CHAPTER 11 Costing and pricing in an entity 487Cost/benefit test Assesses the costs and benefits of tracing costs to cost objects.
Cost driver Measure of the activity, related to a cost pool, that is used to allocate costs.
Cost object Object with a separately measured cost.
Cost pool Collection of similar costs.
Costing system System used to allocate costs to cost objects.
Direct costs Costs that can be directly traced to a cost object.
Dumping When a foreign-based entity sells products in Australia at prices below the market value in
the country where the product is produced, and the price could harm an Australian industry.
Full cost Direct costs plus allocated indirect costs.
Indirect cost rate Total indirect costs (overhead costs) for the cost pool divided by the total level of
the cost driver.
Indirect costs (overheads) Costs that are not economically feasible to trace to the cost object.
Internal value chain Linked activities undertaken within an entity — from the inception of the
product or service to the final delivery to customers.
Inventoriable product costs Costs of converting raw material into finished products.
Job costing system System of accounting for product costs that is used by entities producing
individual products or batches of products that are unique.
Market-based pricing Pricing method based on some measure of customer demand.
Overapplied overhead When the indirect costs applied to an inventoriable product cost are greater
than the actual costs incurred.
Peak load pricing When different prices are charged at different times to reduce capacity restraints.
Penetration pricing Setting prices low when new products are introduced to increase market share.
Period costs Costs written off in the current accounting period.
Predatory pricing Setting prices low to drive competitors out of the market and then raising prices
once competition is removed.
Predetermined indirect cost rate Estimated level of indirect costs (overhead cost) for the cost pool
divided by the estimated level of the cost driver (allocation base).
Price discrimination Setting different prices for different customers.
Price skimming When a higher price is charged for a product or service at the time it is first introduced.
Process costing system Product costing system used by entities that produce large numbers of
identical items in a continuous production process.
Resource drivers Cost drivers that measure resource consumption by activities.
Underapplied overhead When the indirect costs applied to an inventoriable product cost are less than
the actual costs incurred.
Variance Difference between budgeted costs and actual costs.
Volume drivers Cost drivers that relate to the volume of output.
APPLY YOUR KNOWLEDGE 25 marks
The financial controller of Seats R Us has established indirect cost pools and cost drivers for the coming
year as follows.
Indirect
cost poolsBudgeted
cost Cost driverTotal level of
cost driverMachine processing
Power
Materials handling
Quality control
Other indirect costs$120 000
350 000
85 000
145 500
184 500Number of set-ups
Machine hours
Materials weight
Number of units
Direct labour hours40
22 500
35 000 kg
82 000 units
14 560 hours
$885 000