Cost Accounting Flashcards
What are the Value Chain Functions?
- Research and Development
- Design
- Production
- Marketing
- Distribution
- Customer Service
- Desired ROA
What are examples of up-stream and down-stream activities in value chain functions
Upstream:
* Research and Development
* Design
* Supply
Downstream:
* Marketing
* Distribution
* Customer Service
What are Variable Costs and Fixed Costs?
Variable Costs:
* Change with production levels (e.g., raw materials, direct labor).
Fixed Costs:
* Remain constant regardless of production (e.g., rent, salaries).
What are Cost Object, Direct Cost, and Indirect Cost?
Cost Object:
* Any item (product, project, department) for which costs are measured.
Direct Costs:
* Costs directly traced to a cost object (e.g., materials, specific labor).
Indirect Costs:
* Costs not directly traceable to a specific cost object (e.g., utilities, rent).
Explain the three costs related to product cost
- Direct Material
- Direct Labour
- Manufacturing Overhead
What are Product costs and Period Costs
Product Costs are expenses directly associated with the production of goods, including direct materials, direct labor, and manufacturing overhead. These costs are included in inventory on the balance sheet until the products are sold.
Period Costs are expenses not tied to production and are expensed in the period they occur, such as selling and administrative expenses. These costs are recorded on the income statement when incurred.
Explain the inventoriable costs -> balance -> income statement components
Inventory Costs:
* Direct Material: Raw materials used to produce the product.
* Direct Labor: Wages paid to workers directly involved in manufacturing.
* Manufacturing Overhead: Indirect production costs like factory utilities, equipment depreciation, etc.
Balance Sheet Components:
* Raw Materials Inventory: Materials not yet used in production.
* Work in Process Inventory: Goods currently being manufactured.
* Finished Goods Inventory: Completed products ready for sale.
Income Statement Flow:
* Sales Revenue
* Less: Cost of Goods Sold (COGS) (direct material, direct labor, and manufacturing overhead for sold goods)
* Equals: Gross Profit
* Less: Selling & Administrative * Expenses (e.g., R&D, design, supply, marketing, distribution, customer service)
* Equals: Net Profit
Period Costs:
Expenses such as selling, administrative, and overhead that are directly included in Selling & Administrative Expenses and are not part of COGS.
Outline Manufacturing Overhead Costs
Many types of overhead costs:
* Property taxes, insurance, repairs related to manufacturing process. Factory ulitities, property taxes. Redpreication for factory, building equipment, production servision, etc.
Costs unrelated to manufacturing process are expensed (period)
Costs related to manufacturing process are accumulated in manufacturing overhead account (product)
Classify the costs into fixed or variable, indirect or direct and period or product:
* Direct labour
* Interest expense
* Manufacturing overhead
* Direct materials
* Adminstractive expenses
Direct Labor:
Variable, Direct, Product
Interest Expense:
Fixed, Indirect, Period
Manufacturing Overhead:
Fixed or Variable (depends on nature), Indirect, Product
Direct Materials:
Variable, Direct, Product
Administrative Expenses:
Fixed, Indirect, Period
What do the equations for Total Costs show?
Cost Structure:
* Total Costs = FC + (VC/unit x Activity) shows how total costs are affected by fixed costs and variable costs related to production levels. It highlights the relationship between cost behavior and activity levels.
Cost Composition:
* Total Costs = Direct Costs + Indirect Costs illustrates the breakdown of costs into those that can be directly attributed to a product versus those that support overall operations but cannot be directly traced. This helps in understanding where costs are incurred.
Cost Types:
* Total Costs = Product Costs + Period Costs indicates the distinction between costs associated with producing goods (product costs) and costs expensed in the current period (period costs). It helps in budgeting and financial reporting.
A Manfacturing Cost Accounting Systems involved three inventory accounts, what are these?
- Raw materials
- Work in progress
- Finish goods
Pre-determined Overhead Application Rate (POAR)
POAR = (Estimated total manufacturing overhead cost for the coming period) / (Estimated total units in the allocation base for the coming period)
Ideally, the allocation base is a cost driver that causes overhead – traditionally often direct labour hours
How to apply overhead to a product
Overhead applied = POAR * Actual activity
What is segmenting the overheads
Segmenting overheads means dividing overhead costs and allocating them based on different factors to improve accuracy. Businesses often split into departments or cost centers, assigning overheads based on relevant metrics like labor hours, machine usage, or space occupied. This helps better reflect the true cost of jobs, projects, or departments.
What are ‘price takers’
Price tasks are companies that price based off supply and demand. This occurs when products are not easily differentiated from competitor goods.
How to calculate target cost
Market price - Desired Profit
What are the budgets for BSNS115
- Sales forecast
- Production and Purchases budgets
- Collection of receipts and cash budgets
- Flexible budgets
What are the key differences between Management Accounting and Financial Accounting across the following fields:
* Service perspective
* Time frame
* Breadth of concern
* Reporting frequency and promptness
* Degree of precision
* Reporting standards
Service Perspective:
* Management accounting is internal (for managers).
* Financial accounting is external (for investors/creditors).
Time Frame:
* Management accounting focuses on the present and future.
* Financial accounting focuses on the past (historical data).
Breadth of Concern:
* Management accounting focuses on micro units (departments).
* Financial accounting covers the entire organization (macro level).
Reporting Frequency:
* Management accounting is frequent (daily/period-end).
* Financial accounting is annual.
Degree of Precision:
* Management accounting prioritizes relevance.
* Financial accounting demands high accuracy.
Reporting Standards:
* Management accounting has no formal standards.
* Financial accounting must follow GAAP and AASBs.
What is Cost Behaviour Analysis?
Cost Behaviour Analysis is the study of how specific costs respond to changes in level of business activity.
What are the different costs within Cost Behaviour Analysis?
Variable Costs:
* Costs that vary in total directly and proportionately with changes in the activity level.
* Remain the same per unit at every level of activity
Fixed Costs:
* Costs that remain the same in total regardless of changes in the activity level within a relevant range.
* Fixed cost per unit cost varies inversely with activity: as volumne increases, unit cost declines, and vice versa.
Mixed Costs:
* Costs that have both a variable element and a fixed element.
* Change in total but not proportionately with changes in activity level.
* TC = VC (Variable Cost) + FC (Fixed Cost)
* TC = VCPU * Quantity + FC
* y = mx + c
What are the two assumptions regarding cost behaviour?
Relevant Range
* This assumption states that cost behavior patterns hold true only within a specific range of activity levels, beyond which fixed and variable costs may change.
Linearity
* This assumption suggests that total costs can be represented as a straight line within the relevant range, meaning that costs will change proportionally with changes in activity levels.
What is Relevant Range?
The relevant range is the activity level range where cost behaviors are consistent (the range over which the company expects to operate during a year):
- Variable costs: Typically change proportionally with activity, but can become curvilinear at very high or low levels.
- Fixed costs: Stay constant within the range, but can change outside of it (e.g., renting more space or adding management).
Contribution Margin Format
Difference between sales revenue and variable expenses:
* Sales - VC = CM - FC = Profit / loss
CVP Analysis
Breakeven Point = (Total Fixed Costs) / ((Selling Price per Unit) - (Variable Cost Per Unit))
