Textbook Notes (363,145)
Canada (158,221)
Accounting (526)
ACC 410 (34)
Chapter 2

Chapter 2

5 Pages
Unlock Document

Ryerson University
ACC 410
Keith Whelan

Chapter 2 – The Cost Function Cost Concepts and Terminology - Cost Categorization (1) Relevance (2) Behaviour (3) Traceability (4) function (5) Controllability • Relevance – revenues and costs that differentiate between two alternatives that will occur in the future Examples: Relevant: Opportunity cost – potential benefit given up by not taking one alternative over another Irrelevant: Sunk cost – cost has already been incurred and cannot now be avoided • Fixed costs – behaves such that total cost will not change within a certain range of activity – so-called relevant range; do not vary • Variable costs – varies in proportion to the production level; change proportionately with changes in activity levels • Cost object – thing or activity for which we measure costs - Direct costs – cost that can be directly traced to a cost object - Indirect costs – incurred for benefit of more than just one object • Manufacturing costs include: - Prime costs: direct materials and direct labour - Conversion costs: direct labour and manufacturing overhead Relevant Range – span of activity for a given cost object, where total fixed costs remain constant and variable costs per unit of activity remain constant • Variable cost rates can also change across relevant ranges • Marginal cost – incremental cost of an activity Relevant costs for a cost object – Managers identify one or more cost objects based on the relevant information they need for a particular decision, for budgeting and planning, or for valuing products or services Identifying Relevant Costs from the Accounting System – careful thought and judgement are required to identify relevant costs; however, it helps to know whether costs are direct or indirect Direct and Indirect costs • Production costs except direct materials costs and direct labour costs are often combined into groups (cost pools) in the accounting system and referred to as overhead costs Opportunity costs – used when making decisions; difficult to measure Sunk costs – inclusion might occur because sunk costs are readily visible in the accounting records or because managers become emotionally attached to prior decisions www.notesolution.com Cost behaviour – variation in costs relative to the variation in an organization’s activities Cost Functions – algebraic representation of total cost of a cost object over a relevant range of activity • Within relevant range, the change in total costs as volume increases is nearly linear • Within relevant range, we assume total fixed and variable cost per unit remain constant • TC = F + VQ • Piecewise linear cost function – when slope of a variable cost function changes at some point but remains linear after the change • Stepwise linear cost function – when a fixed cost function changes at some point but remains constant after the change Cost Driver – some input or activity that causes changes in total cost for a cost object • Identifying potential cost drivers - organization’s information system can help identify cost drivers Example – ERP (Enterprise Resource Planning) helps track both financial and nonfinancial information • No apparent cost drivers - can’t be easily associated with any type of cost driver Discretionary costs – reflect periodic (usually annual) decisions about the maximum amount that will be spent on costs for activities such as advertising, executive travel, or research and development • Can be either fixed or variable • Often based on past profitability • Can be altered during the period Economies of Scale - refers to the cost advantages that a business obtains due to expansion • Factors that cause a producer’s average cost per unit to fall as the scale of output increased Learning Curves – rate at which labour hours decrease as the volume of production/services increases • Over time, goods/services produced more quickly and efficiently • Techniques to estimate a cost function: • Engineered estimate of cost • Two-point method • Analysis at the account level • High-low method • Scatter plots • Regression analysis - Poor management decision can result if quality of cost estimates is not considered www.notesolution.com Engineered Estimates of Cost – each activity is analyzed according to the amount of labour time, materials and other resources used • Use accountants, engineers, employees, and/or consultants to analyze the resources used in the activities required to complete a product, service, or process Analyses at the Account Level – review the pattern of a cost over time in the accounting system and use our knowledge of operations to classify the cost as variable, fixed, or mixed Scatter plots – graphical technique in which data points for past costs are plotted against a potential cost driver Two-point method – uses any two sets of data points for cost and a cost driver to algebraically calculate a mixed cost function • It is much easier and less costly to use than account analysis or engineered estimates of cost, but: -It es
More Less

Related notes for ACC 410

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.