Cost Measurement and Assignment Flashcards
What is marginal cost or revenue?
Additional cost or revenue resulting from one more unit of output.
Variability is defined in terms of what?
Volume, activity or output
How do average fixed cost and average variable cost behave?
Average fixed cost decreases as volume increases, while average variable cost increases as volume increases (subject to the relevant range).
Define “product costs.”
Cost that can be associated with making or acquiring goods for sale; product costs are held in inventory until the products are sold; also known as inventoriable costs.
Define “conversion costs.”
Costs necessary to convert raw materials into a finished product: comprised of direct labor costs plus factory overhead costs.
Define “prime costs.”
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs; also known as direct costs.
List the three factors of production.
- Direct Material;
- Direct Labor;
- Factory Overhead.
Define “normal spoilage.”
Unavoidable as part of the manufacturing process. Normal spoilage is included with other costs as an inventoriable product cost.
Define “abnormal spoilage.”
Unplanned but considered controllable, for example, spoilage due to natural disaster, carelessness, inefficiency, or accidents. Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.
Describe the differences between retail inventories and manufacturing inventories.
Retail = merchandising inventory; Manufacturing = raw materials, work-in-process and finished goods.
Describe the accounting treatment of proceeds from sale of scrap.
If the amount of scrap in immaterial, any monies received from the sale of scrap can be used to reduce factory overhead, and thereby reduce Cost of Goods Sold. Alternatively, if the value of scrap is significant and is saleable, it can be treated as “other sales” in the revenue
Describe the accounting treatment of normal spoilage.
Included with other costs as an inventoriable product cost.
What is the difference between “mixed costs” and “step-variable costs”?
Mixed costs have a fixed component and a variable component, while step-variable costs remain constant in total over a small range of procuction levels, but vary with larger changes in production volume.
Define “relevant range.”
(1) the range of activity for which the assumptions of cost behavior reasonably hold true; AND (2) the range of activity over which the company plans to operate.
Define “shared services”.
An arrangement where one part of an organization provides an essential business process where previously it had been provided by multiple parts of that same organization.
Describe the differences between off-shoring and outsourcing.
Outsourcing is always outside of the company (but may or may not be outside the country). Off-shoring is always outside of the country (but may or may not be outside the company).
What is usually the main reason for outsourcing?
Outsourcing is often used to lower cost and increase quality by utilizing a vendor’s specialization.
How is Business Process Reengineering (BPR) different from incrementally reducing non-value activities?
BPR often involves an extreme transformation by analyzing and making sweeping improvements to an entire process.
What does process management do that activity-based costing (ABC) alone does not do?
Increase manager understanding of the cause-and-effect relationships involved between processes and the resources they consume, and promote the elimination of waste.
Compared to traditional costing, how does ABC treat high-volume simple products compared to lower-volume complex products?
With ABC, costs tend to shift away from high-volume, simple products to lower-volume, complex products.
When can activity-based costing be used?
With job order and process costing systems; standard costing and variance analysis, and service businesses as well as manufacturers.
When does absorption costing income equal direct costing income?
When the number of units sold equals the number of units produced, absorption costing and direct costing produce identical incomes. (Note: This assumes that fixed cost per unit remains the same from one period to the next.)
