S_Session 02 - Cost Concepts.pdf

I ndirect or o verhead c osts costs that costs that

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I NDIRECT or O VERHEAD C OSTS : Costs that costs that are difficult to trace to a specific cost object. Examples include general plant management or national advertising that benefits more than one product. Whether a given cost is direct or indirect depends upon the cost object being considered.
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6 Assume the cost object is attending Acct 102. Is accommodation expense for the summer a direct cost? How about the cost of the text books? How about tuition for Summer Acct 102? Would your answer to tuition fees change if this was a regular semester?
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Using Cost Data for Decision-making What costs will be affected by this decision (i.e., which costs are relevant)? How will costs change with this decision? As we will see, for many decisions, a firm’s existing cost accounting system cannot provide the information we need. 7
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Need to Know How Costs Change For some purposes (e.g. to plan for future operations or to make a decision) we need to know how costs will behave (change). For that purpose, it is useful to classify costs on the basis of their relationship with a cost driver. Cost Driver Any factor whose change “causes” a change in costs – that which “drives” the cost to be incurred, in the first place, or to change, subsequently. (e.g., production or sales volume). 8
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Variable costs (VC) are costs that change in total in proportion to changes in the magnitude of the cost driver. Cost Driver Cost Total cost changes in proportion to the change in the cost driver (Almost all cost accounting systems assume that the relationship between a variable cost and its driver(s) is linear.) Variable Cost 9
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Fixed costs (FC) are costs that, for a given time period, remain unchanged regardless of any changes in the magnitude of the cost driver. Cost Driver Cost Total cost does not change Fixed Cost 10
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Semi-variable Cost Total Cost to Operate Delivery Trucks Variable Cost = Slope = $1.00/delivery Fixed Cost = Intercept = $3,000 Number of Deliveries 11
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Step Cost Depreciation Expense Number of Units Produced 12
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Relevant Range Cost Machine Hours Estimated Total Cost
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