Decision Making Flashcards
Total cost =
Fixed + Variable (x, cost driver)
Direct Materials include..
Physically included in final product (Freight in, Insurance in transit, storage, import duties, purch/rec department costs)
Manufacturing Overhead
All other costs not DM, DL
Indirect materials
Indirect labor (payroll taxes, benefits for man EE’s, rent/depreciation of factory assets, lubricants, shop supplies, utilities to keep factory open)
Prime costs
DM and DL
Conversion costs
DL and Man OH
Products costs
Manufacturing costs - DM, DL, Man OH (Prime and Conversion costs). Normal spoilage
Period costs
Non-manufacturing costs - SG&A, Marketing costs, Freight out, Re-handling costs, Abnormal spoilage, expenses in period
3 different cost systems
Actual (DM, DL, Man OH are all actual)
Standard (All costs based on standards)
Normal (DM, DL based on actual, Man OH on standards)
Pre-determined OH rate
Est OH costs / Est DL $/hrs
Dollars over non-dollars equals..
Dollars over dollars equals..
Dollars
Percentage
JE to apply OH
Debit WIP
Credit Factory OH applied
JE for actual OH
Debit Factory OH control
Credit Cash/Liability for materials
JE for under/over applied
Debit Factory OH applied
Credit Factory OH control
Offset to CGS (Debit is underappied, Credit overapplied)
Raw Materials calculation
Beg RM \+ Purchases = Available for use - End RM = Direct Materials used (to WIP)
CGM (WIP) calculation
Beg WIP \+ Costs added to production (DM,DL, applied OH) = Available to FG - End WIP = CGM (to FG)
Finished Goods/CGS calculation
Beg FG \+ CGM (from WIP) = FG Available - End FG = CGS
Absorption/Full costing/GAAP I/S:
Sales - Var CGS - Fixed CGS = Gross margin - Var SG&A - Fixed SG&A = Operating income
Variable/Direct/Prime/CM/Internal I/S:
Sales - Var CGS - Var SG&A = CM - Fixed Man Costs - Fixed SG&A = Operating income
CM
Sales - Var costs = CM - Fixed costs = Operating profit
Margin of Safety
Total sales - Break Even sales = MOS
* $MOS/Total sales = % MOS
If either actual volume is lower than expected or actual fixed costs are greater than expected…
If actual volume is greater than expected amount or if actual fixed overhead is lower than the expected amount…
- The amount of overhead applied will be lower than the actual amount and fixed overhead will be underapplied.
- The amount of overhead applied, which is actual volume times the predetermined rate, will exceed the actual amount and fixed overhead will be overapplied
The break even point is reached when…
The contribution margin from each unit equals unit fixed costs
List some variable costs
DM, DL, Delivery charges, Commission
Special Order characteristics
- Special order selling price minus relevant variable man costs/unit= unit CM x units= inc in income
- Full capacity, can only choose one (price>VC/unit + opportunity cost [or CM of alternative use])
- Excess capacity, they can do both so accept if
price > VC/unit - Fixed costs ignored unless special order will increase FC
Make or Buy Decision characteristics
- When calculating cost to manufacture, include amount of fixed that will be eliminated if buy
- Compare imcremental costs, but minus any operating profits (opportunity costs) from being able to utilize the factory
- OC of using facility for another purpose (man diff product, lease, sell, etc) is subtracted from cost of purchasing from outside supplier, or added to the cost of production
Break Even in Sales Dollars
Fixed + Profit (Loss)
/ CM ratio (CM/sales price)
Retain or Eliminate Decisions…
- Understand that allocated costs do not disappear when a division or product line is discontinued (CEO salary doesn’t decrease when product line stops)
- If CM of line>fixed that would be eliminated, then DON’T eliminate the line
- Remember: when calculating the eliminate, don’t include avoidable FC of line, but include unavoidable FC
Break Even in Units
Fixed + Profit (Loss)
/ Unit CM
** Figure out CM first with info given and go back and apply to projected profit using sales amount given
Sales =
Variable exp
+ Fixed exp
+ Net income
Unit CM =
Unite sales price
- Unit variable costs
CM ratio
Unit CM / Unit sales price
or..
Total CM / Total sales
Diff in income between absorption and variable costing
Equal to fixed man OH per unit x inc/dec in units of inventory
If EI > BI, absorption will be…
HIgher income
If production > sales, then profit is..
Greater under absorption costing
Fixed cost per month=2,500
Unit selling price=100
Variable cost % of sales= 60%
What annual sales must have to break even in dollars?
CM ratio = 40% and annualized fixed costs are 30,000
30,000/40%= 75,000
Fixed costs =
CM per Unit x Break even in Units
How to figure out Absorption vs. Variable costing income differences without the sales data…
Try to figure out what percentage of units were added to ending inventory (produced 100, sold 80 so 20 was added to EI) and then take that portion of the fixed MO
Variable costs include…
DM + DL + Variable OH
Incremental revenue =
Final sales value minus Sales at split off
Total composite units sold equals…
Total CM (fixed costs + profit needed) / Composite CM = Total composite units x actual units sold (4 units sold of A for every one of B sold means actual units is 5) = Actual units sold
High-low method
Find highest and lowest activity. Take difference in cost (high-low) divided by diff in activity (high-low) to get variable cost per.
Fixed= Total cost (in a given month) - (VC per unit x units)
Cost-volume-profit assumes that both…
Selling price and variable cost per unit do not change with volume changes, so variable costs are the same % of sales revenue at either point of graph; Fixed costs are greater % of revenues at the lower point on graph
The independent variable is the..
cost driver (DL hours, machine hours, etc)
standard costs are determined by dividing…
budgeted costs by normal volume
Step Variable Costs
Relatively fixed over small range of output but are variable over large range of output
Incremental Cost
The difference in total cost between the two alternatives (don’t let fixed costs fool you)
Short term cost analysis
- Use relevant costs only
- Ignore sunk costs (fixed MO, etc)
- Opportunity cost is a must
2 common approaches to product pricing
- CM approach- based on relevant VC plus add’t FC necessary for increased production
- Cost-plus pricing- takes cost and adds predetermined markup
= % markup on selling (GP%)
/ 1 - % markup on selling
Weighted CM =
Composite CM=
CM x Sales mix ratio
Total weighted CM of all products
Composite units (#units from each product) = Break even composite units for each= Break even composite dollars=
Fixed costs/Composite CM
Composite units x sales mix ratio for each product
Break even composite units for each x selling price for each
