Chapter 4 - Decision Making (Managerial Accounting) Flashcards
Total Cost formula is in the following format:
following format:
y = A + Bx
What do the letters represent?
Total Cost = Fixed Costs + Variable Cost (X)
X is the Volume/Cost driver
All these costs must be in the RELEVANT RANGE
Basic purpose of Cost Measurement
to allocate costs of productions to units produced. Thus, provides important management decisions - especially for product pricing decisions
Fixed Costs
costs that remain constant no matter what volume aslong as its operating in the relevant range of volume
Volume/Cost driver
This is the independent variable; in other words it can be icnreased or decreased depending on how good the company’s production is. Thus, it is multiplied by the variable costs.
The amount of costs incurred largely depend on the volume of this number
Total Cost is independent or largely dependent?
Largely dependent on the other factors, esp Cost driver (which is independent)
y = A + Bx
The format of the Total Cost Formula. The point of showing it this way is to note the Y (total cost) and X (cost driver)
Y is LARGELY DEPENDENT
X is INDEPENDENT because that can actually be increased or decreased by the company’s discretion and production.
How to find Variable Cost: High-Low Method
You look at the highest and lowest observations. The difference in their cost is divided by the difference in their activities
Example of High Low
- You look at the highest cost and notice its 110k at 30k hours. The lowest is 80k at 20k hours.
-
$110k-$80k
30k - 20k hours
= $30k
10k hours
= $3 per hour is our variable costs
3. Plug it in and see if it works. After doing some algebra, we should get our fixed costs of 20k.
Using the highest observation:
110k = A + $3 (30k hours)
A = 110k - 90k = 20k
Using the lowest observation:
80k = A + $3 (20k hours)
A = 80k - 60k = 20k
Three types of product costs
- Direct Materials - Materials that are physically included in the final manufactured product
- Direct Labor - Wages paid to ONLY those employees working with the direct materials to change them from Raw to Finished Goods
- Overhead - All other costs that are related to the cost of making the product (NOT non-manufacturing or periodic costs)
Examples of Direct Materials
Say we’re manufacturing paper clips, direct materials would be the metal.
Other examples are:
- freight in
- insurance in transit
- import duties
- storage
Examples of Overhead
- Indirect Materials - Sandpaper to smooth edges of paper clips, or cleaning supplies for the assembly line
- Indirect Labor - supervisors and maintenance workers of the factory building
- Other examples: payroll taxes and fringe benefits for manuf employees, rent and depreciation on factory assets, lubricants, utilities to keep factory in operation
Prime Cost vs Conversion Cost
The Prime Costs are the direct costs: Direct Materials and Labor
Conversion Costs are costs necessary to convert the raw materials into products. So it doesnt include the direct materials, but its the Labor and Overhead.
Manufacturing vs Non-MFG costs
Manufacturing costs are the Direct Labor/Materials and Overhead
Non-MFG - Periodic expenses like:
- SGA Costs
- Marketing Costs
- Freight Out
- Re-Handling costs
Spoilage is MFG or Non-MFG cost?
Depends. if its Normal Spoilage its MFG. Non-MFG would be ABNORMAL SPOILAGE
Normal Cost System
Direct Materials and LAbor are absed on actual costs, whereas Overhead is based off a predetermined standard
Why is overhead considered “applied”?
Can’t be directly traced to the product as you can with direct material or labor.
Flow of a cost System (write it out) w/formulas
