Cost Accounting Flashcards
Contribution Margin
(Sales - VC)
The contribution to fixed costs and operating income from the sale of a product or provision of a service.
Contribution Margin Format
Sales - VC = CM - FC = Profit / Loss
CM Ratio
CM / Sales
UCM / Selling Price
The portion of each sales dollars that remains after covering the variable costs and are available to cover fixed costs or provide for profit.
Relevant Range
Different fixed costs have different relevant ranges which is the level of activity over which a particular cost behaviour pattern exists.
Linearity
We assume that there is a linear relationship between total costs and activity when its actually a curvy linear relationship.
An Alternative formula for CVP analysis
SPx = VCx + FC + Profit
Breakeven
BE in Units = FC / UCM
BE in $ = FC / CM%
or = (FC / UCM) x SP
(UCM = SP - VC / unit)
Margin of Safety
How much above breakeven we are currently operating at.
Can indicate risk.
Operating Leverage
The mix of FC and VC within the cost structure of the organisation. Higher the FC = higher the operating leverage = higher the risk.
Cost Accounting
Relies on the accumulation and determination of product and process or service costs for the purpose of assigning these to a cost object.
Costs are assigned to products (cost sits in finished goods until sold ie inventory in BS) and become expenses when the product is sold (COGS = product cost x units sold).
Product Costing
Assign all possible direct costs (RM + DL) to the job and then charge each unit of output with a ‘fair share’ of indirect costs (OH).
Direct Costs
Traced to a specific product.
Would not be incurred if the product discontinued.
eg RM, DL
Indirect Costs
Cannot be traced to a specific product.
Would be incurred even if the product discontinued.
eg OH
Manufacturing Overhead
All manufacturing costs except RM and DL.
They’re indirect as it is not feasible to relate OH items to individual products or services.
Period Costs
All other costs which are not product costs.
They’re indirect.
Usually a lump sum for the period / year.
Total Costs Summary
Total Costs = FC + VC
Total Costs = DC + IC
Total Costs = Product + Period
3 Inventory Accounts in Manufacturing cost accounting system
- Raw Materials = parts, assemblies, materials
- Work in progress = accumulate all manufacturing costs as goods are being made.
- Finished Goods = Cost of completed item.
POAR
= Estimated total manufacturing OH cost for the coming period / Estimated total units in the allocation base for coming period.
CAB = normally a driver of OH costs
Businesses may have single overhead rates or multiple.
Applied OH
= POAR x Actual quantity of CAB
Variance
Difference between actual and applied OH
- Smaller variance = Transferred directly to COGS
- Material variance (misstatement will affect decision of a user) = May be allocated to work in progress, finished goods or COGS proportionally.
Pricing
Pricing usually takes into consideration the 3 Cs:
- Cost
- Customers
- Competitors
Cost-plus pricing
Generally product cost + Mark-up
However it is flexible and may take into consideration customers and competitors.
Market-based pricing
Starts with ‘target price’ which is an estimate based on an understanding of customers perceived value for a product / service and how competitors are / will price theirs.
Businesses can then work backwards to find a target cost.
Relevant Information
- Differential costs: Will differ according to alternative activities being considered.
- Opportunity cost: Income foregone by choosing one alternative over another.
Overall relevant costs must be:
- Controlable
- Future costs
- Consider capacity
- Must first be operating above breakeven otherwise this is the first decision.
Irrelevant Information
- Allocated cost: A common cost that has been arbitrarily assigned to a product or activity, eg Overhead.
- Sunk cost: A cost that has already been incurred and will not change.
FC likely to be irrelevant.
Factors which need considering
Strategic reasons, competitive reasons, employees and expertise, resourcing, reputation, control and hidden costs.
Product Mix Decision
Managers often face the problem of deciding how scare resources are going to be utilised.
Relevant cost = CM per limiting factor.
(FC usually irrelevant so managers focus on maximising CM)
Most profitable mix of products occurs when the CM / limiting factor is maximised.
Make or Buy Decision
Relevant cost = Avoidable costs
Quantitative decision = look for cheapest option
Other important factors to consider:
- Control over timing, quality and pricing of inputs
- What happens to staff
- Do we have use for facilities currently in operation (ie use them to produce something else)
- Any hidden costs
Special Order Decision
A one off order from a customer
Relevant costs = Capacity, CM (FC not relevant so any increase in CM = increased profit)
Other factors to consider:
- Is there other customers who would pay more if we selling off cheaply.
- Potential loss of customer goodwill
- Would it be more beneficial to decrease total capacity if inability to to sell full production in an ongoing problem.
- Accessing overseas markets
Sales Forecast
Forecasted volume x forecasted price
Inventory Flow Model
Opening Inventory \+ Production / purchases = Goods available for sale - Closing Inventory = Cost (or quantity) of goods sold
Production Budget
Always in units
Opening Inventory \+ Production = Goods available for sale - Closing Inventory = Goods sold
Sales
+ Ending Inventory
-Opening Inventory
= Production
Purchases budget
In Raw Materials
Opening Inventory \+ Purchases = Materials available for production - Ending inventory = Materials used
RM uses in production
+Ending Inventory
-Opening Inventory
= Purchases
Cash Receipts Budget
How much cash we get from our customers
immediate or delayed
Cash Budget
How much cash we have spent and received and thus how much cash the business currently has.
Helps reflect the business better than anything else as it has less manipulation and estimates.
