Chapter 4: Costing Fundamentals Flashcards
Cost Accounting Basics
What is included in conversion costs?
- Direct Labor (DL)
- Manufacturing O/H and Indirect Labor
- Indirect labor is a component of manufacturing O/H
Cost Accounting Basics
What are prime costs?
- Direct Materials (DM)
- Direct Labor (DL)
- DM costs includes machining and assembly of a product
Cost Accounting Basics
What are product costs?
- Was the costs used in order to produce the product?
1. Yes: Product Cost
2. No: Period cost - Product costs are deferred when the unit is not sold
- Product costs are capitalized as part of inventory.
- They are classified as an asset until the product is sold
- Product costs include DM, DL, OH and may be the costs of goods purchased for resale
If total production costs and DL are listed when calculating Inventory, do not include DL in the calculation because it’s already included in the total production costs
Cost Accounting Basics
What is the calculation to determine product costs?
Conversion Costs + DM
OR
DL + Manufacturing OH + DM
Cost Accounting Basics
How is the conversion cost calculated when DL and O/H are not determined?
COGM - DM Used in Production + O/H
Cost Accounting Basics
How is leftover material used in production processed?
- Materials have no further use: Waste (Period Cost)
- Materials have further use: Scrap (Product Cost)
Fixed, Variable, and Mixed Costs
What is the relationship between variable, fixed and total costs to units?
Variable Cost
* Variable Cost/Unit: No Change
* Increase in number of units: Total Variable Cost Increases
* Decrease in number of units: Total Variable Cost Decreases
Fixed Cost
* Total fixed cost: No Change
* Increase in number of units: Fixed Cost per unit Decreases
* Decrease in number of units: Fixed Cost per unit Increases
Total Cost
* Increase in number of units: Total Cost Increases
* Decrease in number of units: Total Cost Decreases
Fixed, Variable, and Mixed Costs
What is the slope equation for a regression analysis?
y = a + bx
* y = Total Mixed Cost
* a = Fixed cost (also known as the y-intercept)
* b = Variable Cost (also known as the slope)
* x = Activity
Fixed, Variable, and Mixed Costs
What is a regression analysis?
A regression analysis is used in order to estimate the dependent variable (i.e. cost) based on a determined independent variable (i.e. units produced)
b = The dependend variable
x = The independent variable
Fixed, Variable, and Mixed Costs
What is a multiple regression analysis?
- For a multiple regression analysis, at least one dependent variable is needed there can be multiple independent variables
- The total of one dependent variable can be accounted for by two or more independent variables
Fixed, Variable, and Mixed Costs
How is the learning curve calculated?
- The learning curve is percentage when the average time per unit decrease and the output doubles
- The batches are double for each new group.
- The new cost is calculated by multiplying the previous hours x the learning curve percentage
Fixed, Variable, and Mixed Costs
What are the steps to calculate the high-low method?
- Step 1: Calculate the difference between the highest and lowest number of units
- Step 2: Using the highest and lowest units, calculate the difference in total costs
- Step 3: Calculate the variable cost per unit by multiplying either the high or low amount x the number of units based on the High-Low Differences
- Step 4: Calculate the fixed cost by deducting the variable to from the total cost
- Step 5: Calculate the total estimated variable cost per unit based on the High-Low Unit Cost
- Step 6: Calculate the total costs by adding the estimated variable cost and the fixed cost that was determine in setp 4
Fixed, Variable, and Mixed Costs
What is the calculation to determine additional income or loss when using a lockbox system?
- Step 1: Calculate the revenue saved by multiplying the daily revenue x the number of reduced days in A/R
- Step 2: Calculate the interest revenue on the total amount from reduced days in A/R
- Step 3: Calculate any fees
- Step 4: Determine income or loss by subtracting the interest revenue less any fees
Absorption Costing and Variable Costing
How are costs reported under the absorption costing method?
- When units produced exceed units sold, the operating income will always be more than under variable costing because the fixed O/H is based on units sold
- When units sold are more than units produced, the operating income will be less than under variable costing
- Absorption costing treats all manufacturing costs as product costs
- Non-product costs, i.e. SG&A, are treated as period costs
- Absorption costing is required as GAAP since it includes all manufacturing costs in the cost of production
- Absorpotion costing calculates gross profit
- Under absorption costing, fixed selling costs is based on the units produced
Absorption Costing and Variable Costing
How are costs reported under the variable costing method?
- When units produced exceed units sold, the operating income will always be less than under absorption costing because all fixed costs are treated as period costs
- When units produced are less than units sold, the operating income will be more than under absorption costing
- Variable costing is used for internal reporting only
- Variable costing calculates contribution margin
- Under variable costing, selling costs is based on the units sold
Absorption Costing and Variable Costing
What variable costs are included when calculating COGM in variable cost accounting?
- Direct Labor
- Direct Material
- Variable Overhead
Absorption Costing and Variable Costing
What variable costs are included when calculating contribution margin in variable cost accounting?
- Cost of Good Manufactured
- Variable Selling Expenses
- Variable Administrative Expenses
Cost-Volume-Profit Analysis
What is the difference between linear and non-linear?
- A linear rate is constant
- A non-linear rate varies
Cost-Volume-Profit Analysis
What are the components used to calculate a break-even point?
- Number of Units
- Contribution Margin
(Unit Sale - Unit Variable Cost) - Contribution Margin Ratio
- Fixed Cost
Cost-Volume-Profit Analysis
What is the formula to calculate the break-even point?
Fixed Cost / Unit Contribution Margin
Cost-Volume-Profit Analysis
What is the formula to calculate break-even point in dollars?
Fixed Costs / Contribution Margin Ratio
Cost-Volume-Profit Analysis
When is Multi-Product Break-Even Analysis used?
- Multi-product break-even analysis is used when a company is selling more than one product
- Fixed costs may either be used for both products or there may be separate fixed costs for multiple products
Cost-Volume-Profit Analysis
What are the assumptions when performing multi-product break-even analysis?
- Unit selling price and unit variable costs are unchanged
- The sales mix will remain constant
- Sales volume equals product volume
Cost-Volume-Profit Analysis
What is the formula to calculate multi-product break-even analysis?
Fixed Cost / Weighted Average Contribution Margin
Cost-Volume-Profit Analysis
What is the Calculation for Weighted Average Contribution?
- Step 1: Calculate Sales Mix
Product Budget Unit / Total Number of Budget Units - Step 2: Calculate the Total Contribution Margin
Contribution Margin from Product A + Contribution Margin from Product B - Step 3: Calculate the Weighted Average Contribution
Total Contribution / Total Number of Units
OR
Sales Mix x Contribution Margin - Step 4: Calculate the Overall Weighted Break-Even Point
Fixed Cost / Weighted Average Contribution - Step 5: Calculate the Individual Break-Even Point
(Number of Units for Product A / Total Number of Units) x Weighted Break-Even Point
OR
Sales Mix x B/E Point - Step 6: Calculate the Break-Even Point in Sales
B/E Point in Unit x Sales Price per Unit
Cost-Volume-Profit Analysis
What is the formula to calculate profit?
Contribution Margin
(Fixed Costs)
Cost-Volume-Profit Analysis
What is the formula to calculate Margin of Safety in Dollars?
Actual or Budgeted Sales
(Break-Even Sales)
