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An Introduction To Cost Terms and Purposes
An Introduction To Cost Terms and Purposes
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Cost Object
Cost Object
Cost Assignment
Tracing
Allocating
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Cost Drivers
The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately. The number of bicycles assembled is a cost driver of the cost of handlebars.
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Fixed Costs
$94,500
3000 Volume
4000
5000
6000
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Variable
Fixed
Indirect
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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200000
Total Costs
$94,500
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Manufacturing
Manufacturing companies purchase materials and components and convert them into finished goods.
A manufacturing company must also develop, design, market, and distribute its products.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Merchandising
Merchandising companies purchase and then sell tangible products without changing their basic form.
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Merchandising
Service companies provide services or intangible products to their customers. Labor is the most significant cost category.
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Types of Inventory
Manufacturing-sector companies typically have one or more of the following three types of inventories: 1. Direct materials inventory
2. Work in process inventory (work in progress) 3. Finished goods inventory
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Types of Inventory
Merchandising-sector companies hold only one type of inventory the product in its original purchased form. Service-sector companies do not hold inventories of tangible products.
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Inventoriable Costs
Inventoriable costs (assets) become cost of goods sold
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Period Costs
Period costs are all costs in the income statement other than cost of goods sold. Period costs are recorded as expenses of the accounting period in which they are incurred.
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Beg. Balance Direct mtls. used Direct labor Indirect mfg. costs Ending Balance
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Manufacturing Company
BALANCE SHEET
Inventoriable Costs
INCOME STATEMENT
Revenues
Finished Goods Inventory
when sales occur deduct
Materials Inventory
Period Costs
Equals Operating Income
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Merchandising Company
BALANCE SHEET
Inventoriable Costs
INCOME STATEMENT
Revenues
Inventory
when sales occur deduct
Merchandise Purchases
Period Costs
Equals Operating Income
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Prime Costs
Direct Materials Direct Labor Prime Costs
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Prime Costs
What are the prime costs for Bicycles by the Sea? Direct materials used + Direct labor = $200,000 105,500 $305,000
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Conversion Costs
Direct Labor Manufacturing Overhead Conversion Costs
Indirect Labor
Indirect Materials
Other
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Conversion Costs
What are the conversion costs for Bicycles by the Sea? Direct labor $105,500 + Indirect manufacturing costs 194,500 = $300,000
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If this worker works 44 hours on a given week, how much are his gross earnings? Direct labor 44 hours $18 = $792 Overtime premium 4 hours $ 9 = 36 Total gross earnings $828
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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