December 8, 2011

Introduction to Cost Terms - Review Notes

Cost: Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount (or money) that must be paid to acquire goods and services.

Budgeted cost is provided in the plan. Forecasted cost is an estimate. Actual cost is the cost actually incurred at the time of transaction.

Cost Object: Cost object is anything for which a separate measurement of cost is desired.

Cost System: A cost system accumulates costs and the assigns them to various cost objects.

Cost accumulation is the collection cost using documents like purchase orders, invoices, various expense vouchers, and issue receipts of materials, wage and salary schedules. These documents are entered in journals and ledgers like the financial accounting or book keeping procedure.

Cost assignment is a term that encompasses both (1) tracing accumulated costs to a cost object, and (2) allocating accumulated costs to a cost object.

Direct cost: Directs of a cost object are related to the particular cost object and they can be traced to the cost object through accounting documents as and when they are incurred in an economically feasible way.

Indirect cost: Indirect costs are also related to the cost objects but they cannot be identified with cost objects at the time they are incurred in an economically feasible way. Hence they are accumulated without explicit reference to the cost objects at the time they are incurred and then allocated to various cost objects at a later date to find out the costs of cost objects.

Variable cost: A variable cost with reference to a cost object changes in total in proportion to changes in the level of total activity or volume of output. With reference to an automobile, petrol is an example of variable cost. If one drives more, more petrol is consumed.

Fixed cost: A fixed cost remains unchanged for a given time period despite changes in the level of activity or volume of output. Insurance premium for a car, an annual tax for a car can be given as examples. They are not related to the distance traveled by a car in a period.

Cost driver: Cost driver is a factor, that has a causal relation with a cost over a given time span. In the case of variable costs, activity volume or output volume are cost drivers. that is at the total variable cost level, more output would mean more total cost.

Fixed cost: Fixed cost has no cost driver in the short term. But in the long term it also has cost drivers.

Inventoriable costs: These costs are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold.

Period costs: These costs are treated as expenses of the period in which they are incurred because it is presumed that they do not benefit future periods.

Prime cost and conversion costs are terms used in manufacturing companies. Prime costs are all direct manufacturing costs. Conversion costs are all manufacturing costs other than direct material costs.

Overhead cost: Costs which are not directly related to the production of goods being produced and sold are classified under overhead costs. They are essential for the production and selling process but they are not accounted directly on the job cards or batch cards of the goods being produced and sold.

Refer for More Detailed Explanation
Horngren et al. Cost Accounting, 13th Edition, Pearson Education
Cost Accounting - Horngren et al., Book Information and Review

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