2 an introduction to cost terms and purposes - Pearson Learning ...

DECISION POINTS
The following question-and-answer format summarizes the chapter’s learning objectives. Each decision
presents a key question related to a learning objective. The guidelines are the answer to that question.
ISBN: 0-536-53243-5
Decision
Guidelines
1. How do managers choose a A cost object is anything for which a separate measurement of cost is needed. Examples
cost object?
include a product, a service, a project, a customer, a brand category, an activity, and a
department.
2. How do managers decide whether A direct cost is any cost that is related to a particular cost object and can be traced to that
a cost is a direct or an indirect cost? cost object in an economically feasible way. Indirect costs are related to the particular cost
object but cannot be traced to it in an economically feasible way. The same cost can be
direct for one cost object and indirect for other cost objects. This book uses cost tracing to
describe the assignment of direct costs to a cost object and cost allocation to describe the
assignment of indirect costs to a cost object.
3. How do managers decide whether A variable cost changes in total in proportion to changes in the related level of total activity
a cost is a variable or a fixed cost? or volume. A fixed cost remains unchanged in total for a given time period despite wide
changes in the related level of total activity or volume.
4. How should costs be estimated? In general, focus on total costs, not unit costs. When making total cost estimates, think of
variable costs as an amount per unit and fixed costs as a total amount. The unit
cost of a cost object should be interpreted cautiously when it includes a fixed-cost
component.
5. How do you distinguish among Manufacturing-sector companies purchase materials and components and convert them
manufacturing-, merchandising-, into finished goods. Merchandising-sector companies purchase and then sell tangible
and service-sector companies? products without changing their basic form. Service-sector companies provide services
(intangible products) to their customers.
6. How do manufacturing companies The three categories of inventories found in many manufacturing companies depict stages
categorize inventories?
in the conversion process: direct materials, work in process, and finished goods.
7. Which costs are initially treated as Inventoriable costs are all costs of a product that are regarded as an asset in the
assets for external reporting, and accounting period when they are incurred and then become cost of goods sold in the
which costs are expensed as they accounting period when the product is sold. Period costs are expensed in the accounting
are incurred?
period in which they are incurred and are all of the costs in an income statement other than
cost of goods sold.
8. How do managers assign costs Managers can assign different costs to the same cost object depending on the purpose.
to cost objects?
For example, for the external reporting purpose in a manufacturing company, the inventoriable
cost of a product includes only manufacturing costs. In contrast, costs from all business
functions of the value chain often are assigned to a product for pricing and product-mix
decisions.
9. What are the features of cost Three features of cost accounting and cost management are (a) calculating the cost of
accounting and cost management? products, services, and other cost objects; (b) obtaining information for planning and
control and performance evaluation; and (c) analyzing the relevant information for making
decisions.
TERMS TO LEARN
This chapter contains more basic terms than any other in this book. Do not proceed before you check
your understanding of the following terms. Both the chapter and the Glossary at the end of the book contain
definitions.
actual cost (p. 27)
average cost (p. 35)
budgeted cost (p. 27)
conversion costs (p. 42)
cost (p. 27)
cost accumulation (p. 27)
cost allocation (p. 27)
cost assignment (p. 27)
cost driver (p. 32)
cost object (p. 27)
cost of goods manufactured (p. 39)
cost tracing (p. 27)
direct costs of a cost object (p. 27)
direct manufacturing labor costs (p. 37)
direct material costs (p. 37)
An Introduction to Cost Terms and Purposes
49
Cost Accounting: A Managerial Emphasis, Twelfth Edition, by Charles T. Horngren, Srikant M. Datar, and George Foster.
Copyright © 2006 by Pearson Education, Inc. Published by Prentice Hall.