BEC 4 - Decision Making Flashcards
Cost Accounting
A primary purpose of cost measuremnt is to allocate the costs of production to the units produced. It also proveds important information for management decisions, such as product pricing decisions.
Total Cost Formula
TC = Fixed + Variable(x)
Relevant Range
A range of production that is wide enough to make it likely that the entity will operate within it for at least the short-term & small enough to make the cost patterns predictable. The range in which cost assumptions remain valid, meaning that fixed cost are in fact fixed and variable costs are variable.
- Total FC remain the same when operating within a relevant range, BUT FC per unit will deacrease as production increases.
- Variable Costs per unit remain the same when operating within a relevant range.
- As a result, when production levels increase, the same amount of fixed cost is being spread over a greater number of units, reducing the FC per unit.
Product Costs
What are the 3 types?
Product Costs - A cost that is incurred exclusively as a result of production & which is treated as part of the total cost of the item being produced such as:
- DM - Direct Materials
- DL - Direct Labor
- Manufacturing Overhead
- Indirect Materials
- Indirect Labor
- Normal Spoilage (part of product cost)
NOTE: Manufacturing Costs are often called product costs, since they are matched to the product & not expensed until the product is sold.
Period Costs
Period Cost - A cost that is not related to the manufacturing process and is charted to expense in the period incurred such as:
- Selling, general & admin
- Marketing costs, freight out
- Abnormal Spoilage
- An expense in the period
Prime Costs
vs.
Conversion Costs
TESTED
Prime Costs = DM Used + DL
Conversion Costs = DL + Mfg O/H Applied
Conversion Costs = Cost of Goods Manufactured + Ending WIP - Beginning WIP - Direct Materials
What are the 3 Cost Systems?
(Actual,Standard,Normal)
TESTED
- Actual Cost System - All costs are actual
- Standard Cost System - All costs are based on standards
- Normal Cost System - DM & DL costs are actual, Mfg O/H is based on standard.
Predetermined Overhead Rate (POHR)
What are the 2 Formulas?
POHR - the amount of overhead to be allocated to each unit of production based on an estimate of total MOH costs that is made at the beginning of the period, divided by an estimate of the total units of production expected to be incurred during the period. NOTE: POHR can be calculated in two ways:
POHR = Estimated O/H Cost / Estimated DL $ or Hrs
- POHR per $ = Estimated O/H Cost / Estimated DL Hrs
- POHR x DL hours worked.
- POHR % = Estimated O/H Cost / Estimated DL $$$
- Adds a percentage to total $ DL worked.
- (1+%POHR) x DL Base $$$)
- Adds a percentage to total $ DL worked.
Applied O/H
Formula?
Applied O/H - the amount of MOH charged to the production based on the units of production for a period multiplied by the POHR.
Applied O/H = POHR * Actual Production
NOTE: Applied Overhead is based on an ESTIMATED amount.
Over-Applied Overhead
vs.
Under-Applied Overhead
Flow & JEs 3 Steps?
TESTED
Over or Underapplied Overhead is determined by the difference between Actual OH incurred & the amount of Applied OH.
Calculation & Journal Entry: (3 Steps)
1.) Applied OH: (ESTIMATED Overhead)
DR: WIP Control
CR: Factory OH Applied (Temp Acct)
2.) Actual O/H: (ACTUAL Overhead)
DR: Factory OH Control (Temp Acct)
CR: Cash
3.) Over-Applied or Under-Applied: (Close Temp Accounts)
DR: Factory OH Applied
DR: COGS - Plug (Underapplied)
CR: Factory OH Control
CR: COGS - Plug (Overapplied)
The Flow of a Cost System
Raw Materials > WIP > Finished Goods > COGS
TESTED
Raw Materials
+Beginning RM
+Purchases (Direct Materials)
=Available
-Ending
=Raw Materials Used (DM Used)
Work in Process (WIP)
+Beginning WIP
+DM Used
+DL
+Applied O/H (Estimated)
=WIP Available
-Ending WIP
=CoGM (Cost of goods manufactured/completed)
Finished Goods
+Beginning FG
+CoGM
=FG Available
-Ending FG
=COGS
Cost of Goods Sold
+COGS
+Underapplied (Applied O/H estimated)
-Overapplied (Applied O/H estimated)
=COGS
Absorption Costing
How to arrive at Operating Income?
The conventional method of accounting under which all manufacturing costs, both variable & fixed, including DM, DL, & MOH, are included in inventory & cost of sales & only those costs not incurred as part of the manufacturing vosts are treated as period costs.
Absorption Costing/ Full Costing / GAAP:
+Sales
- Variable COGS (production costs)
- Fixed COGS (production costs)
=Gross Margin
- Variable SGA (period costs)
- Fixed SGA (period costs)
=Operating Income
Variable Costing
How to arrive at Operating Income?
A method of accounting under which variable manufacturing costs, including DM, DL, & variable MOH are included in inventory and costs of sales and & all fixed costs, including fixed MOH, are treated as period costs.
_Direct/ Variable/ Prime/ *CM/ Internal:_
+Sales
- Variable COGS (production costs)
- Variable SGA (period costs)
=Contribution Margin***
- Fixed Mfg. Costs (Fixed Costs are expensed) (period costs)
- Fixed SGA (period costs)
=Operating Income
NOTE: Correct! Under direct costing, all fixed costs, including fixed manufacturing overhead, is considered a period cost. Additionally, selling costs are always treated as period costs. As a result, the entire $180,000 would be reported as period costs.
Absorption Costing
vs.
Variable Costing
“PSA”
Regarding Absorption & Variable Costing, the difference in operating income will be equal to the fixed manufacturing overhead per unit multiplied by the increase/deacrease in the units in inventory.
“PSA”
Production > Sales = Absorption Income is Higher
Production < Sales = Variable Income is Higher
Contribution Margin (CM)
&
Contribution Margin Ratio
CM = Sales - Variable COGS(Direct Costs) - Variable SGA
Contribution Margin Ratio = CM / Sales Price
