Cost terminologies

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Cost is the is a resource sacrificed or forgone to achieve a specific objective. measured using monetary value that must be paid to acquire the goods. an actual cost is the cost incurred as distinguished from budgeted costs.

a cost object is something for which a separate cost measurement is required. can be a product or service.

direct costs are costs that can be directly linked to a unit of output. e.g. direct labour and direct material.

cost-tracing describes the assignment of direct costs to particular cost object.

indirect costs are costs that cannot be directly linked to a unit of output e.g. indirect labour and overheads.

cost allocation describes the assignment of indirect costs to the particular cost object.

Cost allocation & cost assignment

cost accumulation is the collection of cost data in some organised way by means of an accounting system

cost assignment is the general term that encompasses tracing accumulated costs to a cost object, and allocating accumulated costs to a cost subject.

Explain cost drivers, variable costs and fixed costs

variable costs are costs that change with the level of output e.g. material costs

fixed costs are costs that do not change with the level of output e.g. rent

semi-variable costs are costs that have a fixed cost element that doesn't change with the level of output and a variable cost element that changes with the level of output.

cost driver is a factor such as the level of activity or volume that affects costs e.g. the cost driver for variable cost is volume whose change causes a change in costs proportionately.

total costs=fixed costs + variable costs

unit costs= total cost/total number of units

direct materials are purchase costs that can be economically traced back to the cost object and includes delivery charges, VAT, and other customs duties.

direct manufacturing labour costs is the compensation of all manufacturing labour that can be traced to the cost object as well as wages, fringe benefits paid to machine operators and assembly line workers.

indirect manufacturing overheads all manufacturing costs considered to be part of the cost object, but that cannot be traced economically back to the cost object.

prime cost is the addition of all direct manufacturing costs.

Conversion costs are costs other than direct material costs.

Raw materials

Opening stock materials

+Purchases of materials

–Closing stock materials

=Cost of Direct materials used

Work-in –progress (WIP)

Opening stock WIP

+Mfg costs incurred

–Closing stock WIP

=Cost of goods manufactured

Finished goods

Opening stock of finished goods

+Cost of goods manufactured

–Closing stock of finished goods

=Cost of goods sold

conversion costs are all costs other than direct materials cost.