COMMERCE 2AB3 Lecture Notes - Lecture 2: Finished Good, Fixed Cost, Cost Driver
26 Jun 2018
School
Department
Course
Professor
CHAPTER 2 – CLASS NOTES
3 CLASSIFICATIONS OF COST
BEHAVIOUR TRACEABILITY
How can it be traced?
FUNCTION
Why are you spending
money?
VARIABLE BEHAVIOUR
(UVC, UTC)
DIRECT COST
Can be economically traced to the cost object
(the item being produced)
Ex. The CEO of Toyota's salary is direct or indirect to Toyota.
Direct - there's a certain salary that the CEO gets regardless of
the models that are sold.
PRODUCT PURPOSE
(Production)
- Product cost
(inventoriable cost):
Assets, goes in a
balance sheet. When
sold they will go in the
COGS of the Income
Statement.
FIXED BEHAVIOUR
(UFC, FTC)
INDIRECT COST
- Selling cost or it is not economically feasible
to trace the cost object.
- They must be ALLOCATED, ASSIGNED, or
CHARGED to the cost object using a cost
allocation base (cost driver).
Ex. Utilities, cleaning supplies, water usage,
etc.
(Harder to track)
Ex. CEO of Toyota's salary is direct or indirect in respect to
the Corolla model?
Indirect - the CEO works for a company which has many
models, so we don't know how much of his time is spent on
what model. We can't trace the salary back to a particular
model.
PERIOD PURPOSES
(Selling)
- Selling costs, they are
expenses, and go in the
Income Statement.
COMPLICATIONS
Gas Rent
Variable
Unit Variable
Cost = $1/Liter
= Fixed
Fixed
$500 rent for room
for 1 hour.
Unit fixed cost for 1
student: $500
2 students: $250
= Variable
Total Variable
Cost for Gas:
1L = $1
20 L = $20
Total Fixed Cost
$500
Therefore, fixed costs and
variable costs are only defined
in totality.
Ex. If I want to find out how much DeGroote
should contribute to the profs salary, is it clear,
can it be traced? Yes! There's a fixed salary for
hours and courses taught.
Other things are harder to trace: Ex. The Podium:
the cost of wood, nails, tablet etc. It wouldn't be
worth it to calculate the cost of all the little objects
that make it up. It is purposely made indirect,
because we don't want to bother tracking the cost
of making each podium since some may have cost
more than others depending on the price of the
materials.
Unit Variable Cost (UVC)- has value when expressed.
find more resources at oneclass.com
find more resources at oneclass.com
Unit Fixed Cost (UFC) - useless, unless coupled with a denominator.
Denominator Level - cost allocation base/capacity
oEx. Unit fixed cost for rent is $50 if 10 students come to class, so when
5 students come it's $100.
oWhy is it $50 per student? 10 students is the denominator level.
PRACTISE QUESTIONS
TRUE OR FALSE
1. All direct costs are always production costs.
TRUE – Sales Salaries cannot be tracked.
2. All fixed costs are product costs.
FALSE – Rent is split between production and what is for rent. Some costs
can be selling costs.
3. Direct materials are variable, direct, and product costs.
TRUE – It is a variable because if I’m using 1kg of wood for one table, then for
2 tables I would use $200 etc.
4. All indirect costs are always period costs.
FALSE – We can’t track an indirect cost, but we don’t know if it’s for
production or selling (Ex. Rent is split between production & selling).
January 11, 2015
CH. 1,2: HOMEWORK PRACTISE
1. Variable Cost Per Unit – fixed
So it can’t be a and d
E (None of the above) is never an answer
B) Fixed cost per unit increases as production decreases
The rent per student increases as # of students decreases
5. Change in level of cost driver,
c) Because fixed costs are fixed in total, and variable costs are variable in
total.
6 COST CATEGORIES
1. Direct Materials (DM) Wood, Glass, Bottle, Top, Label, Metal
2. Direct Labour (DL) Touch Labour (people who make the units), Wages
3. Variable
Manufacturing
Overhead (V.M.O.M)
Utilities (the more you produce, the more you will
incur, but there’s no way to track it to the product),
Maintenance of the Machines, Indirect Materials, glue,
paint, nails (the more you produce, the more you need)
4. Fixed Manufacturing
Overhead (FMOH)
Rent, Depreciation, Spare Parts, Maintenance,
Insurance, Property Taxes, Production Supervisor
Salary
5. Variable Selling and
Admin (VS&A)
Shipping, Sales Commissions, Packaging.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Selling costs, they are expenses, and go in the. Can be economically traced to the cost object (the item being produced) The ceo of toyota"s salary is direct or indirect to toyota. Direct - there"s a certain salary that the ceo gets regardless of the models that are sold. Selling cost or it is not economically feasible to trace the cost object. Charged to the cost object using a cost allocation base (cost driver). Utilities, cleaning supplies, water usage, etc. (harder to track) Indirect - the ceo works for a company which has many models, so we don"t know how much of his time is spent on what model. We can"t trace the salary back to a particular model. There"s a fixed salary for hours and courses taught. The podium: the cost of wood, nails, tablet etc. It wouldn"t be worth it to calculate the cost of all the little objects that make it up.
