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 include machining and assembly of a product
Cost Accounting Basics
What are product costs?
- Product costs are based on the costs that it took to produce a unit of product
- 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
- Materials have further use: Scrap
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 Costs Increase
* Decrease in number of units: Total Variable Costs Decrease
Fixed Cost
* Total fixed cost: No Change
* Increase in number of units: Fixed Costs per unit Decreases
* Decrease in number of units: Fixed Costs per unit Increases
Total Cost
* Increase in number of units: Total Costs Increase
* Decrease in number of units: Total Cost Decrease
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)
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
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
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
