Cost measurement: cost measurement, basic methods of cost accumulation & assignment, & theoretical economic ideas of business

enterprise. Cost Measurement concepts = managerial accounting & internal reporting (Calculate COM -> COGS; compare budget to actual) 1. Focuses on usefulness & future orientation 2. For internal users making operational decisions (cost object & cost objectives) II. Cost Drivers & Causal Relationships -Cost drivers are dynamic factors that have the ability to change total costs (volume, activity, etc...) A. Types of Theoretical Cost Drivers: 1. Executional (short-term) = dynamic factors that are helpful to the firm in managing short-term costs of the firm (e.g. relationships with suppliers, enhancements to the production process, and involvement of staff in creating a more efficient process). 2. Structural (long-term) = strategic decisions or plans that would have long-term effects on the costs (experience, available technology, complexities) B. Types of Operational Cost Drivers 1. Volume-based = based on an aggregate volume of output (# of direct labor hours used or # of production units), associated with traditional cost accounting systems. 2. Activity-based = by department; activity that adds value to output (packaging, inspection, etc.) = contemporary cost accounting systems. C. Cost Drivers as Overhead Allocation Bases Applied O/H + DM +DL = COGM -O/H costs are indirect and must be applied on some basis. 1. Allocation Bases = cost drivers Mfg O/H maybe allocated to products or other cost objects through use of cost drivers (or allocation bases) 2. Activity Centers (production departments) correlated with the incurrence of mgf O/H costs in an activity center (contemporary) III. COST OBJECTS = resources or activities serve as the basis for management decisions; require separate cost measurement & may be products, product lines, departments, geographic territories, or any other classification that aids in decision-making

A. Focus of Cost Objectives: 1. Valuation (COGM) of product or inventory 2. Cost control (compare to standards & budgets) *A single cost object can have more than 1 measurement. Inventory (product) costs for financial statements are usually different than costs reported for tax purposes. Both inventory (product) costs and costs reported for tax purposes are different from costs used by management to make decisions. A. Common Cost Objects & their Definitions: 1. Product costs = costs related to mfg. of the product (not expensed until product sold) a. Inventory & COGM & Sold b. Inventoriable c. DM, DL, Mfg O/H applied 2. Period Costs = expensed in period incurred, not inventoriable. a. Admin expenses, interest expenses. b. Selling of product & administering & managing the operations of the firm. 3. Manufacturing costs (treated as product costs) a. Include all costs associated with manufacture of a product b. Capitalized to cost of the manufactured product c. Direct & indirect costs 4. Non-manufacturing costs (treated as period costs) a. Not relate to manufacturing of a product (selling, general & admin expenses) b. Expensed in period incurred. *Cost accounting systems are designed to meet the goal of measuring cost objects or objectives. The most frequent objectives include: -Product costing (inventory & COGM & sold) -Income determination (profit) -Efficiency measurements (comparisons to standards) IV. TRACING COSTS OF COST OBJECTS A. DIRECT COSTS (easily traced) to cost pool or object. a. Direct raw materials (used, including freight-in net of any applicable purchase discounts) + reasonable amount for normal scrap created by the process

b. Direct labor = directly related to product or performance of a service plus reasonable expected down time for the labor (breaks, setups, trainings) B. INDIRECT COSTS in the factory = mfg. O/H Not easily traceable to a cost pool or cost object; Incurred to benefit 2 or more cost pools or objects; Benefit each cost gave to the cost pool or object cannot determined without estimate or using allocation methodology Indirect Materials Indirect Labor not easily traceable to a particular product, service, etc. Other Indirect Costs those other than materials or labor (depr, rent, maintenance, property taxes, insurance, rent, utilities, etc., S, G & A)

A. Overhead Allocation Using Cost Drivers a. Indirect costs are allocated to benefiting cost pools or cost objects using cost drivers that are considered to have strong relationship to the incurrence of these costs. i. Allocation bases = cost drivers ii.Accounting = single cost pool V. COST BEHAVIOR (fixed vs. variable) -Indirect costs incl. in manufacturing O/H consist of both fixed and variable components. Variable costs - Short run & long run impacts = with relevant ranges *Distinction between variable costs and fixed costs allows managers to determine the effect of a given % change in production output on costs. Long-run Characteristics any cost can be considered variable B. Semi-variable costs (mixed costs) vary with incremental changes in capacity & are graphically displayed in a stair step pattern. Ex: Direct Cost : Utilities & Labor Indirect Labor Supervisors Other Indirect Costs Telephone Expense Other Indirect Costs Depreciation Relevant range = range for which the assumptions of the cost driver are valid. When cost driver no longer w/in relevant range, variable & fixed cost assumptions for that cost driver cannot be used to allocate costs to cost objects.

IV. STANDARD COSTS - measure costs firm expects it should incur during production 1. Standard Cost per Unit (lower is better) per nit budgets that serve as targets with which to measure production goals. 2. Efficiency (cost) & effectiveness (productivity) - standard costs considered as an allowed cost for an anticipated output. A. Standard Costing Systems service, manufacturing standard costs are used for all mfg costs (raw materials, direct labor, & mfg overhead). a. Direct costs = standard price X standard quantity b. Indirect (overhead costs) = standard (predetermined) application rate X standard quantity VII. JOINT PRODUCT COSTING & BY-PRODUCT COSTING -allocating single cost of the process among multiple products if 2 or more final products produced from same raw materials. Joint products = 2 or more products that are generated from a common input By-products = minor products of relatively small value that incidentally result from the manufacture of the main product. Split-off Point = Point in the production process where the joint products can be recognized as individual products. Joint Product costs = costs incurred in producing products up to split-off point Separable costs = costs incurred after split-off point *Joint product costs are only allocated to the main product. By-products do not receive an allocation of joint costs. JOINT PRODUCTS: 1. Allocation by Unit Volume Relationships 2. Relative Sales Value @ Split-off Approach 3. Net Realizable Values Allocate based on total net realizable values at the split-off point. a. Net realizable value = sales value cost of completion & disposal b. This is used purely of inventory costing & is of little use for cost planning & control purposes. BY-PRODUCTS: minor values 1. Revenue can be a reduction to common costs for joint product.

2. Revenue can be classified or credited to miscellaneous income. VIII. ACCUMULATING & ASSIGNING COSTS -cost object = custom order: job costing may be used -mass-produced homogeneous product process costing -operations costing uses components of both job order costing & process costing -back-flush costing accounts for certain costs at the endo f the process in circumstances where there is little need for in-process inventory valuation. -Life cycle costing monitor costs throughout the products life cycle (focus on more than just the manufacturing phase of the products life. IX. COST OF GOODS MANUFACTURED & SOLD Manufacturing costs incurred during period are increased or decreased by net change in WIP inventory to equal cost of goods manufactured. X. JOB ORDER COSTING used when there are relatively few units produced & when each unit is unique or easily identifiable. -cost is allocated to a specific job as it moves through the manufacturing process. -Job-cost records where costs for the job are accumulated. -best suited for customized production environments such as construction, aircraft assembly, printing, etc. Application of O/H: 1. Calculated Overhead rate = budgeted O/H costs divided by estimated cost driver 2. Apply O/H = actual cost driver X O/H rate XI. PROCESS COSTING averages costs & applies them to a large number of homogeneous items 1. Unit (quantity) accounting: number of units accounted for must = units charged to the department. 2. Cost accounting = amount of costs accounted for = amt of costs charged to the department.

EQUIVALENT UNITS = an equivalent unit of direct material, direct labor, or conversion costs is qual to the amt of DM, DL, or conversion costs necessary to complete 1 unit of production. Ex. 10,000 actual units of DM. DL, or O/H in process that are 75% complete would represent 7,500 equivalent units of DM, DL, or OH production a. Normal spoilage (inventory cost) occurs under regular operating conditions & is included in the standard cost of the manufactured product => increase per unit cost b. Abnormal spoilage not included in the standard cost of a mfg product; expensed as period expense, charged against income of the period as a separate component of COGS.