCTION TO COST TERMS AND...

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