Chapter 3: Basic Cost Management Concepts

allocation bases
the cost drivers used to
allocate costs.
average cost or unit cost
the total manufacturing cost
(materials, labor, and overhead)
divided by the number of units
of output
conversion cost
refers to direct labor and
overhead combined into a single
incurred when a resource is
used for some purpose
cost allocation
the assignment of indirect
costs to cost pools and cost
cost assignment
the process of assigning costs
to cost pools or from cost pools
to cost objects.
cost driver
any factor that causes a change
in the cost of an activity
cost object
any product, service, customer,
activity, or organizational unit
to which costs are assigned for
some management purpose
cost of goods manufactured
the cost of goods finished and
transferred out of the Work-inProcess
Inventory account this
cost of goods sold
the cost of the product
transferred to the income
statement when inventory is sold.
cost pools
the meaningful groups into
which costs are often collecte
direct cost
can be conveniently and
economically traced directly to a
cost pool or a cost object
direct labor cost
includes the labor used to
manufacture the product or to
provide the service
direct materials cost
includes the cost of the materials
in the product and a reasonable
allowance for scrap and defective
executional cost drivers
factors the firm can manage
in the short term to reduce costs,
such as workforce involvement,
design of the production process,
and supplier relationships.
factory overhead
All indirect costs are commonly
combined into a single cost in a factory
finished goods inventory
the cost of goods that are
ready for sale.
fixed cost
the portion of the total cost
that does not change with a
change in the quantity of the cost
driver within the relevant rang
indirect cost
has no convenient or economical
trace from the cost to the cost
pool or from the cost pool to the
cost object.
indirect labor cost
includes supervision, quality
control, inspection, purchasing
and receiving, and other
manufacturing support costs.
indirect materials cost
refers to the cost of materials
used in manufacturing that
are not physically part of the
finished product.
internal accounting controls
a set of policies and
procedures that restrict and guide
activities in the processing of
financial data with the objective
of preventing or detecting errors
and fraudulent acts.
materials inventory
the cost of the supply
of materials used in the
manufacturing process or to
provide the service.
mixed cost
the term used to refer to total
cost when total cost includes
both variable and fixed cost
All indirect costs are commonly
combined into a single cost
period costs
are all non product expenditures
for managing the firm and
selling the product.
prime costs
refer to direct materials and
direct labor that are combined
into a single amount.
product costs
for a manufacturing firm include
only the costs necessary to
complete the product: direct
materials, direct labor, and
factory overhea
relevant range
the range of the cost driver
in which the actual value of the
cost driver is expected to fall
and for which the relationship
to total cost is assumed to be
approximately linear.
step cost
varies with the cost
driver but in steps.
structural cost drivers
strategic in nature and
involve plans and decisions that
have a long-term effect with
regard to issues such as scale,
experience, technology, and
total manufacturing cost
the sum of materials used,
labor, and overhead for the
unit cost or average cost
the total manufacturing cost
(materials, labor, and overhead)
divided by the number of units
of output
value stream
a group of related products
variable cost
the change in total cost
associated with each change in
the quantity of the cost driver.
work-in-process inventory
contains all costs put into the
manufacture of products that are
started but not complete at the
financial statement date.