Cost Accounting – Review

Schaum's Outline of Cost Accounting, 3rd, Including 185 Solved ProblemsProduct 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
– Includes both variable (varies with volume) and fixed costs (doesn’t vary in specified time span)
– 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.