About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
4 3 2 Cost Measurement and Allocation Explained

3 2 Cost Measurement and Allocation Explained

Key Concepts

Cost Measurement

Cost measurement involves determining the monetary value of resources used in producing goods or services. This process includes identifying and quantifying all costs associated with a particular activity or product.

Example: A manufacturing company measures the cost of raw materials, labor, and overhead to determine the total cost of producing a batch of products.

Cost Allocation

Cost allocation is the process of assigning costs to cost objects, such as products, services, or departments. This ensures that each cost object bears its fair share of the total costs incurred.

Example: A company allocates its overhead costs (like rent and utilities) to different departments based on the square footage each department occupies.

Direct Costs

Direct costs are costs that can be directly traced to a specific cost object. These costs are easily identifiable and can be directly attributed to the production of a product or service.

Example: The cost of raw materials used in manufacturing a specific product is a direct cost because it can be directly linked to that product.

Indirect Costs

Indirect costs are costs that cannot be directly traced to a specific cost object. These costs are shared among multiple cost objects and require allocation methods to assign them.

Example: The salary of a factory manager is an indirect cost because it cannot be directly attributed to a specific product but is necessary for the overall production process.

Cost Drivers

Cost drivers are factors that cause a change in the cost of an activity or a cost object. They are used to allocate indirect costs to specific cost objects based on the resources consumed.

Example: Machine hours can be a cost driver for allocating maintenance costs in a manufacturing plant. The more machine hours used, the higher the maintenance costs allocated.

Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is a method that assigns costs to activities based on their use of resources and then assigns those activity costs to products or services based on the activities they consume.

Example: A company using ABC might allocate setup costs to products based on the number of setups required for each product, rather than using a simple machine hour allocation.

Examples and Analogies

Consider cost measurement as "weighing ingredients" in a recipe. Just as you need to measure each ingredient accurately to make a dish, you need to measure each cost accurately to determine the total cost of production.

Cost allocation is like "dividing the bill" at a restaurant. Each person should pay their fair share based on what they ordered, similar to how costs are allocated to different cost objects.

Direct costs are like "ingredients" in a recipe that are directly used in making a dish. Indirect costs are like "utilities" that are necessary but not directly traceable to a specific dish.

Cost drivers are like "triggers" that activate certain costs. For example, the more you drive a car, the more fuel you consume, and the higher your fuel costs.

Activity-Based Costing (ABC) is akin to "tracking calories" in a diet. You track the calories consumed in each activity (like running or swimming) and then allocate them to your daily intake based on the activities you performed.

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