COST CONCEPTS, BEHAVIOR

AND CVP ANALYSIS

 COSTS AND COST CONCEPTS
 COST – a measurement, in monetary terms, of the amount of
resources used for some purpose. When notified by a term that
defines the purpose, cost becomes operational, e.g., selling cost,
acquisition cost, variable cost, etc.

 COST POOL – an account in which a variety of similar costs are

accumulated prior to allocation to cost objects. It is a group of
costs associated with an activity.
 Example: Production, Marketing, R&D, Customer Service,
Purchasing, Material Handling
 COSTS AND COST CONCEPTS
 COST OBJECT – the intermediate and final disposition of cost
pools.
 Example: product, job, process
 COST DRIVER – a factor that causes a change in the cost pool
for a particular activity. It is used as a basis for cost allocation;
any factor or activity that has a direct cause-effect relationship
 Example: number of purchase orders, number of units, number of
hours worked, number of electricity units consumed
 ACTIVITY – any event, action, transaction, or work sequence
that incurs costs when producing a product or providing a
service
 Example: set up, assembly, inspection
 COST BEHAVIOR
 COST BEHAVIOR – describes how a cost behaves or changes as
the amount of cost driver changes

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST – in total: constant within the relevant range as
activity output changes; per unit: changes as activity level changes
2. VARIABLE COST – in total: varies in direct proportion to changes
in activity output; per unit: remains constant
3. MIXED COST – has both fixed and variable components
 COST BEHAVIOR
 COST BEHAVIOR ASSUMPTIONS :

RELEVANT RANGE ASSUMPTION

Relevant range refers to the band of activity within which the
identified cost behavior patterns are valid. Any level of activity outside
this range may have a different cost behavior pattern.

TIME PERIOD ASSUMPTION

The cost behavior patterns identified are true only over a
specified period of time. Beyond this, the cost may show a different
behavior.
DIRECT COSTS vs. INDIRECT COSTS

 DIRECT COSTS - related to the particular cost object and

can be traced to it in an economically feasible (cost-effective)
way.
 INDIRECT COSTS - related to the particular cost object
but cannot be traced to it in an economically feasible (cost-
effective) way.
DIRECT COSTS vs. INDIRECT COSTS
 DIRECT COSTS vs. INDIRECT COSTS

The term cost allocation is used to describe the assignment of indirect costs
to a particular cost object. Cost assignment is a general term that
encompasses both (1) tracing direct costs to a cost object and (2) allocating
indirect costs to a cost object.
PRODUCT COSTS vs. PERIOD COSTS
 PRODUCT COSTS
 inventoriable costs
 all costs of a product that are considered assets in a
company’s balance sheet when the costs are incurred
and that are expensed as cost of goods sold only when
the product is sold

MANUFACTURING – direct materials inventory, work in

process inventory, finished goods inventory
MERCHANDISING – merchandise inventory
PRODUCT COSTS vs. PERIOD COSTS
 PERIOD COSTS
 all costs in the income statement other than cost of
goods sold
 treated as expenses of the accounting period in which
they are incurred because managers expect these costs
to increase revenues in only that period and not in
future periods.
MANUFACTURING – all nonmanufacturing costs (for
example, design costs and costs of shipping products to
customers)
MERCHANDISING - all costs in the income statement
not related to the cost of goods purchased for resale
PRODUCT COSTS vs. PERIOD COSTS
PRODUCT COSTS vs. PERIOD COSTS
A Framework for Cost Accounting and
CostManagement
The following three features of cost accounting and cost
management can be used for a wide range of applications:
1. Calculating the cost of products, services, and other cost
objects
2. Obtaining information for planning and control and
performance evaluation
3. Analyzing the relevant information for making decisions
SEGREGATION OF FIXED AND VARIABLE
ELEMENTS OF MIXED COSTS