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Chapter 2

ACTG 2020 Chapter Notes - Chapter 2: Fixed Cost, Management Accounting, Opportunity Cost


Department
Accounting
Course Code
ACTG 2020
Professor
Claudine Dufrene
Chapter
2

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Chapter 2 Notes: ACTG2020
One of the most important tasks of managerial accounng is to determine the cost of products,
services, customers, and other items of interest to managers.
A cost is the (monetary) sacrice made to achieve a parcular purpose (develop a product / a
program…).
An expense is the cost incurred when an asset is used up or sold to generate revenue. (An
investment) Past event
Revenue per unit is called price
Cost and price are NOT the same; revenue and price ARE the same
oPrice must be > Cost for the rm to earn income
Income statement: Revenues – Expenses = Prot
Accumulang Costs: way that costs are measure and recorded
Assigning Costs: wat that a cost is linked to some cost object
Cost Object: any item such as a product, service, customer, department, project, geographic
region, plant, and so on, for which costs are measured and assigned
Opportunity Cost: a benet given up or sacriced when one alternave is chosen over another)
Types of costs:
oDirect/Indirect
oPrime
oConversion
oProduct/Period
oVariable/Fixed
oMixed
oSelling
oAdministrave
A direct cost is one that can be easily traced to a cost object (Eg.the salary of a worker making
the soap).
An indirect cost is a cost that cannot be easily traced to a cost object (CEO’s salary).
Allocaon means that an indirect cost is assigned to a cost object by using a reasonable and
convenient method. Since no clearly observable causal relaonship exists, allocang indirect
costs is based on observaons and/or assumed causal linkages.
None-value-added-system (These are the costs of acvies that can be eliminated with no
deterioraon of product quality, performance, or perceived value)
A cost management system traces costs to objects that caused them, so that managers can
isolate responsibility for spending and objecvely evaluate operaons.
Total Variable Costs move in direct proporon to a change in acvity.
oFor example, the total cost of raw material for soaps goes up in proporon to the
number of soaps produced.
Total Fixed Costs remain constant in total as the level of acvity changes.
oFor instance, property taxes for the manufacturing facilies remains the same whether
100 soaps or 1,000 soaps are produced.
Product costs
oAssociated with the manufacturing of goods or the provision of services
Non producon costs
oAll other costs
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