Cost Accounting Flashcards
Break-even analysis
Total cost and total revenue is linear
Unit variable cost are constant
Prime costs
Direct materials plus direct manufactoring labor
Cost of electricity
The cost of electricity for a manufacturing plant, whether fixed or variable, is included in factory overhead and, therefore, is a product cost.
Quantity variance
Actual quantity - Standard quantity multiplied by standard price
Price variance
(Actual quantity x Actual price) - (Actual quantity x Standard cost)
Usage Variance
(Actual quantity x Standard price) - (Standard quantity x Standard price)
Contribution margin per unit
Sales/sales price per unit = units sold
Contibution margin/units sold = contribution margin per unit
Break-even point in units
Fixed cost/contribution margin per unit
Margin of safety
Break-even sales dollars= break-even point in units x sales price
Current sales - break-even sales dollars = margin of safety
Absorption Costing Income statement
Include both variable and fixed (all prodcution costs) manufacturing costsas product costs.
As such, the cost of goods sold, product costs and the value of the ending inventory on the absorption income statement are higher than on the variable income statement.
The first action to take is to determine the production cost per unit produced.
Sales Revenue
COGS: Variable costs
Variable selling and administrative
Contribution margin
Fixed selling & administrative cost
FOH cost
Operating income
Direct or variable costing Income Statement
Direct costing Include only variable manufacturing costs as product cost and expense fixed manufacturing costs as period expense.
Sales Revenue
COGS: variable costs
COGS: FC
Gross margin
Fixed selling and administrative costs
Variable selling and administrative cost
Operating income
Variable overhead application
estimated variable overhead costs / estimated activity level (machine hours) = predetermined variable rate
Value-added activity
An activity adds value to an organization if the activity adds value for the customer. Customers are willing to pay for activities that add value for them.
Activity-based costing (ABC)
Activity-based costing (ABC) involves the allocation of overhead costs to products based on the cost driver that actually caused those costs to be incurred. In contrast to traditional costing methods which accumulate costs by department or function, ABC accumulates costs by the specific activity being performed.
For example, costs related to the purchase of materials may be allocated according to the number of purchase transactions which occurred. Therefore, cost drivers comprise a necessary part of any ABC system.
On the other hand, non-value-added activities represent expenditures for which no value is added to the product. Hence, costs can be reduced by eliminating non-value-added activities without affecting the salability of the product.
ABC is based upon two principles. First, activities consume resources. Second, these resources are consumed by products, services, or other cost objectives (output). ABC allocates overhead costs to products on the basis of the resources consumed by each activity involved in the design, production, and distribution of a particular good.
Volume-based production
Volume-based production is somewhat of an opposite to activity-based costing in the sense that the volume-based approach, while simple, does not accurately reflect the relationship between the products produced and the costs incurred, as it systematically overassigns costs to some products and underassigns costs to others.
Coefficient of determination ( R2: R-squared)
indicates the degree to which the behavior of the independent variable(s) predicts or explains the dependent variable.
Coefficient of determination measures goodness of fit.
Quantity demanded (regression analysis)
y= a + bx
y= the dependent variable
x= the independent variable
a=the y-axis intercept of the regression line
b=the slope of the regression analysis
Activity rates
To determine activity rates, divide the estimated overhead cost by the expected activity.
Cost applied to WIP
To determine overhead cost applied to activities, multiply the activity rate by the actual occurrence of the base.
Transfer price
Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. However, this is only true where idle capacity exists to make the transfer. If there is no idle capacity, the market value serves as both the ceiling and the floor for price.
A market price transfer price will lead to goal congruence and a sustained level of management effort while maintaining autonomy of divisions when there is a competitive marketplace.
Committed costs
Committed costs arise from investments that cannot be altered in the short run.
correlation coefficients
Regression coefficients can range from − 1.00 (perfect negative correlation to 1.00 (perfect positive correlation, and the closer to − 1.00 or 1.00 the stronger the relationship. It is the coefficient closest to − 1.00 or 1.00.
Break-even sales dollars
Break-even in units x selling price
Contribution margin ratio
CM/Selling price
Decreased break-even point in dollars
Maintain selling price and variable cost per unit, maintain volume and reduce fixed cost
Joint costs
Joint costs are sunk costs that are unavoidable, regardless of whether the item is sold at split-off or processed further.
The joint cost allocated to product X will increase only if the joint cost allocated to either or both of the other products is decreased. The joint cost allocated to the other products would decrease only if the sales value of one or both products is decreased.
Phisical output method
The physical output method does not consider sales value or net realizable value of any of the joint products. In theory, a product with a low net realizable value might have a high percentage of physical output, resulting in that product receiving a high percentage of joint cost. It is possible in this case for a product to receive more allocated joint cost than its net realizable value.
