Decision Making Flashcards
What are the three elements of production?
(1) direct materials (DM) = materials that end up composing the finished product and can be easily traced to the finished product
(2) direct labor (DL) = labor that acts directly on the product to transform direct materials into finished products and can be easily traced to the finished product
(3) manufacturing overhead (MOH) = all other production costs, i.e. costs that cannot be traced easily to a finished product
- also called factory overhead, indirect factory costs
What kind of things can be included in manufacturing overhead (MOH)?
(i) indirect materials and labor – can’t be traced easily to finished product
(ii) factory utilities
(iii) wages/salary for maintenance workers or managers
(iv) factory machinery and depreciation
Is overtime pay for direct laborers considered to be direct labor or manufacturing overhead?
Manufacturing overhead – the rationale is that overtime costs are to be attributed not simply to the extra products created, but to the total volume of products, since that is what requires overtime
What elements are included in conversion cost?
It is the cost to convert direct materials to a finished product, so it involves (a) direct labor and (b) manufacturing overhead
What elements are included in prime cost?
It includes all costs easily traceable to finished products, so it involves (a) direct materials and (b) direct labor
What is the difference between product costs and period costs?
Product = all costs related directly or indirectly to physical products, and thus included in inventory
-recognized as the cost of goods sold when physical products are sold
Period = not directly or indirectly related to physical products, e.g. G&A expenses and selling expenses
-recognized in the period when the cost is incurred
What are different ways that costs can be categorized?
(i) traceability – whether they can be traced to finished products
(ii) behavior – whether fixed or variable
(iii) function – what they do within the business, e.g. selling costs
(iv) object of expenditure – what goods or services they purchase, e.g. wages, advertising expense
(v) controllability – whether managers can influence the amount of the cost (within a given amount of time)
What are two different kinds of fixed costs?
(1) committed = related to long-term assets and equipment that have a cost independent of production volume
(2) discretionary = related to activities budgeted to occur by management whose cost is independent of production volume, e.g. R&D costs and advertising costs
How does a measure of total fixed cost (TFC) compare to a measure of average fixed cost per unit (AFC)?
TFC will always be a constant, while AFC will be decreasing as production volume increases
Specifically, the graph for AFC will have a convex negative slope – it will bulge towards the origin
How does a measure of total variable cost (TVC) compare to a measure of average variable cost per unit (AVC)?
TVC will steadily increase as production volume increases, while AVC will be a constant amount
TVC will have a constant positive slope – not convex or concave
What are mixed costs?
Costs with both fixed and variable components (thus called semivariable), since they vary with total production but are not zero for zero production, e.g. electricity and maintenance
These can sometimes be split up into their variable and fixed components to simplify calculations
What are step-variable costs?
Costs that are fixed within specific ranges of input, but have specific points at which the cost “steps up” to the next level – so the total-cost graphs for these look like stair steps
E.g. if supervisors are needed for every 20 factory workers, then the supervisory cost would be fixed for the first 20, be twice as much for 21-40, be three times as much for 41-60, etc.
Generally speaking, how do total costs and average costs relate to volume?
Total = directly
Average = inversely
How do learning curves relate to labor productivity and labor costs?
Because workers get better at their job than when they first start, they will be able to produce more products as they gain experience
Thus labor costs will go down per unit produced as time goes on (though there will be a limit to this)
What is an experience curve?
Very similar to a learning curve, except that it relates to a group rather than individuals – refers to how well a given group can perform a task as a firm or within a firm, e.g. how well an assembly line can work together to efficiently complete their segment of the production process
What is the main difference between a manufacturer’s income statement and a merchandiser’s income statement?
The manufacturer’s statement includes a cost of goods manufactured used to calculate the cost of goods sold, rather than calculating it from beginning inventory, purchases, and ending inventory
Cost of goods manufactured = cost of goods that are completed and moved to the inventory of finished goods
What is the overall structure for a cost of goods manufactured schedule?
Beg. work-in-process (WIP) \+ manufacturing costs incurred = total manufacturing costs - ending WIP = cost of goods manufactured
Within the cost of goods manufactured schedule, how are the “manufacturing costs incurred” measured?
Direct materials (DM) used
+ direct labor (DL) used
+ manufacturing overhead (MOH)
= manufacturing costs incurred
Within the calculation of manufacturing costs incurred, how are direct materials (DM) used measured?
Beginning balance of DM \+ purchases = DM available for use - ending balance of DM = DM used
Within the calculation of manufacturing costs incurred, how is direct labor measured?
Not with any special schedule – just measured as the total wages paid to the relevant workers, usually a single given amount
Within the calculation of manufacturing costs incurred, how is manufacturing overhead measured?
Indirect material
+ indirect labor
+ misc. manufacturing costs
= MOH
How is work-in-process inventory calculated?
Beg. balance of WIP \+ material, labor, and MOH used = goods available to finish - goods finished = ending balance of WIP
How is finished goods inventory calculated?
Beg. balance of FG \+ goods finished (from the WIP schedule) = goods available for sale - cost of goods sold = ending balance of FG
What is cost-volume-profit (CVP) analysis?
Sees how different decisions impact cost, volume, and profit, and is especially concerned with break-even points, i.e. at what point of volume revenues overtake costs (thus it is also called break-even analysis)
What are some assumptions of CVP analysis?
(i) costs are properly classified as either fixed or variable (e.g. there is a relevant range over which fixed costs do not change)
(ii) production efficiency is constant
(iii) inventory is constant (production = sales)
(iv) volume is the only relevant thing affecting costs
(v) the sales mix of multiple products is constant
(vi) costs and revenues are linear over the relevant range
What does a CVP chart generally look like?
With units of output on the x-axis and dollars on the y-axis, a P/V chart shows positive-sloped lines for sales and total costs at given levels of output
At any given point of output, the profit (or loss) is the difference between the sales and total cost – and the point of intersection is the break-even point
CVP charts also include a (horizontal) line for fixed costs and a line for variable costs (parallel to total costs)
