B3 - Operations Management: Cost Accounting and Performance Management Flashcards
Cost object
Resources or activities that serve as the basis for management decisions
What is an example of a cost object?
Product lines, departments, or geographic territories
Product costs
Relate to manufacturing the product
Inventoriable
considered assets before the product is sold
What are the three components of product costs?
Direct materials, direct labor, manufacturing overhead
Period costs
Expensed in the period in which they are incurred
T/F Period costs are inventoriable
F
T/F Product costs are inventoriable
T
Period cost expenses
Selling, general, and administrative expenses, interest
Period cost components
Cost of selling the product and administering and managing operations of the firm
Manufacturing costs
direct and indirect costs associated with manufacturing a product
How are manufacturing costs treated?
Capitalized to the cost of the manufactured product
Nonmanufacturing costs
Period costs that are expensed in the period incurred
Objectives of cost accounting systems
inventory and COGS, Profitability, comparison to standards
Direct cost
Easily traced to a cost object or pool
Direct raw materials
Materials purchased to be used in production (including freight in) plus a reasonable amount for normal scrap
Direct labor
Cost of labor that is directly related to the production of a product or the performance of a service plus breaks
Indirect costs
Not easily traceable to a cost pool or cost object and incurred to benefit two or more cost pools/objects
How are indirect costs determined?
Allocation methods
Where are indirect costs classified?
Manufacturing overhead
Direct labor + Direct material
Prime Cost
Direct labor + Manufacturing Overhead
Conversion Cost
Which costing method is applied:
1. Overhead rate = budgeted overhead costs/estimated cost driver
2. Applied overhead = actual cost driver X overhead rate
Traditional costing
Traditional costing overhead rate
budgeted overhead costs/estimated cost driver
Traditional applied overhead
actual cost driver x overhead rate
T/F Variable costs change proportionally with cost driver
T
T/F Variable costs change in total but remain constant per unit
T
T/F Fixed costs changes when the cost driver changes
F
T/F Fixed costs remain constant in total but vary per unit
T
T/F costs are considered variable in the long run
T
What kind of cost is depreciation
fixed
Relevant range
range for which assumption that the cost driver has a linear relationship with costs incurred are valid
Cost of goods manufactured formula
Beginning WIP
+Manufacturing Costs
-Ending WIP
Cost of goods sold formula
Beg FG
+COGM
-End FG
Cost accumulation
Assigns costs to products
What is cost accumulation driven by
Cost object
What type of cost accumulation would be used?
Custom order
Job costing
What type of cost accumulation would be used?
Mass produced, homogenous
Process costing
What type of cost accumulation would be used?
little need for in-process inventory valuation
backflush costing
What type of cost accumulation would be used?
manufacturing phase of product’s life
Life cycle costing
Manufacturing costs are increased or decreased by the net change in ___________.
WIP
Job order costing
Product costing that identifies the job as the cost objective and is used when there are relatively few units produced or each unit is separately identifiable
Job cost records
accumulate costs from material requisition, labor time ticket, and job order costing
material requistion
documents showing materials requested for use on the job
labor time ticket
documents that show labor hours and labor rate associated with the time applied to job
Process costing
averages costs and applies them to a large number of homogenous items
Step 1 of process costing
Summarize the flow of physical units
Step 2 of process costing
calculate the equivalent unit output
Step 3 of process costing
Accumulate the total costs to be accounted for
Step 4 of process costing
Calculate the average unit costs based on total costs and equivalent units
Step 5 of process costing
Apply the average costs to the units completed and the units remaining in ending WIP
What are the two process costing assumptions?
Transfers in are 100%
Timing of addition of DM include: beginning of period - 100% or partially complete, end of period - not WIP inventory at month end
Equivalent units
Units completed during the month
Units partially completed at the end of the period
How is normal spoilage accounted for?
Capitalized as part of inventory costs
How is abnormal spoilage accounted for?
Period expense
Underapplied manufacturing overhead
Actual costs exceed estimated (unfavorable)
Overapplied manufacturing overhead
Actual costs are less than estimated (favorable)
What does Overhead applied mean?
Overhead is comprised of actual costs that are calculated during the period and must be estimated when calculated product costs
Equivalent Unit FIFO: step 1
Completion of units on hand at beginning of period (1-% completed in prior period)
Equivalent Unit FIFO: step 2
Units started and completed during the period (Units completed - beginning WIP)
Equivalent Unit FIFO: step 3
Units partially completed (EI * % Complete)
Equivalent Unit WA: Step 1
Units completed during the month (Beg WIP + Units started and completed)
Equivalent Unit WA: Step 2
Units partially complete at end of period (EI * % Complete)
What kind of activity based costing would apply
Direct labor hours or machine hours
Volume based
How does using volume based activity based costing affect amount of costs assigned to product lines?
Distorts amount of costs assigned to various product lines because all overhead costs do not fluctuate with volume
What kind of activity based costing would apply
Tasks, units of work, etc
Activity based
Resource cost driver
Amount of resources that will be used by an activity
Activity cost driver
Amount of activity that a cost object will use and it is used to assign the costs to the cost objects
Activity centers
Operation necessary to produce a product
Cost pool
Group of costs or specifically identified cost center, in which costs are grouped, assigned, or collected
Value Chain
Series of activites in which customer usefulness is added to the product
Non-value added activities
Do not increase product value or service and are targeted for elimination
Joint product costs
Costs incurred in producing products up to the split off point
Separable costs
Costs incurred on a product after the split off point
Productivity ratio
Quantity of output produced/ Costs of all inputs used
What type of diagram helps identify defects?
Pareto
What type of diagram helps identify source of defect?
Fishbone
Pareto diagram formula
Defects per type/Total # defects
Cumulative defects
Defects per type 1 + Defects per type 2/ Total # defects
Types of Responsibility Segments “CRPI”
Controlling Costs
Revenue
Profit SBU
Investment SBU
Profit SBU
Managers are held responsible for producing a target profit by taking accountability for both revenue and cost
Investment SBU
Managers are held responsible for return on assets
Contribution Margin
Selling price - variable costs
Gross Margin
Revenue-COGS/Revenue
Net Income
Sales - COGS - Operating Expenses
Gross Profit
Sales - COGS
T/F Contribution Margin is NOT controllable?
False
Selling price - variable costs
Controllable Margin
Contribution Margin - Fixed costs
FICA
Balanced scorecard critical success factors
F in FICA
Financial - profit & growth
I in FICA
Internal business processes - efficient production and keeping defects low
C in FICA
Customer satisfaction
A in FICA
Advancement of innovation and HR - Retention of key employees
ROI
Income/Investment capital
OR
Profit margin X Investment turnover
Prevention costs
prevent production of defective units
Prevention or appraisal cost:
Employee training
Prevention
Prevention or appraisal cost:
Inspection expense
Prevention
Prevention or appraisal cost:
Redesign of process
Prevention
Prevention or appraisal cost:
Search for higher quality suppliers
Prevention
Prevention or appraisal cost:
Statistical quality checks
Appraisal
Prevention or appraisal cost:
Testing
Appraisal
Prevention or appraisal cost:
Inspection
Appraisal
Appraisal costs
incurred to discover and remove defective parts before they are shipped to the customer or next department
Nonconformance costs
Internal and external failures
Conformance costs
Appraisal and prevention
Absolute conformance
0 defects; rigorous standard
Internal failure
Curing known defects before reaching customers
External failure
Curing known defects after reaching customers
Internal or external failure
Lost customers
External
Internal or external failure
Warranty
External
Internal or external failure
Return costs
External
Internal or external failure
Rework costs
Internal
Internal or external failure
Cost to dispos
Internal
Internal or external failure
Tooling change
Internal
Calculating investment capital
Average assets (Last year + CY)/2
Average PPE + Average WC
Profit Margin
Net income/Sales
Investment turnover
Sales/Assets
Hurdle rate
Shows whether ROI is covering cost of capital
Investment myopia
overemphasis of managers on investment return targets in the short run
ROE
Net income/Equity
What 3 components are included in DuPont Analysis
Net Profit Margin, Asset Turnover, Financial leverage
Asset turnover
Sales/Assets
Financial leverage
Assets/Equity
Tax burden
Extent to which a company retains profits after paying taxes
What is profit margin driven by?
Competition
What is asset turnover driven by?
Management efficiency
What is financial leverage driven by?
Risk management is willing to assume
Tax burden formula
Net Income/Pretax Income
Interest burden
reflects how much in pretax income a company retains after paying interest to debt holders; dependent on amount of debt and cost of borrowing
Interest burden formula
Pretax income/ earnings before interest and taxes (EBIT)
EBIT Margin
Measure of company profits earned on sales after paying operating and nonoperating costs (other than interest and taxes); dependent on competition and power of suppliers
EBIT Margin Formula
EBIT/Sales
What happens when ROE is greater than required rate of return
Value added
Residual income
Measures value added for stockholders in dollars; positive value indicates performance is meeting standards
Residual income formula
Net income - Required return on equity
Reuiqred return
NBV x Hurdle Rate
Economic value added
Measures excess of income after taxes earned by an investment over the return rate defined by the company’s overall cost of capital
EVA Formula
NOPAT - Required return
NPAT
Measures return to all suppliers of capital and includes interest but removes taxes
NOPAT Formula
EBIT x (1-T)
