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Accounting 211 > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

Pricing

(Two Ways)

A
  • Market-Determined Price
    • use product cost infomration and decide wheterh its cost strucutre will allow it to compete profitably
  • Organization-Set Price
    • organizations will often set a price that is an increment of its product’s cost
    • Called cost plus pricing
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2
Q

Cost Plus Pricing

A
  • A pricing approach where an organzation sets a price that is an increment of its product’s cost
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3
Q

Target Costing

A
  • A tool used in product planning to focus efforts in product and process design on developing a product that has a good profit potential in view of market requirements
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4
Q

Budgeting

A
  • one of the most widespread uses of cost information
  • a management accounting tool that projects or forecasts costs for various levels of production and ssales activity
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5
Q

Variable Costs

A
  • one that increases proportionally with changes in the activity level of some variable
  • example: the acquisition and consumption of the wood creates a cost for wood that increases proportionately with the number of chairs made
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6
Q

Cost Driver

A
  • a variable that causes a cost
  • example: a rocking chair
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7
Q

Variable Cost Formula

A

Variable Cost

=

Variable cost/ unit of cost driver x Cost Driver Units

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8
Q

Fixed Cost

A
  • a cost that does not vary in the short run with a specified activity
  • Depends on the amount of a resource that is acquired rather than the amount that is used
  • Often _capacity-related costs _
  • examples: depreciation, wages paid to production supervisors
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9
Q

Total Cost

A

Variable Costs + Fixed Costs

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10
Q

Cost-volume-profit (CVP) analysis

A
  • using the concepts of variable and fixed costs to dentify the profit associated with various levels of activity
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11
Q

Profit Equations

A
  • Profit = Revenue - Total costs
  • = Revenue - Variable Costs - Fixed Costs
  • = Contriubtion Margin x Units produceds and Sold - Fixed Costs
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12
Q

Contribution Margin

A
  • The difference between the total revenue and total variable costs
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13
Q

Contribution Margin Per Unit

A
  • the contribution that each unit makes to coverning fixed costs and providing a profit
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14
Q

Contribution Margin Ratio

A
  • The ratio of contribution margin per unit to selling price per unit
  • the fraction of each sales dollar that is available to cover fixed expenses and produce a profit
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15
Q

Units Needed to be Sold Equation

A
  • (Target Profit + Fixed Costs ) / (Contribution Margin Per Unit)
  • Used to calculate the breakeven volume
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16
Q

Required Unit Sales

(target profit as % of revenue)

A
  • required unit sales = (fixed costs) / (contribution margin per unit - 20% x price per unit)
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17
Q

Target Profit

(Including Taxes)

A
  • target profit = [(contribution margin per unit x required unit sales) - Fixed Costs] x (1 - Tax rate)
18
Q

Required Unit Sales Including Tax Rate

A
  • required unit sales = [(target profit/(1-tax rate) + fixed costs)]/ contribution margin per unit
19
Q

What-if Analysis

A

*

20
Q

Incremental Profit Formula

A
  • Incremental Profit = Incremental Contribution margin - Incremental cost
  • Example: spending extra money on advertising
21
Q

Two product CVP equation

A
  • profit = rocking chair contribution margin x rocking chairs sales + kitchen chair contribution margin x kitchen chair sales - fixed costs
22
Q

Breakeven Point

A
  • when the profit is 0
23
Q

The Bundle Apporach

A
  • bundling the two products together in order to because illustrate the number sold
  • example: 1 “bundle” is 20 rocking chairs and 80 kitchen chairs
    • sell 3 bundles, 60 rocking chairs are sold and 240 kitchen chairs are sold
      *
24
Q

Assumptions Underlying CVP Analysis

A
  • the price per unit and the variable cost per unit (therefore the contribution margin per unit) remain the same over all levels of production
  • All costs can be classified as either fixed or variable or can be decomposed into a fixed and variable component
  • Fixed costs remain the same over all contemplated levels of production
  • Sales equal production
25
Q

Mixed Cost

A
  • a cost that has a fixed component and a variable component
  • example: cell phone bill (fixed monthly rate, as well as how much data you use or w/e)
26
Q

Step Variable Costs

A
  • Increases in steps as quantity increases
  • example: the total cost of supervisory salaries per 30 workers
27
Q

Incremental Costs

A
  • the cost of the next unit of production and is similar to the economist’s notion of marginal cost
  • generally defined as the variabl cost of a unit of production
    • however, the variable cost per unit may change as production volume chagnes
    • if the cost is a step vaiable, treating the cost as a variable cost will lead to estimation errors
28
Q

Sunk Costs

A
  • a cost that results from a previous commitment and cannot be recovered
29
Q

Sunk Cost Phenomenon

A
  • Referred to sometimes as the Concorde Effect or the COncorde Fallacy
  • When sunk costs affect managerial decisions, even though they shouldnt
30
Q

Relevant Cost

A
  • A cost that will change as a result of some decision
  • example: the extra money you will spend going to a concert you already have a ticket for
31
Q

Avoidable Cost

A
  • A cost that can be avoided by undertaking some course of action
  • The most obvious avoidable costs are variable costs
32
Q

Opportunity Cost

A
  • The maximum value forgone when a course of action is chosen
  • provide important insights at the individual product level
33
Q

Make-or-buy Decision

A
  • deciding whether to contract out for a product or service
  • Focusing on if the costs avoided internaly are greater than the external costs that will be incurred
34
Q

Examples of Internal Costs Avoided

A
  • example: internal costs avoided
    • all variable costs
    • any avoidable fixed costs such as the cost of supervisory personnell who would be laid off or machinery that would be sold
35
Q

Examples of External Costs Incurred

A
  • The cost of purchasing the part
  • Any transportation costs
  • Any other costs involved in dealing with the outside supplier, ordering the product and receiving and inspecting it
36
Q

Manufacturing Costs

(3 groups)

A
  • Classified into 3 groups
    • Direct Materials
    • Direct Labor
    • Manufacturing Overhead
37
Q

Direct Material Costs

A
  • Materials that can be traced easily to a unit of output and are of significant economic consequence of to the final product
38
Q

Direct Labor Costs

A
  • Those labor costst that can be traced easily to the creation of a unit of output
    *
39
Q

Manufacturing Overhead Costs

A
  • All costs incurred by a manufacturing facility that are not direct materials costs or dierct labor costs
  • example: materials that are not of significant economic consequence to the final product
40
Q

Floor Price

A
  • The minimum price that a company would normally consider for the order
  • computing it exploits the relevant cost idea by considering the cost that will change as a result of taking the order
41
Q
A

Accounting 211 (12 decks)

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