CMA Part 1 Sec D Cost Management Flashcards
Measurement Concepts
Fixed Costs
…is a cost that does not change with changes in the level of production, i.e., the total cost remains constant over the relevant range of production. The cost per unit decreases with increases in production volume. The fixed cost is the sum of committed costs and discretionary [term] costs.
Variable Costs
…is a cost that varies with changes in the level of production (i.e., total cost increases with increases in production volume). Cost per unit is constant over the relevant range of production.
Mixed Costs
Costs that have both a fixed and variable component. For example, the cost of operating an automobile includes some fixed costs that do not change with the number of miles driven (e.g., operating license, insurance, parking, some of the depreciation, etc.) Other costs vary with the number of miles driven (e.g., gasoline, oil changes, tire wear, etc.)
Relevant Range
…refers to a normal range of volume or normal amount of activity in which the total amount of a company’sfixed costswill not change as the volume or amount of activity changes.
Cost Object(s)
is often a product or department for which costs are accumulated or measured.
[term] is anything for which a separate measurement of cost is required.
For example, a product is the [term] for direct materials, direct labor and manufacturing overhead. The factory maintenance department is a [term] for the cost of the maintenance employees and the maintenance supplies. Later the factory maintenance department costs will be assigned to products, which are also cost objects.
Cost Pool
…is an account into which a variety of similar cost elements with a common cause are accumulated.
It is prefereable for all the costs in a [term] to have the same cost driver.
Costs are often grouped by departments, by jobs, or by behavior pattern. For example, overhead costs are accumulated by service departments in a factory and then allocated to production departments before multiple departmental overhead rates are developed for product costing purposes.
Allocation Base
…is a measure used to allocate cost pool dollars to cost objects. It is the link between the cost pool dollars and the cost object. Any logical relationship can be used and it should ideally have a cause-and-effect relationship to the variability of costs in the cost pool. Ideally, the [term] is a cost driver.
Cost Driver
…is the basis used to assign costs to a cost object.
…is an activity that is the root cause of why a cost occurs. There is a causal relationship between a cost pool and a cost object, the [term] is the method for assigning or allocating cost pool dollars to the cost object.
Actual Costing
A method of costing manufactured items that differs from normal costing and standard costing. Under [term] each accounting period’s manufacturing inputs are valued at their actual cost, the actual number of dollars paid for direct materials, direct labor and overhead.
Work in process inventory
…refers to the raw materials, labor, and overhead costs incurred for products that are at various stages of the production process. A manufacturer must disclose in its financial statements the cost of its [term] as well as the cost of finished goods and materials on hand.
Finished goods inventory
The products in a manufacturer’s inventory that are completed and are awaiting to be sold. You might view this account as containing the cost of the products in the finished goods warehouse. A manufacturer must disclose in its financial statements the amount of finished goods, work-in-process, and raw materials.
Raw materials inventory
…is the total cost of all component parts currently in stock that have not yet been used in work-in-process or finished goods production. There are two subcategories of [term], which are:
Direct materials. These are materials incorporated into the final product. For example, this is the wood used to manufacture a cabinet.
Indirect materials. These are materials not incorporated into the final product, but which are consumed during the production process. For example, this is the lubricant, oils, rags, light bulbs, and so forth consumed in a typical manufacturing facility.
Normal costing
The actual cost of direct materials, the actual cost of direct labor, and manufacturing overhead applied by using a predetermined annual overhead rate.
Estimated overhead costs are divided by estimated production for the year to determine an application rate.
Standard costing
…is a system designed to alert management when the actual costs of production differ from budgeted, or [term].
[term] are predetermined, attainable unit costs. A [term] is not just an averae of past costs, but an objectively determined estimate of what a product, unit cost should be. The cost estimate excludes past inefficiencies and takes into accout expected future changes.
Variable costing
…considers only variable manufacturing costs to be product costs, i.e., inventoriable.
Note: the phrase “direct costing” is misleading because it implies traceability.
Absorption costing
Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements.
The inventoried cost of teh prodcut thus includes all production costs, whether variable or fixed. This technique is required for external financial reporting and for income tax purposes.
Joint product costing
…is used when a business has a production process from which final products are split off during a later stage of production. The point at which the business can determine the final product is called the split-off point. It is a cost that benefits more than one product.
If a company incurs costs prior to a split-off point, it must allocate them to products, under the dictates of both GAAP and IFRS. If you were not to allocate these costs to products, then you would have to treat them as period costs, and charge them to expense in the current period.
By-product costing
…costing is used when a business has a production process from which final products are split off during a later stage of production. These [term] products have minor additional costs and minor sales.
Split-off point
The split-off point is the point in the production process at which joint products are individually identifiable.