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
Cost-Volume-Profit
What are the 3 common applications?
(BE,Profit,Return on Sales)
CVP - analysis provides mgmt with profitability estimates at all levels of production in the relevant range. There are 3 common applications:
- Determining sales needed to break even
- Determining sales needed to achieve a particular dollar profit
- Determining sales needed to achieve a particular return on sales
Break Even
What are the 2 Types? Formulas?
Break Even - the sales volume, which may be expressed in terms of units or dollars, that must be sold in order for total revenue to be equal to total expenses, resulting in neither profit nor loss.
BE Units = (Fixed Costs + Profit/Loss) / Contribution Margin (CM)
BE $$$ = (Fixed Costs + Profit/Loss) / CM Ratio
Break Even in Units
BE Units = (FC + Profit/Loss*) / CM per Unit
NOTE: In determining the desired profit* just add in the formula.
Break Even in Sales Dollars
BE Sales Dollars = (FC + Profit/Loss*) / CM Ratio
NOTE: In determining the desired profit* just add in the formula.
Break Even Analysis
Formulas?
Correct! Breakeven analysis is based on the assumption that all costs and revenues are linear and that, over the relevant range, neither fixed costs nor variable costs per unit will remain constant. This includes the assumption that unit variable costs will also remain unchanged.
BE Units = (FC + Profit/Loss) / CM Per Unit
BE $ = (FC + Profit/Loss) / CM Ratio
CM Per Unit = (Sales Price - Variable Costs) / #Units
CM Ratio = (Sales Price - VC Mfg) / Sales Price
Sales Price of a Unit
Formula?
Sales Price = Product Cost / (1-CM Ratio)
A company produces and sells two products. The first product accounts for 75% of sales and the second product accounts for the remaining 25% of sales. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the break-even point, what number of units of the first product will have been sold?
You answered incorrectly
Incorrect! A synthetic composite unit, or batch, is used to determine the breakeven point and represents 3 units of the first product and 1 unit of the second product. The breakeven point in units is determined by the following relationship:
Breakeven Point in Units = Fixed Costs ÷ Contribution Margin (CM)
Fixed costs for the company are the combined fixed costs of each product, or $312,000 ($100,000 + 212,000).
The contribution margin per composite unit is determined by the individual products within the batch. The contribution margin for the first product is $4 (selling price of $10 - variable cost of $6) and the contribution margin for the second product is $12 (selling price of $25 - variable cost of $13). Each composite unit represents 3 units of the first product and 1 unit of the second product.
CM of Composite Unit = (CM of First Product)(# of First Product) + (CM of Second Product)(# of Second Product)
CM of Composite Unit = ($4) (3) + ($12) (1) = $ 24
The breakeven point in terms of composite units is determined as follows:
Breakeven Point in Units = Fixed Costs ÷ Contribution Margin
Breakeven Point in Units = $312,000 ÷ $ 24
Breakeven Point in Units = 13,000 composite units
The company will breakeven when it sells 13,000 composite units. Each composite unit represents 3 units of the first product, so the company will sell 39,000 (13,000 x 3) units of the first product at the breakeven point.
Brewster Co. has the following financial information:
Fixed costs $20,000
Variable costs 60%
Sales price $50
What amount of sales is required for Brewster to achieve a 15% return on sales?
a. $33,333
b. $50,000
c. $80,000
d. $133,333
You answered correctly
Correct! The amount of sales required to achieve a 15% return on sales is computed using the following relationship.
(Amount of Sales) - (Variable Costs) - (Fixed Costs) = (Return on Sales)
Let n be the amount of sales. Variable costs are 60% of sales, or 0.6n. Return on sales must be 15% of sales, or 0.15n.
n - 0.6n - $ 20,000 = 0.15n
This is rearranged as:
n = $ 80,000
Brewster will achieve a 15% return on sales when the amount of sales is $80,000.
Return On Sales = FC / (CM Ratio - Target Return on Sales)
In a traditional job-costing system, issuing indirect materials to production increases which account?
a. Materials (stores) control.
b. Work in process control.
c. Manufacturing overhead control.
d. Manufacturing overhead applied.
You answered correctly
Correct! In a traditional job-costing system, indirect costs are included in manufacturing overhead. When overhead is incurred, it is recognized with an increase to manufacturing overhead control.
You answered incorrectly
Incorrect! In a traditional job-costing system, indirect costs are included in manufacturing overhead. When overhead is incurred, it is recognized with an increase to manufacturing overhead control. Manufacturing overhead applied is increased when manufacturing overhead is allocated to units being produced.
Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott’s fixed cost?
a. $16,000
b. $24,000
c. $80,000
d. $96,000
You answered correctly
Correct! If Cott has a margin of safety of $80,000, an $80,000 decrease in sales would cause Cott to break even, meaning the remaining contribution margin would be equal to fixed costs. If sales were to decrease by $80,000, the remaining $120,000 in sales would have a 20% contribution margin of $24,000, which would equal fixed costs.
BE = Fixed Cost / Contritubiton Margin
BE = 200,000 - 80,000
Contribution Margin = 20%
120,000 = Fixed Cost / 20%
Fixed Cost = 24,000
