Analyzing Costs Flashcards
Use of Managerial Accounting
R&D Design of products, service, or processes Production Marketing Distribution Customer Service
Cost
Amount of assets given up or liabilities incurred to acquire some goods or services.
Unexpired costs are
Assets
Expired costs are
Expenses
Is the cost incurred in the manufacturing of product for the customer?
If yes product cost
If no period cost
Product costs are
“Inventoried”
Period costs are
Not inventoried.
Fixed Costs
Not immediately affected by changes in the cost-driver level.
Variable Costs
Changes in direct proportion to changes in the cost-driver level.
High-Low Method
Uses the highest volume activity level and the lowest volume activity level to determine the intercept and slope.
Discretionary Costs
Amount and timing of these costs are at the discretion of the management.
Eg: R&D costs, Advertising costs, training costs.
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another.
Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future.
Sunk costs should not be considered in decisions.
Cost Classifications
Direct Materials Direct Labor Manufacturing Overhead Indirect Materials Indirect Labor
Direct Materials
Direct materials are those materials that become an integral part of the finished product and whose cost can be conveniently traced to the finished product. An example is a radio installed in an automobile.
Direct Labor
Those labor costs that can be easily traced to individual units of products. An example are the wages paid to automobile assembly
Manufacturing Overhead
Includes all manufacturing costs except direct materials and direct labor. Examples are indirect materials, indirect labor, maintenance and repairs on production equipment, heating-cooling and lighting, property taxes, depreciation and insurance on manufacturing facilities.
Indirect Materials
Those materials used to support the production process. Examples: lubricants and cleaning supplies used in automobile assembly plant.
Indirect Labor
Those wages paid to employees who are not directly involved in production work. Examples: Maintenance employees, janitors and security guards.
Breakeven Analysis
The break-even point is the of sales at which revenue equals expenses and net income is zero.
Components of breakeven analysis
Fixed costs
Variable costs
Contribution margin
Break-Even Point Basic Methods:
Contribution Margin Method
Equation Method
Contribution Margin
Selling Price - Variable Costs
Equation Method
Net income equals zero at the break-even point.
Assumptions
Expenses can be classified into variable and fixed categories. The behavior of revenues and expenses is linear over the relevant range. Expect no changes in efficiency and productivity. There is only one product.
Target Net Profit
Managers can also use CVP analysis to determine the total sales, in units and dollars, needed to reach a target net profit.
If BEV ↑
Fixed costs ↑
CM ↑
Unit variable cost ↑
Selling price per unit ↑
Sales Mix Analysis
Sales mix is the relative proportions or
combinations of quantities of products
that comprise total sales.
