ch02s - Cost Management Concepts and Cost Behavior Chapter...

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Cost Management Concepts and Cost Behavior Chapter 2
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What Does Cost Mean? There is no single definition of cost Management accountants have used different systems, or classifications, to develop cost information
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Product Costs Related to the purchase or manufacture of goods for resale. Assigned to inventory and cost of goods sold. Period Costs Related to selling and administrative operations. Recognized as expenses in the same time period. The Meaning of Cost The use of valuable resources, in order to achieve a stated purpose. In accounting, cost is reported in monetary terms.
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Manufacturing Companies The 3 major categories of manufacturing costs: Direct Materials Raw materials, components, and other parts that can be traced to a specific product. Direct Labor Payments and benefits for those employees who convert direct materials into finished product. Manufacturing Overhead Indirect material Indirect labor Other overhead
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Expenditure – company purchases raw materials for $100 Cost – company reports $100 of raw materials on balance sheet Expense – company records $100 expense on income statement when it sells the product that uses the raw material
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Financial reporting - GAAP The key issues for external users of accounting information: Consistency Reasonably accurate allocation of costs between the income statement and the balance sheet GAAP prescribes how to determine costs for external reporting
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Internal Use of Cost Information Costs are used for planning and evaluation. The objective is to determine all the components, both manufacturing and nonmanufacturing, of the costs associated with a cost object
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Internal Use Of Cost Information Planning Using cost as a basis for determining the selling price of a prospective product Using cost in a budgeting model to forecast costs under different levels of activity Evaluation Deciding whether the market price for an existing product makes the product profitable Determining whether a process is cost efficient compared to similar internal or external processes
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Cost Object Management accounting concept A cost object is something for which we want to compute a cost: A product A product line An organizational unit
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Cost behavior Flexible resources are resources whose costs are proportional to the amount of the resources used Wood used to make furniture in a factory Electrical power to operate machinery Fuel used to deliver the furniture to customers Variable costs – proportional to the amount of resource used
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Cost Behavior Capacity-related resources are acquired in advance of the work being done Capacity-related costs depend upon how much of the resource is acquired, not used Fixed costs
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Direct Cost A cost of a resource or activity that is acquired for or used by a single cost object
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Direct Costs Cost object - dining room table Cost of the wood that went into the dining
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This note was uploaded on 11/16/2010 for the course ECN 5050 taught by Professor Yamashita during the Spring '10 term at Nova Southeastern University.

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ch02s - Cost Management Concepts and Cost Behavior Chapter...

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