1. Blueprint Problem II: Cost assignment, Product, and Service Costs

   Direct Tracing, Driver Tracing, and Allocation

   Cost is the cash or cash equivalent value given up for goods and services that are expected to bring a future benefit to the firm. When the cost is used up in the production of revenues, they are and are also called . When no revenue or benefits are produced when a cost is used up, this outcome is called .

   Cost accounting has the objective of measuring and assigning (as accurately as possible)the costs of resources used by cost objects. A cost object is anything for which costs are measured and assigned. Examples of cost objects include . are those costs that can be traced easily and accurately to a cost object. are those costs that cannot be traced easily and accurately to a cost object. Traced easily means that costs are assigned in . Traced accurately means that costs are assigned by means of .

   Direct tracing is used whenever it is possible to physically observe the exact amount of resources used by a cost object. This is typically possible whenever the cost object is the exclusive user of resources. However, when costs objects share uses of resources then the next-best approach is to use causal (cause-and-effect) factors called . The accuracy of to assign costs depends on the soundness and strength of the cause-and-effect relationship. cannot be traced to cost objects. In this case, these costs are assigned using allocation. For costs where no causal relationship exists, assignment is based on convenience and the resulting assignment is thus arbitrary.

   Apply the Concepts

   a. Assigning the cost of handlebars to a bicycle is an example of .

   b. Assigning the cost of a plants landscaping maintenance to products in proportion to the revenue produced by each product is an example of .

   c. Assigning the cost of electrical power to two departments within a factory using kilowatt hours consumed is an example of .

   d. Assigning the cost of an industrial engineer to two different product lines is an example of .

   e. Which of the following words best describe allocation:

   f. Which of the following words best describe direct tracing:

   g. Which of the following words best describe driver tracing:

   Product and Service Costs

   One of the most important cost objects is the output of organizations. The two types of output produced by organizations are products and services. are goods produced by converting raw materials into finished products through the use of labor and capital inputs. are tasks or activities performed for a customer or an activity performed by a customer using an organizations products or facilities using an organizations products or facilities.

   Defining product cost depends on the managerial objective being served. Calculating product costs for external financial reporting is one of the more important managerial objectives. For this purpose, costs are subdivided into production and nonproduction categories (manufacturing and nonmanufacturing for manufacturing firms). Only production costs are used to determine product costs. Production costs are further subdivided into three categories: direct materials, direct labor, and overhead. Direct materials are those materials that . Direct labor is labor that . Overhead consists of .

   Certain combinations of production costs can be useful in certain settings. Conversions costs are the sum of . Prime costs are the sum of .

   Nonproduction costs are divided into two categories: marketing (selling) costs and administrative costs. These costs are together often called because they are . Administrative costs are for general administrationadministration which coordinates and provides beneficial services for both marketing and production. Administration within production or within marketing would be a either a production or marketing cost.

   Apply the Concepts

   I. For the following list, select yes that represent production costs:

   Assembly labor
   Sales commissions
   Wheels on a tractor
   Advertising
   Inspection labor
   Plant supervisor
   Chief executive officer
   Shipping of finished goods to customer
   Plant manager
   Plant depreciation
   Sales manager
   Warehousing of finished goods

   II. Corriendo Company manufactures running shoes. For next year, Corriendo plans on producing 20,000 pairs of its most popular line and is budgeting the following costs:

   Direct materials	$225,000
   Direct labor	135,000
   Overhead	240,000

   Required:

   Round your answers to two decimal places.

   1. Calculate the prime cost per pair of shoes: $

   2. Calculate the conversion cost per pair of shoes: $

   3. Calculate the total manufacturing cost per pair of shoes: $