You be the judge
Product Costing
Glossary:
Cost object is anything for which cost data are desired- including products, customers, jobs, and organizational subunits.
Cost driver is factor that affects the costs associated with an activity.
Product costs include all costs involved in acquiring or making a product. Period costs are all the costs that are not product costs.
Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Fixed costs are not affected by changes in activity. Variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity.
Direct cost is a cost that can be easily and conveniently traced to a specified cost object.
Indirect cost is a cost that cannot be easily and conveniently traced to a specified cost object.
Incremental cost is a difference in costs between any two alternatives Common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually.
Relevant costs are costs that differ between alternatives. Irrelevant costs can be ignored-saving decision makers tremendous amounts of time and effort
Controllable
noncontrollable
Dual allocation (sometimes called departmental)-
Volume allocation
Activity-based allocation is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs.
TO: To Whom It May Concern
FROM: Kay Smith
DATE: June 17, 2013
RE: Inappropriate product costing
Page 1
I have a problem with the product cost allocation for special orders of product MP, a basic product that is widely consumed in North America, SMU2 is the only unit with special orders, and almost all the special orders are for product MP. Management believes that it must allocate all costs to its products in order to get a true and accurate measure of each product’s
Glossary:
Cost object is anything for which cost data are desired- including products, customers, jobs, and organizational subunits.
Cost driver is factor that affects the costs associated with an activity.
Product costs include all costs involved in acquiring or making a product. Period costs are all the costs that are not product costs.
Fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Fixed costs are not affected by changes in activity. Variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity.
Direct cost is a cost that can be easily and conveniently traced to a specified cost object.
Indirect cost is a cost that cannot be easily and conveniently traced to a specified cost object.
Incremental cost is a difference in costs between any two alternatives Common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually.
Relevant costs are costs that differ between alternatives. Irrelevant costs can be ignored-saving decision makers tremendous amounts of time and effort
Controllable
noncontrollable
Dual allocation (sometimes called departmental)-
Volume allocation
Activity-based allocation is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs.
TO: To Whom It May Concern
FROM: Kay Smith
DATE: June 17, 2013
RE: Inappropriate product costing
Page 1
I have a problem with the product cost allocation for special orders of product MP, a basic product that is widely consumed in North America, SMU2 is the only unit with special orders, and almost all the special orders are for product MP. Management believes that it must allocate all costs to its products in order to get a true and accurate measure of each product’s