Cost Accounting: Chapter 2

COST ACCOUNTING: Chapter 2

• 5 categories of cost:

• relevance (opportunity costs are for the future, so relevant. sunk costs are irrelevant)
• behavior (fixed costs = stay the same ie. Airplane lease. Variable costs change i.e gasoline price vs. distance)
• traceability (cost object is a way we measure cost. i.e. time, production level, etc.)
• function (direct cost= pilot, indirect cost = ground crew) (manufacturing cost- product. Non-manufacturing cost- period.)
• controllability (direct labour and materials = prime cost, direct labour and manufacturing overhead = conversion cost)

• relevant range: the span of activity for a given cost object. The fixed and variable both stay constant, but operate at a lager span. Ie. Adding routes to air Canada, need to add gates and employees etc. so now they are operating at a diff range. (can happen where as the range increases, the pricing goes down per unit)
• marginal costs: are the costs of creating one additional good or service. Variable costs predict marginal costs (within the range) this is an increase in the gross revenue of a place aka they’re making back the money the spent to make that item.
• What are the different types of cost behavior?

• Variable costs: changes that change with the activity level
• Fixed costs: do not change with change in activity such a production, sales, etc. IE. Rent, insurance, don’t change even if you make 5 more bikes. But it doesn’t change if you make 600 more bikes because they need more space, FIXED COSTS usually change in a step-wise manner on a graph. (can also be called constant, or committed)

• Fixed costs are fixed because they are unavoidable, example is an electric bill.. it is a fixed cost but the cost varies based on usage.

• Discretionary costs are decisions made for the year (for example) about how much you will spend on advertising, marketing, travel etc. they can be altered.
• Cost estimation techniques 
• Engineered estimates of costs: costs are assigned by analyzing time management, labour, production, materials etc.
• Analysis at account level: reviewing patterns and past cost projections to determine if the cost is a variable or fixed, SALARY is usually fixed and wages are too unless they are not full time then they are variable.
• Sometimes we cant decide on a cost function so we use a scatter plot to determine the relationship between a cost and its driver.