Cost accounting Flashcards
How retailers measure COGS
That’s the amount paid for the goods and delivery to warehouse
Does positive income guarantee positive cash flow?
Having positive income does not guarantee positive cash flow
What does efficiency measure?
Efficiency measures how little waste is created when pro ducting and selling a product
What does productivity measure?
Productivity considers how to maximize sales and profits while using as few assets as possible
What is the difference between efficiency and productivity?
Efficiency tries to reduce waste while productivity tries to use assets to generate more revenue and net income
What is the minimum amount a new investment must generate?
All new investments should earn at least enough money to cover their cost of capital
What is the relation between asset turnover and productivity?
The higher is the asset turnover, the mrs productive the company
What is a direct cost?
It is a cost that can be easily traced to individual product that you make (flower for cookies)
What is an indirect cost?
It is a cost that cannot be easily traced to individual product that you make (pan coating for cookies)
What is direct material?
Direct materials are raw materials that you can directly trace to the manufactured product
How to compute cost of direct materials for a product?
To compute the cost of direct materials for any product just add up the cost of all the individual components needed to make the product
What is direct labor?
Direct labor is the cost of paying employee to make your products
How to find total direct labor cost?
First estimate how long each kind of worker takes to do the job, then multiply this time period by the hourly cost of paying each worker
What is indirect material?
Raw material needed to make products that cannot be easily traced to finished product
What i indirect labor?
The cost of labor that is needed to make products but that cannot be easily traced to the finished product
What are product costs?
The costs of making products usually inside the factory. These costs include raw materials, labor and overhead. After the product is made the costs becomes an asset: inventory
What are period costs?
The costs of running your business, usually outside the factory, that is, all the business’s costs except its product costs (office rent, income taxes, advertising)
How to estimate assets turnover?
Asset turnover=(Revenue/Average Assets)
How to improve turnover?
Use all assets continuously. Don’t let them sit around doing nothing. e.g. if you run a factory, make sure your machines manufacture product continuously.
Don’t by inventory until you need it. Keep just enough stock to keep customers happy
Increase sales without increasing assets. Expand working hours etc
Reduce your assets
How to estimate return on assets?
Return on assets= (Net Income/Average assets)
How to compute variable cost per unit?
To compute variable cost per unit divide total variable cost by the number of units produced.
Variable cost per unit= (total variable cost/Number of units produced)
What happens if a company has high fixed costs?
Such company would have to have significant activity to produce sales to offset those costs.
Fixed costs in aggregate remain the same regardless of changes in activity.Fixed costs per unit decrease with volume.
How to calculate total costs?
Total costs=(variable cost per unit*units products)+total fixed costs
How to allocate overhead costs per unit?
- Add up total overhead (indirect materials, indirect labor, , rent etc
- Compute the overhead allocation rate=(total overhead|/total direct labor hours)
- Multiply the overhead allocation rate by the number of labor hours needed to make each product.
What is activity-based costing
It’s when you divide production process into cost pools and cost pools into different activities. Each activity then becomes a cost driver. Drives drive costs of activity in each cost pool.
What is contribution margin?
It is a measure that helps you to compute how much you need in sales to break eve or achieve a target level of profit
How is contribution margin calculated?
Contribution margin=sales-variable costs
How to determine overall profitability?
To determine overall profitability, compare total contribution margin to fixed costs. Net income equals the excess of contribution margin over fixed costs
What does contribution margin per unit measure?
Contribution margin per unit measures how sales affect profitability
How to calculate contribution margin per unit?
Contribution margin per unit=Sales per unit-Variable costs per unit
What is contribution margin ratio?
Contribution margin ratio is a measure of percentage of sales that would increase net income.
How to calculate contribution margin ratio?
Contribution margin ratio=total contribution margin/total sales or contribution margin per unit/sales price per unit
Ex[ample: if contribution margin - 540 and sales =900, contribution margin ratio =540/900=60%. This means that 60 cents of every sales dollar directly increases net income.
How to calculate net income using total contribution margin?
Net income=Total contribution margin-Fixed costs
What is break-even point?
The break-even point is the amount of sales needed to earn zero profit-enough sales so that you don’t earn a loss but insufficient sales to earn a profit.
What is margin of safety?
Margin of safety is the difference between your actual or expected profitability and the break-even point. It measures how much breathing room you have- how much you can afford to lose in sales before your net income drops to zero.
What is operating leverage?
Operating leverage is a measure of how changes in sales can affect net income. For a company with high operating leverage a relatively small increase in sales can have a fairly significant impact on net income
How to calculate operating leverage?
Operating leverage=Total contribution margin/Net income
What is cash payback method?
It is estimation how long a project will take to cover its original investment
How to calculate cash payback?
Cash payback period-Cost of investement/annual net cash flow
How to use cash payback method for investing decisions?
For investing decisions compare cash payback period of one project with that of another