Cost Accounting: A Managerial Emphasis, Sixth Canadian Edition Plus NEW MyAccountingLab with Pearson eText -- Access Card Package, 6/E
CHAPTER 2
AN INTRODUCTION TO COST TERMS
AND PURPOSES
SHORT-ANSWER QUESTIONS
2-1 A cost object is anything for which a
separate measurement of costs is desired. Examples include a product, a
service, a project, a customer, a brand category, an activity, a department,
and a program.
2-2 Direct costs of a cost object are related
directly to the particular cost object and can be traced to it in an
economically feasible way. Indirect costs of a cost object are costs that arise
from common costs shared among distinct types of cost objects and cannot be
traced to each type of cost object in an economically feasible way.
2-3 When direct costs are traced to a
particular cost object the resources used are unique to the distinct type of
cost object and can be accurately assigned to it. When costs of resources
shared unequally among distinct types of cost objects are allocated, managers
are less certain whether the cost allocation base, a measure of direct
resources consumed, accurately measures the benefit or value added to the
distinct type of cost object from its share of common resources consumed.
Managers prefer to use more accurate costs in their decisions.
2-4 Factors affecting the classification of a
cost as direct or indirect include:
1.
the materiality of the cost in
question
2.
available information-gathering
technology
3.
design of operations
4.
the type of costing system in use
2-5 A cost driver is a variable, such as either
the level of activity or volume of direct resources used, that causes a change
in total cost, measured throughout a specific time. A change in the quantity of
a cost driver used results in a change in the level of total costs. For
example, the number of tires per vehicle is a driver of the total cost of tires
for each vehicle.
2-6 The relevant range is the range over which the changes in the quantity of the cost
driver used has a causal relationship with changes in total cost. Relevant
range is important to accurately define cost behaviour as a linear cost
function. Linear cost functions are applied when examining cost-volume-profit
(CVP) relationships as long as the volume levels are within the relevant range.
2-7 The usefulness of a unit cost or rate per
unit of resource used depends on whether the causal relationship is true, for
example with fully variable costs. The rate per unit for variable costs is
computed by dividing some total cost of the resource used (the numerator) by a
corresponding quantity of units of a resource used (the denominator). But when
total cost is fully or partially fixed it is wrong to use a constant rate per
unit. There is no direct causal relationship between a fixed cost which is
constant, and any quantity of any cost object, either input or output. The
fixed cost in the numerator is unchanged but the fixed cost rate will vary as
the denominator quantity changes.
2-8 Manufacturing companies purchase materials
and components and convert them into various finished goods, for example pharmaceutical,
automotive and textile companies.
Merchandising-sector companies purchase and then sell
tangible products without changing their basic form, for example retailing or
distribution companies.
Service-sector companies produce and provide services or
intangible products to their customers, for example, engineering design, legal
advice and audits.
2-9 Manufacturing
companies typically have one or more of the following three types of inventory:
1.
Direct materials inventory. Direct
materials on site and awaiting use in the production process.
2.
Work-in-process inventory. Goods
partially converted from direct materials to goods available for sale, but not
yet finished. Also called work in progress (WIP).
3.
Finished goods inventory. Goods
completed and available for sale but not yet sold.
2-10 No. Service sector companies have no inventories
and, hence, no inventoriable costs.
2-11 Overtime premium is the wage rate paid
to workers (for both direct labour and indirect labour) in excess of their
straight-time wage rates.
Idle time is a sub-classification of indirect labour that
represents wages paid for unproductive time caused by lack of orders, machine
breakdowns, material shortages, poor scheduling, and the like.
2-12 Either a product or a service cost is the sum
of the costs assigned to it for a specific purpose. Purposes for computing a
product cost include:
·
Pricing and product mix decisions,
which should include the costs of all value-chain functions
·
Contracting with government agencies, which
will be defined by a contract and may include only total costs of the
production business function in the value chain
·
Preparing
GAAP-compliant financial statements for external reporting which will be
defined by a contract and because there is no inventory for the service, will exclude
all inventoriable costs
2-13 Financial accountants classify the actual or
historical costs of business transactions during a specific time period in a
standardized way. The costs are accumulated for only transactions in a specific
classification in general ledger accounts. Management accountants are free to
reclassify the reliable costs in general ledger accounts by distinguishing and
including only those costs that are relevant to identifying and solving a
specific cost-management problem.
EXERCISES
2-14
(10 min.) Terminology.
1.
Conversion costs
2.
fixed
cost
3.
Inventoriable
costs
4.
Prime
costs
5.
Period
costs
6.
variable
cost
7.
Indirect
8.
Relevant
cost
2-15 (15 min.) Inventoriable
costs versus period costs.
1.
Spring water purchased for resale
by Sobeys—inventoriable cost of a merchandising company. It becomes part of
cost of goods sold when the mineral water is sold.
2. Electricity used at a Toyota
3. Amortization on Google’s computer
equipment—period cost of a service company. Google has no inventory of goods
for sale and, hence, no inventoriable cost.
4. Electricity for Sobeys store
aisles—period cost of a merchandising company. It is a cost that benefits the
current period and is not traceable to goods purchased for resale.
5. Amortization on Toyota
6. Salaries
of Sobeys marketing personnel—period cost of a merchandising company. It is a
cost that is not traceable to goods purchased for resale. It is presumed not to
benefit future periods (or at least not to have sufficiently reliable evidence
to estimate such future benefits).
7. Water consumed by Google’s
engineers—period cost of a service company. Google has no inventory of goods
for sale and, hence, no inventoriable cost.
8. Salaries of Google’s marketing
personnel—period cost of a service company. Google has no inventory of goods
for sale and, hence, no inventoriable cost.
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