BUSS1030 Chapter Notes - Chapter 12: Cost Accounting, Cost Driver
28 May 2018
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CHAPTER 12: COSTING
THE NATURE OF FULL COSTING
• Cost accounting: all costs involved with achieving some objective
o Involves measuring, recording and reporting costs of any cost object
o E.g. product, service, department, customer, employee etc.
• Why calculate costs?
o To value inventory (balance sheet)
o To determine cost of goods sold (income statement)
o For contractual purposes
o For management decision making (e.g. product pricing)
o To motivate employees
• Full costing: concerned with all costs incurred in making a product, not just variable costs
DIRECT COSTS
• Can be economically and physically traced to specific cost objects (e.g. finished goods) à cost can be measured for
each particular unit
o E.g. flour for bread, wages, steel for cars
• Add up all costs of production in period and divide by units produced
• Simplest when one unit of service/manufactured good
INDIRECT COSTS (OVERHEADS)
• Costs that are not directly accountable to a cost object
o E.g. oil for lubricating machines, maintenance staff’s wages
• May be either fixed or variable
o E.g. administration, personnel, security costs
PRODUCT V PERIOD COSTS
• Product costs: relate directly to finished products
o Expense as Cost of Goods Sold (COGS) when finished products are sold
• Period costs: not directly part of manufacturing process
o Expensed according to time (financial period costs), not specific goods
o E.g. selling and administration costs
TRADITIONAL COSTING SYSTEMS
• Job order cost system: costs are assigned to each individual job
o E.g. printing, legal services, travel, patient healthcare
o Each job can be distinguished from others
o Costs measured according to job/batch, NOT to set time periods
• Process cost system: allocates exactly the same cost to each of a large volume of homogenous products
o Building materials, dairy products, appliances, oil
o Production involves continuous process of similar items
o Costs assigned according to set periods of time NOT according to specific jobs
DETERMINING OVERHEAD RATES
• The predetermined overhead application rate is based on
relationship b/w estimated annual costs and expected annual
operating activity
o Established at beginning of year
o Single figure used to apply overhead costs to jobs
o Enables estimated costs of overheads to be determined at
any given time
• OVERHEADS = VARIABLE COSTS
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