Full Cost and Thier Uses

Topics: Cost accounting, Inventory, Costs Pages: 18 (4264 words) Published: September 18, 2008
Full Costs and their Uses
is a measurement, in monetary terms the amount of resources used for some purpose may be defined as a sacrifice or giving up of resources for a particular purpose. are frequently measured by the monetary units that must be paid for goods and services.

Three Important Ideas for Costs
1.Cost measures the use of resources.
*The cost elements of producing a tangible good or intangible services are physical quantities of materials, hours of labor service and quantities of other resources were used. *Cost measures how many or how much, of these resources were used. 2.Most measurements are expressed in monetary terms.

*money provides a common denominator that permits the amounts of individual resources, each measured into its own scale, to be combined so that the total amount of all resources used can be determined. Ex. Five pounds of material and one hour of labor cannot be added together to produce a meaningful total; but if the amounts are converted to money at, say $2 per pound for material and $17 per hour for labor, they can be added to produce a total cost of $27. 3.Cost measurement always relates to a purpose.

Ex. products, departments, projects, or any other thing or activity for which a monetary measurement of resources used is desired.

Cost object/ive
-is the technical name for the product, project, organizational unit or other activity or purpose for which costs are measured. Cost Accounting System
-routinely collects costs and assigns them to cost objects.

Full Cost
-all the resources used for a cost object
-is (1) the sum of the cost object’s direct costs (the costs that are directly traced to it) and (2) a fair share of the indirect costs (those costs incurred jointly for several cost objects) Ex. Ms. Chen paid $35 for a pair of jeans at a store. $35 is the full cost because $35 of her resources was used to acquire a pair of jeans. Note: The full cost of a cost object is the sum of its direct costs plus a fair share of applicable indirect costs.

Direct Costs of a cost object are items of costs that are specifically traced to or caused by that cost object. Ex. Denim used in manufacturing a batch of jeans is a direct cost of that batch of jeans, and so are the earnings of the employees who worked directly in making that batch of jeans. Indirect Costs are elements of costs that are associated with or caused by two or more cost objects jointly but that are not directly traced to each of them individually. *it is not possible or at least not feasible to measure directly how much of the cost is attributable to a single cost object. Ex. Indirect Costs of a batch of jeans - factory manager’s salary and insurance on the factory building and equipment. *However, if the cost object were instead specified to be the factory where the jeans are produced, then the factory manager’s salary and the insurance costs are direct costs of that cost object.

Elements of Product Cost
-a tangible good (ex. batch of jeans) or a service (ex. repair job on an automobile) Product Costing System
-the system that accumulates and reports the costs of product cost objects *Elements of Product Cost are either material, labor or services.

Direct Material Cost

-the quantities of material that can be specifically identified with a cost object in an economically feasible manner, priced at the unit price of direct material.

Ex. raw materials

Direct Labor Cost

-the labor quantities that can be specifically identified with a cost object in an economically feasible manner, priced at the unit price of direct labor.

Ex. earnings of workers who assemble parts into a finished good or operate machines in its production.

cost of a technician’s time spent repairing an automobile is a direct labor cost of the repair job.

Other Direct Costs

-any direct cost traced to a single product

Ex. energy costs are direct costs of manufacturing energy-intensive products...
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