An Introduction To Cost Terms and Purposes

CHAPTER 2
An Introduction to
Cost Terms and Purposes
Basic Cost Terminology
 Cost – sacrificed resource to achieve a
specific objective 耗用資源成就特定標地
 Actual Cost – a cost that has occurred
 Budgeted Cost – a predicted cost
 Cost Object – anything of interest for which a
cost is desired 成本標的 : 有關係的任何事務因此成本是一種獲取
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 2-2
Basic Cost Terminology
 Cost Accumulation – a collection of cost data
in an organized manner 方法
 Cost Assignment 分配 – a general term that
includes gathering accumulated costs to a
cost object. This includes:
 Tracing accumulated costs with a direct
relationship to the cost object and
 Allocating 分攤 accumulated costs with an
indirect relationship to a cost object
Direct and Indirect Costs
 Direct Costs – can be conveniently and
economically traced 追朔 (tracked 軌跡 ) to a cost
object 標地
 Indirect Costs – cannot be conveniently or
economically traced (tracked) to a cost object.
Instead of being traced, these costs are
allocated to a cost object in a rational 合理 and
systematic 有系統的 manner
Cost Examples
 Direct Costs
 Parts
 Assembly line wages
 Indirect Costs
 Electricity
 Rent
 Property taxes
Factors Affecting Direct/Indirect Cost
Classification
 Cost Materíality: important part

 Availability of Information-gathering
Technology- easy to collect Information
 Operational Design :depend on product
Cost Behavior
 Variable Costs – changes in total in proportion to changes
in the related level of activity or volume 依相關作業或數量變動而成正比例
變動的成本。
 Fixed Costs – remain unchanged in total regardless of 不管
changes in the related level of activity or volume 不隨數量變動而變

動的成本。
 semivariable Cost （半变动成本） – Cost remain Unchanged

 under specific valume or activity. But when valume or
activity is over certain level the cost will be changed.
 通常有一个固定不变的基数，相当于固定成本；但是，在这个基数之上发生的成本部分则是随业
务量的变动而成比例变动，这部分成本相当于变动成本。
Cost Behavior, continued
 Variable costs – are constant on a per-unit basis 單位成本
. If a product takes 5 pounds of materials each, it
不變
stays the same per unit regardless of whether one,

ten, or a thousand units are produced
 Fixed costs – change inversely with the level of
production. As more units are produced, the same
fixed cost is spread over more and more units,
reducing the cost per unit 單位成本越來越低
 Costs are fixed or variable only with respect to a
specific activity or a given time period
Cost Behavior Summarized
Total
Total Dollars
Dollars Cost
Cost perUnit
per Unit
More output = More cost
Change in Unchanged in
Variable
Variable proportion 比例 with Unchanged in
relation to output
Costs
Costs output relation to output
More output = More
cost
Change inversely
Fixed Unchanged in Change inversely
Fixed Costs Unchanged in with output
Costs relation to output with output
More output = lower cost
relation to output More output = lower
per unit
cost per unit
Minnesota Office Products (in millions)
(after cost analysis by consultant) Supreme Deluxe Regular
Direct material costs $84 $54 $62
Direct manufacturing labor costs 14.0 28.0 8.0
Direct energy costs 39.8 40.7 9.5

Other manufacturing overhead
costs 16.8 33.6 9.6
Total manufacturing costs $154.6 $156.3 $89.1
Units produced (from 2-16) 80 120 100
Cost per unit $1.93 $1.30 $0.89

10
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Other Cost Concepts
 Cost Driver – a variable 變動性 that causally 因果關係
affects costs over a given time span 间隔
的
 Relevant Range – the band of normal activity

level (or volume) in which there is a specific
relationship between the level of activity (or
volume) and a given cost
 For example, fixed costs are fixed only within
the relevant range.
A Cost Caveat 警告
 Unit costs should be used cautiously 謹慎地 .

Since unit costs change with a different level
of output 產出 or volume 數量 , it may be more
prudent 謹慎的 to base decisions 建立決策 on a total
dollar basis. 總成本的基礎上
Different Types of Firms
 Manufacturing-sector companies – create and

sell their own products 生產公司 : 生產銷售產品
 Merchandising-sector companies – product
resellers 買賣公司 : 產品銷售
 Service-sector companies
Types of Inventories
 Direct Materials – resources instock and
available for use 直接材料
 Work-in-Process (or progress) – products
started but not yet completed. Often
abbreviated as WIP 在製品 : 在產品
 Finished Goods – products completed and
ready for sale 產成品 : 製成品
Types of Product Costs
 Direct Materials
 Direct Labor
 Indirect Manufacturing 間接生產成本 –
factory costs that are not traceable to the
product. Also known as Manufacturing
Overhead 生產費用 costs or Factory
Overhead 製造費用開支 costs
Distinctions Between Costs
 Inventoriable Costs – product 存貨成本
manufacturing costs. These costs are

capitalized as assets (inventory) until they are
sold and transferred to Cost of Goods Sold
 Period Costs – have no future value and are
expensed as incurred.expenses
Cost Flows
 The Cost of Goods Manufactured and the
Cost of Goods Sold section of the income
statement are accounting representations of
the actual flow of costs through a production
system.
 Note the importance of inventory accounts in
the following accounting reports, and in the
cost flow chart
Cost of Goods Manufactured
Cellular Products
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2007 (in thousands)
Direct Materials:
Beginning Inventory, January 1 $ 11,000
Add: Purchases
Cost of Direct Materials Available for Use
73,000
84,000
Calculates the cost of
Less: Ending Inventory, December 31 8,000 Direct Materials Used
Direct Materials Used 76,000
Direct Labor 9,000
Manufacturing Overhead:
Indirect Labor 7,000
Accumulates the three
Supplies 2,000 product costs for the
Heat, Light & Power 5,000
Depreciation - plant building 2,000
current period
Depreciation - plant equipment 3,000
Miscellaneous 1,000
Total Manufacturing Overhead Costs 20,000
Manufacturing costs incurred during 2007 105,000 Adjusts the current period
Add: Beginning WIP, January 1 6,000
Total Manufacturing Costs to account for 111,000 manufacturing costs to
Less: Ending WIP, December 31 7,000 account for units actually
Cost of Goods Manufactured $ 104,000
completed
Income Statement
Cellular Products
Income Statement
For the Year Ended December 31, 2007 (in thousands) Figure carries
Revenues $210,000
Cost of Goods Sold
forward from the
Beginning Finished Goods, January 1 22,000 Schedule of Cost
Cost of Goods Manufactured 104,000 of Goods
Cost of Goods Available for sale 126,000
Ending Finished Goods, December 31 18,000 Manufactured
Cost of Goods Sold 108,000
Gross Profit 102,000
Operating Costs: Period Costs are
Marketing, distribution, and customer-service 70,000 expensed as
Total operating costs 70,000
Operating Income $32,000 incurred
Direct Materials:
Beginning Inventory, January1$ 11,000
Add: Purchases 73,000

Cost of Direct Materials
Available for Use 84,000
Less: Ending Inventory,
December 31 8,000
Direct Materials Used 76,000
Direct Materials
Beginning 76,000 Used

Inventory 11,000
Purchases 73,000
Ending Inventory December 31 8,000 20

Direct Labor
input 9,000 9,000

used
21
Manufacturing Overhead:
Indirect Labor 7,000
Supplies 2,000
Heat, Light & Power 5,000
Depreciation - plant building 2,000
Depreciation - plant equipment 3,000
Miscellaneous 1,000
Total Manufacturing Overhead Costs20,000
Manufacturing Overhead Costs
7,000
7,000
2,000
2,000
5,000
2,000 5,000 used
3,000 2,000
1,000 3,000
1,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 22
Work in process
Add:Beginning WIP,
January1 6000 Cost of Goods
76,000( Direct Materials USED) Manufactured:
9,000( Direct Labor ) 104,000
7,000
2,000
5,000
2,000
3,000
1,000
Less: Ending WIP, December 31 7000
23
• Beginning Finished Goods, January1
22,000 Cost of Goods Manufactured
104,000
• Cost of Goods Available for sale =
126,000 Less: Ending Finished Goods, December 31—
18,000
• Cost of Goods Sold = 108,000
24
Cellular Products
Income Statement
For the Year Ended December 31, 2007 (in thousands)
Revenues $210,000
Cost of Goods Sold
Beginning Finished Goods, January 1 22,000
Cost of Goods Manufactured 104,000
Cost of Goods Available for sale 126,000
Ending Finished Goods, December 31 18,000
Cost of Goods Sold 108,000
Gross Profit 102,000
Operating Costs:
Marketing, distribution, and customer-service 70,000
Total operating costs 70,000
Operating Income $32,00025
Balance Income
Sheet Statement
Cost Flowchart
Direct
Stored
Direct
Materials Materials
Purchases Revenues
Inventory
Inventoriable
Costs Other Direct
Manufacturing Incurred
Costs Work-in- Finished Cost of
Process Completed Goods Goods
Manufacturing Inventory Inventory Sold
Overhead Applied
Costs
R&D Costs
Design Costs
Marketing Costs Period
Distribution Costs Costs
Customer-Service
Costs
Equals Operating
Income
Other Cost Considerations
 Prime cost 主要成本 is a term referring to all direct
manufacturing costs (labor 直接人工 and materials
直接材料 )
 Conversion cost 加工成本 is a term referring to

direct labor and factory overhead costs,
collectively (direct labor 直接人工 + factory
overhead costs 間接生產成本 )
 Overtime labor costs are considered part of

overhead 間接生產成本或製造費用
Different Definitions of Cost for
Different Applications p43p 44
 Pricing and product-mix decisions – may use
a “super” cost approach (comprehensive)p43p 44
 Contracting with government agencies – very
specific definitions of cost for “cost plus profit”
contracts
 Preparing external-use financial statements –
GAAP-driven product costs only p44 down
Three Common Features of Cost
Accounting and Cost Management
 Calculating the cost of products, services,
and other cost objects
 Obtaining 獲得 information for planning and
control, and performance evaluation
 Analyzing the relevant information for making
decisions
PROBLEM 2-28
 Consider the following account balances (in thousands) for the Canseco
Company:
 Beginning of End of
 2001 2001
 Direct materials inventory $22,000 $26,000
 Work in process inventory 21,000 20,000
 Finished goods inventory 18,000 23,000
 Purchases of direct materials 75,000
 Direct manufacturing labor 25,000
 Indirect manufacturing labor 15,000
 Plant insurance 9,000
 Depreciation C plant building and equipment 11,000
 Repairs and maintenance C plant 4,000
 Marketing, distribution, and customer-service costs 93,000
 General and administrative costs 29,000
 Required:
 1. Prepare a schedule of cost of goods manufactured for 2001.
 2. Revenues in 2001 were $300 million. Prepare the 2001 income statement.
Canseco Company
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2007(in thousands)
Direct materials: 　　
Beginning Inventory, January 1, 2007 $22,000 　
Purchases of direct materials+ 75,000 　
Cost of direct materials available for use= 97,000 　
Ending Inventory, December 31, 2007- 26,000 　
Direct materials used= 　 $71,000
Direct maufacturing labor 　 + 25,000
Indirect manufacturing costs: 　　
Indirect manufacturing labor+ 15,000 + 　
Plant insurance+ 9,000 + 　
Depreciation -- plant building & equipment+ 11,000 + 　
Repairs and Maintenance -- plant+ 4,000 + 　
Total Indirect manufacturing costs 　= + 39,000
Manufacturing costs incurred during 2007 　 =135,000+
Add beginning work-in-progress inventory, January 1, 2007 　 +21,000
Total manufacturing costs to acccount for 　 =156,000
Deduct ending work-in-progress inventory, December 31, 2007- 　 - 20,000
Cost of goods manufactured (to Income Statement)= 　 =$136,000
31
Income Statement
Year Ended December 31, 2007
(in thousands)
Revenues 　 $300,000
Cost of Goods Sold: 　　
Beginning finished goods, January 1, 2007 $18,000 　
Cost of goods manufactured 136,000 　
Cost of goods available for sale 154,000 　
Ending finished goods, December 31, 2007 23,000 　
Cost of goods sold 　 131,000
Gross margin 　 169,000
Operating costs: 　　
Marketing, distribution, and customer-
service costs 93,000 　
General and administrative costs 29,000 　
Total operating costs 　 122,000
Operating Income 　 $47,000
32
• Home work p49(2-19)
• P45 problem
33

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An Introduction To Cost Terms and Purposes

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CHAPTER 2

 Cost Materíality: important part

 Fixed Costs – remain unchanged in total regardless of 不管

changes in the related level of activity or volume 不隨數量變動而變

 semivariable Cost （半变动成本） – Cost remain Unchanged

stays the same per unit regardless of whether one,

(after cost analysis by consultant) Supreme Deluxe Regular

Direct material costs $84 $54 $62

Direct manufacturing labor costs 14.0 28.0 8.0

Direct energy costs 39.8 40.7 9.5

Total manufacturing costs $154.6 $156.3 $89.1

Units produced (from 2-16) 80 120 100

Cost per unit $1.93 $1.30 $0.89

 Relevant Range – the band of normal activity

 Unit costs should be used cautiously 謹慎地 .

 Manufacturing-sector companies – create and

manufacturing costs. These costs are

Beginning Inventory, January1$ 11,000

Add: Purchases 73,000

Direct Materials Used 76,000

Beginning 76,000 Used

Ending Inventory December 31 8,000 20

input 9,000 9,000

Manufacturing Overhead Costs

Less: Ending WIP, December 31 7000

 Conversion cost 加工成本 is a term referring to

 Overtime labor costs are considered part of

Year Ended December 31, 2007(in thousands)

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