Product costs: 
– Costs that can be attributed to the generation and delivery of individual products
– Also called “inventoriable” costs and are capitalized in the WIP accounts
Period costs:
– Costs that are attributable to time periods
– Period costs are not capitalized in inventory accounts and go directly to the income statement
– Only appear on income statement as COGS when the product is sold
Direct costs:
– Costs that can be directly related to a cost object
– Direct materials: materials that are used in production that end up as part of the finished product
– Direct labor: wages for the workers who are directly involved in the production process
Direct fixed costs: Example: machines à how to estimate cost per unit of fixed costs is an issue
Direct variable costs: Example: material, labor
Indirect costs (Overhead costs):
– Costs that cannot be directly related to a cost object à how to estimate cost per unit is an issue
– Includes both variable (varies with volume) and fixed costs (doesn’t vary in specified time span)
– Examples: spare parts for machines, electric power, supervisor’s salary
– Indirect materials: materials used in production that do not end up as part of finished product
– Example: supplies and spare parts for machines
– Indirect labor: costs of workers who work in the factory but not directly on the mfg process
– Example: the factory foreman
Indirect fixed costs: Examples: finance staff, a machine that is used by more than product
Indirect variable costs: Examples: sales force
Relevant costs: used for decision making
– Depends on decision under consideration, no universal method for classifying relevant costs
– Usually variable costs are relevant and fixed costs are not but it depends on the situation
Contribution Margin:
Relevant costs are frequently equal to variable costs
Contribution margin = Price – variable costs (direct, indirect, manufacturing, and SG&A)
Profit = Contribution margin – fixed costs/volume
Breakeven volume (where profit = 0) = fixed costs / contribution margin
Note:
When determining which product to produce you should select the product with the highest contribution margin per unit volume on the capacity constraint assuming that fixed costs do not change.
Be the first to comment on "Cost Accounting – Review"