Showing posts with label Cost Accounting. Show all posts
Showing posts with label Cost Accounting. Show all posts

Types of Fixed Costs

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Committed fixed costs - relate to the investment in facilities, equipment, and the basic organizational structure of the firm.  Examples include depreciation of buildings and equipment, taxes on real estate, insurance, etc.
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What is Cost Drivers

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Cost driver - any factor whose change causes a change in the total cost of a related cost object; more simply, any factor that causes costs.

We assume a causal relation exists between the use of the cost driver and the incurrence of the cost.
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Limitations of Backflush Costing

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This system does not strictly adhere to Generally AcceptedAccounting Principles (GAAP). For example, work in process exists, but is not recognized in the financial statements.
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Costs & Benefits of Backflush Costing

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‘Backflush Costing’ by organization manufacturing in cells, reducing defects and manufacturing lead time, and ensuring timely delivered of materials, enables purchasing, production and sales to occur in quick succession with minimum inventories.
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Difference between Backflush Costing and Conventional Costing

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Two major differences between the two systems are:

Under conventional costing raw materials go to raw materials inventory, they are transferred to WIP. Under JIT/Backflush costing raw materials just go to RIP. In JIT raw materials are only ordered when required.
Under conventional costing, direct labor and overhead are charged direct to WIP. They are then moved to finished goods and cost of goods sold (sequential processing). 
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Different Types of Costs

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A sacrifice or giving up of resources for a particular purpose, frequently measured by the monetary units that must be paid for goods and services.
The expired portion of cost is called expense. In other words, decrease in ownership claims arising from delivery of goods and services or using up of assets.
Direct Cost
Costs that can be identified specifically and exclusively with a given cost objective in a economically feasible way.
Indirect Cost
Costs that can’t be identified specifically and exclusively with a given cost objective in a economically feasible way.
Product Cost
Costs that are necessary and integral part of producing the finished product. These costs don’t become expenses under the matching principles until the finished goods inventory is sold.
Period Cost
Costs are not related to the manufacture of a product, the costs that are identified with a specific time period rather than a saleable product.
Manufacturing Cost
Costs that are related to production of an item. They are composite of direct material, direct labour and manufacturing overhead costs.
Commercial Cost
All the costs incurred outside the factory e.g. selling & marketing expenses and also administrative expenses.
Assignable Cost
The costs which are easily allocable to the respective department is called assignable cost.
Common Cost
The cost of operating a facility, operation, activity area or like cost objective that is shared by two or more users.
Process Costing
A costing system in which the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units. The method of allocating costs to products by averaging costs over large number of nearly identical products.
Operation Costing
A hybrid costing system applied to batches of similar product.
Fixed Cost
Costs that remain unchanged in total for a given period.
Variable Cost
Costs that change in total proportion to changes in the related level of activity volume.
Mixed Cost
A cost that has both fixed and variable elements.
Inventoriable Costs
All costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold.
Target Costing
An approach that determines what a product or service should cost based on its sales price less a target profit. Target costing uses market research to estimate what consumer will pay for a specific product.
Management Cost
All the costs which are related to current operation which must continue to be paid to ensure the continued operating existence of the company.
Example- management and staff salary.
Traceable Cost
Any cost that may be traced to other department if some economic activity is changed or deleted.
Non-traceable Cost
Joint Cost
Cost of a single process that yield multiple products simultaneously.
Separable Cost
Cost incurred beyond spilt off point that are assignable to individual products.
Financial Cost
Costs that are related to obtaining funds for the operation of the company.
Avoidable Cost
Any cost that can be eliminated if some economic activity is changed or deleted.
Unavoidable Cost
Cost that can be continued even if some operation is halted.
Conversion Costs
Is written off at month or year end.
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The Importance of Cost Accounting

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Managers rely on cost accounting to provide an idea of the actual cost of processes, departments, operations or product which is the foundation of their budget, allowing them to analyze fluctuation and the way funds are used socially for profit. Cost accounting is used in management accounting, where managers justify the ability to cut costs for a company in order to increase that company's profit. As a tool for internal use, versus a tool for external users like financial accounting, cost accounting does not need to follow the GAAP standards (Generally Accepted Accounting Principles) because its use is more pragmatic. 
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