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Chapter 12, Accounting- Cost Accumulation, Tracing, and Allocation

Terms in this set (19)

cost accumulation
begins with identifying the cost objects. Primary cost object is cost of promotion.
cost driver
has a cause-and-effect relationship with a cost object.
Companies use ... to establish goals and ... to evaluate management performance in meeting those goals.
cost estimates, actual costs
cost tracing
direct costs can be easily traced to a cost object
indirect costs
cannot be easily traced to a cost object, whether or not a cost is easily traceable requires cost benefit analysis. Also called overhead costs. Cannot be traced to objects in a cost-effective manner.
direct costs
can be traced to cost objects in a cost-effective manner
common costs
support multiple cost objects but cannot be directly traced to any specific object.
controllable costs
costs that can be influenced by a manager's decisions and actions.
cost allocation
involves diving a total cost into parts and assigning the parts to designated cost objects
2 Step process to achieve rational allocation:
1. Compute allocation rate -- divide total cost to be allocated by the cost driver (also called allocation base)
2. Multiply the allocation rate by the weight of the cost driver to determine allocation per cost object.
allocation rate=
total cost to be allocated/ cost driver (allocation base)
cost pool
companies tend to accumulate individual costs into these. Total is then allocated to the cost objects. Should be limited to costs with common cost drivers or disaggregate into smaller pools
Factors in identifying the cost driver:
1. Cause and Effect- which has stronger relationship
2. Availability of Information- Must maintain records of # of sales to select the most accurate cost driver
Causal relationship exists...
between variable overhead product costs (indirect materials, indirect labor, inspection costs, utilites) and the volume of production. Volume measures are good cost drivers for allocating variable overhead costs. --can be expressed as # of units produced, # of labor hours worked, or amount of direct materials used in production
How to decide which 3 volume based cost drivers result in the most accurate allocation of overhead cost?
-units, labor hours, or direct material dollars

Management must decide.
rational share
the object of allocating fixed costs to products
Why is allocation base sometimes called a cost driver?
b/c the base (number of units) used to allocate the cost does not drive the cost
When volume of production varies in fixed cost, what happens?
the cost must be allocated evenly over annual production. Use estimated costs.
predetermined overhead rate
b/c the overhead allocation rate is determined before the actual cost and volume data are available, is called this. Used for producing costing estimates and pricing decisions during a year
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