Main Ideas Notes Cost Accumulation ❖ Determining the cost of a particular object ❖ Begins with identifying the cost objects Cost Driver Aka Allocation Base ❖ Cause and effect relationship with a cost object ➢ Number of caps is a cost driver, it affects the cost of the caps ➢ Hours worked is the driver for labor costs ❖ Total Cost of Object= cost per unit * cost driver (OF EACH COST OBJECT ADDED UP FOR ONE SUM) ❖ Assigning costs to cost objects requires cost training and allocation ❖ Direct costs have many benefits of being tracked ❖ Indirect (aka overhead cost) no point in monitoring - little benefit of being tracked can not be easily tracked ❖ Whether or not a cost is easily traceable is determined by cost/benefit analysis ❖ Cost pools ➢ Including many indiv costs into a cost pool ➢ Water, gas electric, into a cost pool ➢ To promote accuracy, pooling should be limited to costs with common cost drivers Cost Estimates ❖ Companies use cost estimates to establish goals and actual costs to evaluate managerial performance 7 ❖ Cost allocation ➢ Involves dividing the total cost into parts and assigning the parts to designated cost objects ❖ Total cost to be allocated/ cost driver = allocation rate ❖ The multiply the allocation rate by the weight of the cost driver to find the cost allocation per object ❖ To identify a main cost driver, use the one with the strongest cause and effect relationship ➢ Also take into account the info that is available ❖ Volume measures are good cost drivers for allocating variable overhead costs ❖ Sometimes we can not just divide the indirect cost by each unit produced because some products may require more indirect costs than others ➢ Use a different cost driver such as labor hours because the more labor, the more indirect costs are likely ➢ Or use a more direct cost such as direct materials b/c the more direct materials used, the more the more indirect as well ❖ For allocating to fixed costs make sure that the rate equally covers all units ➢ IE if some bottles are bigger than others, you need to use a physical measure that distinguishes how much goes to each products proportionally as a result of different prices. ➢ Also use allocation costs that will remain consistent over a spread of time ❖ Predetermined overhead rate ➢ The rate used to determine BEFORE actual cost and volume data are discovered ❖ Split off point ➢ The point at which products become separate and identifiable in the production process.