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Basic terminologies for Cost Accounting ♡


It is incurred when a resource is used for some purpose
Cost Pools
Costs that are assembled into meaningful groups. Can be classified by type of cost, source, and respon­sib­ility
Cost Driver
Any factor that has the effect of changing the level of total cost. Reasons.
Cost Object
Any product, service, customer, activity, or organi­zat­ional unit to which costs are assigned.


- the process of assigning (cost to cost pools) and (cost pools to cost object)
Two types of cost assign­ment:
Direct tracing (used for assigning direct costs) Allocation (used for assigning indirect costs)
Flow of Cost Assign­ment:
Resource cost ➡ Cost driver ➡ Cost pool ➡ Cost driver ➡ Cost object


- The assignment of indirect costs to cost pools and cost objects through the use of cost drivers.
- Often called allocation bases

Cost object: Table
JE to record WIP goods by using raw materials:
DR WIP inventory
CR Raw material


Variable Cost
- the change in total cost associated with each change in quantity of a selected cost driver. It does not change with changes in volume. More like the cost of direct material.
Fixed Cost
- the portion of total cost that does not change with changes in quantity of the selected cost driver. It does change with changes in volume. More like indirect material.
Mixed Cost
- used to refer to a total cost figure that includes both a fixed and variable component. Mixed of variable and fixed cost.
Step Cost
- varies with the change in cost driver volume but does so in steps.


Direct Cost
- easy to trace into cost pool or cost object. Example: wood for direct material.
Direct Material Cost - wood, metal, plastic Direct Labor Cost - wages, coffee break
Indirect Cost
- not easy to trace into cost pool of cost object. Example: monthly rent for indirect material that is being used to the whole building of different manufa­ctured goods
Indirect Material Cost - tools used, gloves Indirect Labor Cost - superv­ision, inspection Other Indirect Cost - rent expense, deprec­iation, insurance, utility


It provides two roles for the management accoun­tant:
1. Assigning costs to cost objects
2. Explaining cost behavior – how total cost changes as the cost driver changes
Cost behavior – the change in the total amount of a cost associated with changes in the level of a cost driver
Four types of cost drivers:
- Activi­ty-­based
- Volume­-based
- Structural
- Execut­ional


Periodic System
- a method that the finished goods inventory account will be updated every time there is a purchase or sales transa­ction
Perpetual System
- a method that involves a count of inventory at the end of each accounting period to determine ending balance


Materials Inventory
WIP Inventory
Finished Goods Inventory
Note: each account has its own beginning and ending balance
Inventory formula:
Beginning inv + Cost added = Ending inv + Cost transf­erred out


Facilitate strategic decision making because they involve plans and decisions that have long-term effects. Focus: long-term effects
Facilitate operat­ional decision making by focusing on short-term effects. Focus: short-term effects


Product Cost
Includes only the costs necessary to complete the product. Direct material (materials used to become a physical goods) Direct labor (labor used to manufa­cture) Factory overhead (indirect costs for materials, labor, and facilities used to support the manufa­cturing process to product transp­ort­ation)
Period Cost
Includes all other costs incurred by the firm in managing or selling the product. (Selling expense, general and admini­str­ative expense, salary, deprec­iation, building)


Produce goods from raw materials to finished goods. Step 1. Purchase raw materials (wood, plastic, metal). Step 2. Involves adding 3 cost elements (materials used, labor, overhead) to the WIP inventory account. Step 3. The production costs in WIP inventory account will now transfer to Finished Goods inventory account (once the product is complete) then will go to the Cost of Goods Sold (when the product is sold)
Resells goods that was purchased from suppliers. Step 1. Purchase mercha­ndise from supplier and place them into Mercha­ndise Inventory account. Step 2. When sold, transfer it to COGS inventory account.

Costing Steps



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