Cost Accounting Flashcards
Fixed + Variable Cost =
Total Cost
Fixed + (variable cost x units) =
Total Cost
Total Variable Costs change when
activity changes
When activity changes total fixed costs remain
unchanged
Raw materials is an example of what cost?
Total variable costs
Factory building depreciation is an example of what cost?
Total fixed costs as it will not change with the level of production
Direct Labour (wages) is an example of what cost?
Variable cost
Factory water, light and electricity is an example of what cost?
Variable cost
Sales commission is an example of what cost?
Variable cost
Delivery costs is an example of what cost?
Variable cost
Land Tax is an example of what cost?
Fixed cost
Insurance is an example of what cost?
Fixed cost
Supervisory salaries is an example of what cost?
Fixed cost
Depreciation is an example of what cost?
Fixed cost
Advertising is an example of what cost?
Fixed cost
What are the assumptions of cost behaviour? (2)
Relevant Range
Linearity
What is relevant range?
Level of activity over which a particular cost behaviour pattern exists
What is the contribution margin format?
Sales - VC = CM - FC = profit//loss
What does the contribution margin format represent?
Difference between sales revenue and variable expenses
Why is the contribution format useful? (2)
Useful in planning, control and evaluation processes
Emphasises cost behaviour
What is the contribution margin ratio?
Contribution Margin/Sales
What are the 4 questions involved in cost volume profit analysis?
What volume of sales is needed to cover total costs?
What sales volume must be achieved to reach a targeted profit?
If there is a change in FC or VC, what impact will that have on the sales volume needed to cover costs?
What would be the impact of a change in selling price?
What is the formula for CVP?
Sx = VCx + FC + p
What is break-even analysis? (2)
Determines the activity level required to cover all costs associated with the business
Assesses activity level required to achieve profit targets
BE (Units) =
Fixed Costs / Contribution Margin per unit
BE ($) =
Fixed Costs / Contribution Margin Ratio
BE (units) x sales price per unit
BE (+ desired profit) =
(FC + Desired Profit) / Contribution Margin Ratio
BE + desired profit (units) x sales price per unit
What are the 3 weaknesses of break-even analysis?
Non-linear relationships
Stepped fixed costs
Multi-product businesses
Total Costs =
Fixed Costs + (variable rate x activity level)
Direct + Indirect Costs
Product Costs =
Raw materials, direct labour and allocation of overhead
What are direct costs?
Raw Materials & Direct Labour
Can be conveniently traced to a unit of product or other cost objective
What are indirect costs?
Cannot be easily and conveniently traced to a unit of product or other cost objective
Would be incurred even if the product or activity were discontinued
What is product costing?
Ascribe all possible direct costs to the job and then charge each unit of output with a ‘fair share’ of indirect costs
COGS =
product cost x units sold
What is a manufacturing overhead?
Includes all manufacturing costs except raw material and labour
What type of overhead is maintenance and cleaning?
Manufacturing
What type of overhead is depreciation for factory buildings and equipment?
Manufacturing
What type of overhead is production supervision salaries?
Manufacturing
What are period costs?
All other costs that are not product costs
Usually a lump sum for the period
Almost always indirect
Product Costs + Period Costs =
Total Costs
When is the predetermined overhead application rate used?
To apply overhead to jobs before the period begins
POAR =
estimated total manufacturing overhead for the coming period / estimated total units in the allocation base for the coming period
What is actual overhead?
Actual $ spent after bills come in
What is budgeted overhead?
Estimated amount we think we are going to spend (used in POAR)
What is allocated overhead?
Amount of overhead assigned to product
POAR x actual quantity of cost allocation base =
Overhead
Cost Pool (budgeted)/ CAB (budgeted)
POAR
RM + DL + OH =
product cost
Cost-plus pricing =
product cost + mark-up
What is market-based pricing? (3)
Starts with a target price
Estimated based on an understanding of customer perceived value for a product or services and competitors price
One target price established, work backwards to get target cost
What short-run investment decisions?
Decisions affecting the next few days, weeks or months
What is a product mix decision?
Managers faced with issue of deciding how scarce resources (limiting factor) are going to be utilised
Fixed costs are not affected by this decision so management can focus on maximising total contribution margin
Product Mix Equation
Contribution Margin / Limiting Factor
Most profitable when CM / Limiting Factor is maximised
What is the make or buy decision? (3)
Should a company make or buy something?
The production process has costs associated with it
There is a cost to buy it in ready-made
What is relevant cost?
Avoidable cost (cost that can be avoided if we outsource)
We will make a product if…
Avoidable cost is less than the purchase price to buy
We will buy a product if…
Avoidable cost is greater than the purchase price to buy
If the decision is to outsource control is lost over… (3)
Quality
Timing
Pricing of Inputs
If decision is to outsource must question… (3)
What happens to our staff?
Do we have use for the facilities currently in operation?
Is there a cost for distribution or storage?
What is a special order decision?
One off order from a customer who wants X amount at X price, in addition to normal business activity
What components are relevant to a special order decision?
Capacity and Contribution Margin
A long term plan defines…
The general direction of the business over the next five years (what markets, production methods, profit, staff, financing, resources)
5 parts of the planning process
Identify business objectives
Consider options
Evaluate options and make a selection
Prepare long-term plans (long-term budgets)
Prepare budgets (short-term)
What is a sales forecast? (2)
First budget, all others uses sales forecast
Based on the past
Sales forecast equation =
Forecasted Volume x Forecasted Price
What is a cash receipts budget? (2)
How much $$$ we get from customers
Cash and credit sales
What is a cash budget? (4)
Key Budget
How much $$$
Helps reflect business activities better than any other
Show expected future cash receipts and cash payments
Inventory Flow Model
Beginning Inventory + Purchases/Production = Goods Available for Sale - Ending Inventory = COGS
