Cost purposes – Introduction
Cost object = anything for which a separate measurement of cost is desired (anything we wanna know
something about. ex: how much it costs, how much profit can I get from that)
Examples of cost objects:
Bicycles, flights, drinks, quality tests, a department in the government, a programme at the university.
Cost accumulation and cost assignment
Cost accumulation = collection of cost data that we get by using an accounting system (ex: we know
that fuel has been $30, salaries $1000, advertising $200, etc.)
Cost assignment - cuprinde 2:
1. Tracing accumulated costs to a cost object
2. Allocating accumulated costs to a cost object
Traced = direct costs
Allocated = indirect costs
Direct and indirect costs
Direct = costs related to a particular cost object and can be traced to it in an economically feasible
way(ex: the number of tires put on a car, the number of breaks put on a bike, etc = 40*400 = $1600)
Costurile implicate direct in actiunea de producere si care pot fi masurate
Indirect = costs related to a particular cost object but cannot be traced into an economically feasible
way
Ex: number of screws: It is not economically feasible to count each of them so people need to allocate a
cost to it by weighting them which takes less time.
Implicat efectiv in procesul de productie = direct
Chestii auxiliare = indirecte
Ex: an accountant and a manager are not directly involved in the process of producing cars (indirect)
But the mechanic is implied directly => his salary is a direct cost
Factors affecting direct/indirect classification
1. Materiality of the cost = The higher the cost the more chances we have to trace it economically
feasible. Ex: if we produce iPhones, it is okay to trace the number of batteries used since they
are expensive. But it is not economically feasible to trace and count the cost for every screw
used since they are meaningless objects.
Costurile obiectelor scumpe sunt directe (traced) while costurile materialelor neinsemnate (suruburi, o
bucata de hartie, etc.) sunt indiirecte pt ca nu stam sa masuram la fiecare
2. Available information-gathering technology = If we have a good system we can track the
costs for even the little things. If we have barcodes, we can track the cost for each spare part we
used because it doesn’t mean counting by hand and it is super-fast.
Daca e technologie putem sa tratam costurile pe care le clasificam ca indirecte, acum ca directe pentru
ca avem the method to track them.
3. Design of operations = we can trace costs as direct or indirect if we have the possibility to trace
them easily in the accounting system
Obs! = the classification of a cost depends on the cost object we choose. Ex: the salary for the
assembly-department manager might be a direct cost for the assembly department but an indirect cost
for a
Cost drivers and cost management
Firms always have to reduce costs due to various reasons. Cost reduction is divided into 2:
1. Value-added activities = adding value to the services or products
2. Effective managing the use of the cost drivers in those value-added activities
Cost driver = cost generator = cost determinant = any factor that affects total costs
A change in the cost driver generates a change in the total object costs
Cost
management = the actions managers take to continue fulfilling customers’ needs while also controlling
and reducing costs
Variable and fixed costs
Variable cost = are the costs that change in raport cu the total level of activity or volume (Calculated as
cost pe bucata * nr de bucati produse)
Fixed cost = a cost that does not change despite the changes in activity or volume (constant)
Fixed costs become substantially lower/unit once we produce a lot of units
= The graph for fixed costs
Major assumptions
1. Costs are defined as variable or fixed in relation with a specific cost object
2. The time span must be specified
3. Total costs are linear = only straight lines
4. There is only one cost driver others are insignificant (ex: the no. of units produced might be a
cost driver for a specific cost object)
5. Variations in the cost drivers are within the relevant range
Relevant range
= The range of the cost driver in which specific relationship between cost and the level of activity and
volume is valid
Intervalul pentru care un fixed cost ramane acelasi
Ex: when we have leasing fixed costs of 94500, this is only valid if we sell between 1000 and 5000
cars. Above 5000 which means outside the relevant range, the costs might change.
Fixed cost nu depinde de numarul de chestii
produse ci depinde de range-ul in care ma
aflu. E 2000 daca produc 10 masini si 3000 daca
produc peste 10 masini
Fixed costs raman la fel dar within a relevant range
Total costs and unit costs
Unit cost/average cost = dividing the total costs with the number of units produced
Total manufacturing costs 980000
Ex: NNumbers of units manufactured = 10000 = 98 per unit
If we produced 10000 units and 8000 were sold and 2000 remain then we make:
Cost of goods sold : 8000*98 = 784000
Closing stock of finished goods : 2000*98 = 196000
Total manufacturing costs = 980000
Total variable costs+ Total ¿ costs ¿
Unit cost = Number of units
Units cost cautiously
It is better to think about total costs rather than in unit costs!!!
Sometimes variable costs and unit costs might vary but the total cost stay unaffected.
Capital costs vs revenue costs
Capitalized costs = are recorded as an asset presumed to add future value to the company.
Ex: acquisition of equipment and vehicles These costs are written off (ex: depreciation) with
time
Revenue costs = expenses of the accounting period (ex: salaries, monthly rent) – majoritatea
Typologies of companies
Types of stocks
1. Direct materials stock = the materials in stock awaiting to be used in the manufacturing process
2. Work-in progress stock = goods partially worked on but not yet completed (ex: display-ul unui
telefon for the whole phone)
3. Finished goods stock = goods fully completed but not yet sold
For service companies, there is no stock and for merchandising, they only have one stock – the product
in its original form (purchased)
Manufacturing costs
1. Direct materials costs = are the acquisition costs of all materials that eventually become part of
the cost object. They can be traced economically; They include VAT, delivery and everything
else
2. Direct manufacturing labor costs = include the compensation of all manufacturing labour that
can be traced to the cost object in an economically feasible way. Usually wages paid to
machine and assembly operators = salariile oamenilor implicati direct in productie
3. Indirect manufacturing costs = are all manufacturing costs that are considered to be part of the
cost object, but that cannot be traced to that cost object in an economically feasible way. Ex:
manufacturing overhead costs and factory overhead costs
Categories of stock
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