Decision Making Flashcards by Ryan Sturgis

Total cost =

Fixed + Variable (x, cost driver)

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Direct Materials include..

Physically included in final product (Freight in, Insurance in transit, storage, import duties, purch/rec department costs)

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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)

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Prime costs

DM and DL

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Conversion costs

DL and Man OH

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Products costs

Manufacturing costs - DM, DL, Man OH (Prime and Conversion costs). Normal spoilage

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Period costs

Non-manufacturing costs - SG&A, Marketing costs, Freight out, Re-handling costs, Abnormal spoilage, expenses in period

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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)

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Pre-determined OH rate

Est OH costs / Est DL $/hrs

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Dollars over non-dollars equals..

Dollars over dollars equals..

Dollars

Percentage

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JE to apply OH

Debit WIP

Credit Factory OH applied

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JE for actual OH

Debit Factory OH control

Credit Cash/Liability for materials

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JE for under/over applied

Debit Factory OH applied
Credit Factory OH control
Offset to CGS (Debit is underappied, Credit overapplied)

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Raw Materials calculation

Beg RM
\+ Purchases
= Available for use
- End RM
= Direct Materials used (to WIP)

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CGM (WIP) calculation

Beg WIP
\+ Costs added to production (DM,DL, applied OH)
= Available to FG
- End WIP 
= CGM (to FG)

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Finished Goods/CGS calculation

Beg FG
\+ CGM (from WIP)
= FG Available
- End FG 
= CGS

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Absorption/Full costing/GAAP I/S:

Sales
- Var CGS
- Fixed CGS
= Gross margin
- Var SG&amp;A
- Fixed SG&amp;A
= Operating income

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Variable/Direct/Prime/CM/Internal I/S:

Sales
- Var CGS
- Var SG&amp;A
= CM
- Fixed Man Costs
- Fixed SG&amp;A
= Operating income

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Sales
- Var costs
= CM
- Fixed costs
= Operating profit

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Margin of Safety

Total sales - Break Even sales = MOS

* $MOS/Total sales = % MOS

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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

1. Use relevant costs only 2. Ignore sunk costs (fixed MO, etc) 3. Opportunity cost is a must

2 common approaches to product pricing

1. CM approach- based on relevant VC plus add't FC necessary for increased production 2. 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