Week 2 class notes Vocabulary and basic cost concepts

Example

Suppose youre the manager Vinny test engineer submarines touch

screens
Vinny got promoted and manager for general dynamics
Build and repair
What are the type of costs?
o Budgeted (projected) costs
o Actual costs (already occurred) costs
E.g. Automotive world
o

Cost Objects:

Anything we want to know the cost of cost object:

o unit of product
o a product line
o A department
o A service
o A facility
o A customer
In financial you make them MECE, with these you do this so you can make
management decisions, understand costs
Cars
o Direct cost: How to calculate the cost of one tier? 1x 4 = total
o Indirect: How would you calculate salary to the production of one
car? Hard can be difficult.
o TRACEABILITY ACID TEST 1:
Materiality decides direct or indirect- e.g: The glue in
each coffee table, can be measured to build a table small
cost NOT material therefore not direct, IF large costs
Material and direct
Technology: One person building a car = can treat as direct
cost
Design of operations: classifying a cost as direct is easier if a
companys facility is used exclusively for a specific cost object.
o Cost can be direct to one cost object, but indirect with
respect to another cost object:
1 celica = yes
Management of 1 division = yes
Multiple celicas = Indirect

Variable costs v Fixed costs

Variable: proportion changes in proportion to activity

o Unit Variable costs (total variable costs / units produced) is usually
assumed to be constant
Fixed costs do not change, in total, with changes in activity
o Unit fixed costs (total fixed costs / unit produced) does change
o Dont confuse yourself if the fixed cost changes

2. ACID TEST: if we were to increase or decrease activity (units and

volumes) by a little bit, will total cost change? Test 2:

increases

decreases

o
o
o

Top left trace to car, top right (direct) cant trace to one car
(indirect)
Bottom left fixed direct as looking only at the one car, bottom right
fixed indirect lots of products
There is mixed costs e.g. mobile an fixed

o
o
o
o

Mix ingredients
High speed
Over
Manual oricess
Yeast direct, variable TICK (direct as the price is low, but
the cost of one loaf is low, and is easily
measureable.variable as it depends on number of loafs)
Flour direct, variable TICK
Packaging direct, variable TICK (direct if not small,
variable)
Dep on ovens direct, fixed (
Dep direct, fixed WRONG indirect, and fixedif units of
usevariable
Rent direct, fixed ?
Insurance indirct, ficed ?
Utilities direct, variable ?
Labor direct, variable (depends if fixed or variable union
contracts etcif wages set fixed)
Mix dept direct, fixed
Handlers direct, fixed
Custodian Indirect, Fixed
Night guard indirect, fixed
Machinist indirect, variable (reason why indirect is cause
you cannot trace it, mixing diff types of bread)
Maintenance indirect, variable
Cleaning indirect, variable (if spills) if regular (fixed)
Exam = multiple choice and you can make an
argument either way.

More Vocab

Types
o
o
o

of firms
Manuf create
Merchandise dont do much to the product just sell it
Service not involved in selling anything

3. TESTS Decide what type of firm, then decide inventory or period

Manufaccturing firms Types of inventory

o Direct Materials = things for making things
o Work in process = Stuff that is not finished yet
o Finished good
o Inventory product or manuf costs
Direct
Direct manuf labor
Manuf overhead (aka indirect
Are accumulated accounts CGOS
o Period costs

All the costs other than COGS on the income statement

(sales, marketing, R&D, executive salaries)
Merchandising types of inventory
o only one = finished costs
o Other than that period
Service provides
o More likely to be period

1. Inventory as you debit an inventory account, and when they sell it is

expenses in COGS
2. Electricity - Assembly line workers so this is inventory as its its value
chain INDIRECT, VARIABLE BUT IT IS IN THE manuf cost becomes
inventory
3. Yahoo is a service PERIOD cost
4. Period (as its not manuf its merch)
5. Manufacturer it is an inventory cost
6 . period cost
8 period

9. Any cost after the costs are finished, are a period costs. If within manuf
process invent

How we accumulate costs in manufacturing

1. Debits left
2. Credits right
3. 4 accounts
a. Direct materials
i. STEP 1 : DR: Beginning balance, purchases (both
period)
ii. STEP 2: LESS CR: Cost of DM used in manufacturing
(what was used in the period)
iii. Ending balance - not necessarily Zeroed out (flows to
next)

iv.
b. WIP (assets) will All be inventory
i. DR Beginning Balance (inventorable costs)
ii. DR cost of DM used in manuf (inventory)
iii. DR Cost of direct labour (inv)
iv. DR Manuf
1. LESS CR -COGS of manuf its finished!
a. Balance (flows to next)
2.

c. Finished Goods (assets)

i. DR: Finished balance
ii. COGSs (moved here! Its done)
1. CR COGS it gets sold!
a. ENDING Blanaec (flows to next)

2.
d. COGS (expense)
i. DR: Item is sold COGS matching principlestarts at 0,
(Adds here on the 4th)
1. .CR COGS in finished goods (TIMING CR in
previous in above)
In accrual accounting, the matching principle states that
expenses should be recorded during the period in which they
are incurred, regardless of when the transfer of cash occurs.