Chapter 15
Accounting for Costs
3/23/2016
1
Accounting for Costs
• Cost = a measurement, in monetary terms, of
amount of resources used for some purpose.
• Variable cost is a cost that varies in total in direct
proportion to changes in activity.
• Fixed cost is a cost that remains constant in total
within the wide range of activity.
• Mixed cost is a cost that has both variable and
fixed components.
cost/volume
 Average costs = total cost/volume.
 Average cost behaves differently than total
cost.
 As volume goes up 
 Total fixed cost remains constant, total
variable costs goes up, per unit variable costs
stays the same, per unit fixed cost goes down,
per unit total cost goes down.
 As volume increases without limit, unit cost
approaches variable unit cost and fixed cost per
unit approaches zero.
Fixed and Variable Costs
Fixed costs
 Non-variable costs = items of
cost that, in total, do not vary
with volume.
• e.g. Building rent,
property taxes,
management salaries.
• Fixed costs are fixed for a
range of activity and a
limited period of time.
• Fixed costs may change for
reasons such as a deliberate
management decision to
change them.
Variable costs
 Items of cost that vary, in
total, directly and
proportionately with volume.
 Volume refers to activity
level.
 e.g. Material costs
varies with units sold.
 Electricity costs varies
with production hours.
 Stationery and
postage costs varies
with number of letters
written.
Direct and Indirect Costs
Direct costs
Indirect costs
• Costs that can be
easily and conveniently
traced to a unit of product or
other cost object.
• Costs that cannot be easily
and conveniently traced to a
unit of product or other cost
object.
• Examples: direct material
and direct labor
• E.g. Wood to make furniture,
hours worked on project, flour
to make cake.
• Example: manufacturing
overhead
• E.g. rent of a factory that
make cars/furniture,
manager’s salary.
Terms direct and indirect are only meaningful in context of
a specific cost object.
Can we control costs?
• Item of cost assigned to a specific responsibility
center that is significantly influenced by actions
of manager.
• Direct Costs may be controllable (e.g. supplies
usage) or non-controllable (e.g. depreciation on
equipment or buildings purchased in previous
periods).
• all indirect costs are non-controllable.
Manufacturing Costs (Product cost)
Direct
Materials
Direct
Labor
The Product
Manufacturing
Overhead
Non-manufacturing Costs (Period
cost)
Marketing or
Selling Cost
Administrative
Cost
Costs necessary to get
the order and deliver
the product.
All executive,
organizational, and
clerical costs.
Activity-Based Costing
Direct Cost :
Materials & labor
Indirect Cost: Overhead Costs
First-Stage Allocation
Order
Size
Customer
Orders
Product
Design
Customer
Relations
Other
Second-Stage Allocations
$/MH
$/Order
$/Design
$/Customer
Cost Objects:
Products, Customer Orders, Customers
Unallocated