3-1 Cost assignment refers to
the general case of assigning costs to cost pools or cost objects. When there is a direct and traceable link
between the cost and the cost pool or cost object, then the management
accountant traces that cost to the cost pool or cost object. When there is an indirectlink between
the cost and the cost pool or cost object, then the management accountant uses
cost allocation. Cost allocation uses
cost drivers to assign the cost.
3-2 Direct costs can be
physically identified with and/or traced to the cost object because there is a
direct causal link between them.
Indirect costs cannot be traced to each cost object. Direct costs for a manufactured product
include the materials (called direct materials) which are part of the product
and the labor (called direct labor) which is used to assemble the product. Indirect costs include the machinery, plant
and other labor necessary to manufacture the product, but which is not directly
traceable to the product, such as labor for inspection and supervision.
3-3 All direct costs are
variable by definition since they can be directly traced to the cost object,
and thus must vary with the cost driver.
3-4 All fixed costs must be
indirect, since the increase in the cost driver or volume of output does not
affect the level of fixed cost.
3-5 A cost driver is any
activity that has the effect of changing the level of total cost.
3-6 Variable costs are those
for which total cost changes with each change in the cost driver. Fixed costs are the portion of total cost
which remains constant as the cost driver changes.
3-7 A step-fixed cost varies
with the cost driver, but in discrete steps.
Costs remain fixed over narrow ranges of the cost driver. However, total costs increase by a constant
amount at set intervals. Examples of
step-fixed costs are the costs for certain clerical tasks, order filling, and
other administrative tasks. At specific
levels of the cost driver, an additional clerk must be added. Therefore, total costs increase by a constant
amount at these points.
3-8 The relevant range is the
range of the cost driver for which total cost is approximately linear. The relevant range is used to provide a
useful range of activity for the cost driver in which it can be assumed that
variable costs will be constant per unit of the cost driver. This is an assumption since the behavior of
actual costs is likely to be non-linear (see Exhibit 3-6) over the range of the
cost driver. The concept of the relevant
range allows the management accountant to use the concept of constant unit
variable cost for a defined range of operations, even though actual unit
variable costs change over the entire range of the cost driver.
3-9 Conversion costs are the
sum of direct labor and overhead costs. Prime costs are the sum of direct
materials and direct labor.
3-10 Average cost can be
misleading unless the activity level (denominator) is known. Because average
cost includes a fixed cost component, it will be different at each possible
activity level. The term average cost is
meaningless if the denominator is unknown.An increase in volume does not
increase total cost by the amount of the increase in volume multiplied by total
unit cost; total cost increases by the increase in volume multiplied by the
unit variable cost.
3-11 Total variable costs
increase as the cost driver increases.
Total fixed costs remain
constant as the cost driver increases.
Average variable costs
remain constant as the cost driver increases.
Average fixed costs
decrease as the cost driver increases.
3-12 Unit cost is the additional
cost that is incurred as the cost driver increases by one unit.
3-13 Product costs are costs
which are capitalized as assets, or inventoried. They are referred to as manufacturing costs
in manufacturing firms and merchandise inventory in merchandising firms. Period costs are expensed as they are
incurred because there is no expectation that they will provide any future
benefit to the firm. Since period costs
are not directly or indirectly related to the production process, they are
sometimes called non-manufacturing costs.
3-14 Cost of goods manufactured
is the cost of the units produced this period and transferred into finished
good inventory. Cost of goods sold is
the cost of the units sold this period.
Cost of goods sold will differ from cost of goods manufactured because
of changes in finished goods inventory.
If finished goods inventory is very nearly the same from the beginning
to the end of the period, then cost of goods sold and cost of goods
manufactured will be very nearly the same.
3-15 The types of inventory in
manufacturing firms are:
1. materials inventory
2. work-in-process
inventory
3. finished products
inventory
3-16 Both accuracy and
timeliness are important attributes of cost information. Accuracy is important because effective
planning and decision making require accurate cost information. The same is true for effective decision
making.
3-17 Executional cost drivers
include employee empowerment, design of the production process or work place,
and management of supplier relationships.
3-18 Structural cost drivers
include scale, experience, technology, and complexity
3-19 Indirect materials include
items used in the production process that are not included in the product
itself; rags and small tools, lubricant for the machines, etc.
3-20
Indirect
labor includes labor that is used in the manufacturing process but cannot be
traced to each product as it is produced;
indirect labor includes supervision, inspection (by batch, because
inspection of each and every product would be a variable cost), training, etc.
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