Definitions Flashcards
associating costs with the type of activity for which that cost is incurred
Classification by Function
task performed each time a batch is processed. Volume measure at batch level – depend on # of batches processed, rather than # of units produced. Activity measure # of: PO’s, production orders, setups, material moves.
BATCH LEVEL ACTIVITY
increase total sales or decrease the break-even point or both. To decrease break-even point either decrease fixed expenses or increase unit CM. To increase unit CM must either increase selling price or decrease variable cost per unit
HOW CAN THE MARGIN OF SAFETY BE INCREASED?
Marketing selling and administration
period cost
a segment whose manager is responsible for meeting revenue targets and is considered to have the authority to strongly influence (if not control) revenues.
REVENUE CENTRE
2 step system - cost are assigned to products on the basis of activities they consume.
ACB COSTING
the price charged when one segment of an organization provides goods or services to another part of the organization
TRANSFER PRICE
Manufacturing/nonmanufacturing or product/period
Classification by function
small batches or custom production; large variety of different products. E.g. custom homes, auto repair shops, greeting cards, services-accounting, legal, advertising.
JOB ORDER COSTING
a cost that differs between 2 alternatives. can be fixed or variable
differential costs
costing method. Includes both fixed and variable (fully absorbs overhead costs). Includes: DM, DL and V/F MOH as part unit/product. An “average” cost.
FULL ABSORPTION COSTING
Total cost increases as activity increases
Variable Cost
those labor hours that can be easily traced to individual units of product
DL
investment in long term assets & basic org. structure of a firm.
Committed Fixed Cost
the net operating income that an investment centre earns above the required return on its operating assets
RESIDUAL INCOME (RI)
Uses only two data points to estimate VC and can produce inaccurate results
High-Low method
a segment of an organization whose manager is responsible and accountable for costs, revenues, profits, or investments
RESPONSIBIITY CENTRE
per unit cost decrease with increases in activity
Fixed Cost
product costing includes: DM, DL and allocated MOH using a predetermined overhead rate = Estimated total MOH/Estimated total allocation rate.
NORMAL COSTING SYSTEM
in manufacturing also considered a product/ conversion cost
Indirect cost
A cost that has already been incurred and cannot be changed by any decision made now or in the future
Sunk cost
amount remaining from sales revenue after all variable costs deducted. to cover fixed cost and earn a profit
Contribution Margin
costing method that includes only variable portion of MOH. DM, DL and variable MOH are included as part of the finished unit of product.
VAIABLE COSTING
actual overhead costs allocated to units. Actual costs not know until period end (not timely). Unit cost of the same product can fluctuate.
ACTUAL COSTING
an individual unit within an organization whose manager has the responsibility to carry out its activities
SEGMENT
the profit generated per dollar invested in operating assets. ROI = NOI/AOA OR MARGIN X TURN OVER = NOI/SALES X SALES/AOA
RETURN ON INVESTMENTS (ROI)
Total cost remains constant within a relevant range
Fixed Cost
the amount available to cover fixed expenses and earn a profit
CONTRIBUTION MARGIN
arise from annual decisions to spend in certain fixed cost areas.
Discretionary Fixed Cost
varies in response to more than a unit change in activity
Step VC
objective and precise and takes all data points into account R2 - variation explained by cost driver. higher the R the more reliable
Least square regression method
the relative proportion of fixed, variable and mixed costs in an organization
cost structure
Unit Cost is constant
Variable cost
uses all data points and visual inspection. Is not precise or duplicable
scattergraph method
all costs involved in acquiring or making a product
product cost
activity that relates to specific products (testing/design) and carried out regardless of #of batches or units produced. Depend on the # of different Products a firm produces. Activity measure: test time, design time, # part types.
PRODUCT LEVEL ACTIVITY
materials used in the finished product that can be easily and economically traced directly to the product. Raw materials
DM
a method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit
CM METHOD
only “relevant costs are considered in making decisions
cost classification by relevance
a volume measure (resources consumed vary in direct proportion to # of units produced); an activity is performed each time a unit is produced. Activity measure: mhrs, DLhrs, #units.
UNIT LEVEL ACTIVITY
Income before income and taxes – also referred to as EBIT earnings before interest and taxes
NOI
a fixed cost that supports more than one business segment but is not traceable to any one segment.
COMMON FIXED EXPENSE/COST
cannot be easily be easily or economically traced to a costing object
Indirect Cost
a segment where the manager is responsible for costs but not revenues, profit or investments. Service units accounting, IT, HR, general admin.
COST CENTRE
used to apply MOH costs to products. Ideally it should be a cost driver of the overhead cost. DL hours, machine hours.
ALLOCATION BASE
a first step at improving, same limitations as plant wide allocations but at a departmental level
LIMITATIONS OF DEAPARTMENT OVERHEAD ALLOCATION (RATES)
Held on the BS and expensed to match the revenue generated from sale
product cost
a measure of management’s ability to control operating expenses in relation to sales. Margin = NOI/AOA
MARGIN
a multi-dimensional performance measurement system, which contains measure along at least dimensions: financial; customer, internal business processes; learning & developement
BALANCED SCORECARD
an organization where decision making is made by a single managers or a small management team
CENTRALIZED ORGANIZATION
classifying as variable or fixed to assist in in managers predictions
Cost classification by behavior
cash, accounts receivable, inventory, pp&e, and all other assets held for productive use in an organization
OPERATING ASSETS
on the differences between alternatives arte relevant
Differential Costs
cost object - department, division, product, product line, customer, territory
Cost classification by traceability
Income before income and taxes – also referred to as EBIT earnings before interest and taxes
NET OPERATING INCOME
a measure of whatever causes the incurrence of a variable cost
activity base
shows the financial positions of a company at a specific point in time
balance sheet
varies in direct proportion with output/activity
true VC
sales generated for each dollar invested in operating assets. TO = SALES/AOA
TURNOVER
MOH
Indirect Cost
refers to the relative proportion of fixed and variable costs in an organization. Cost structure impacts profit stability – the higher the proportion of fixed costs the higher the DOL which increases income volatility.
COST STRUCTURE
units, #batches, #products do not cause these costs to occur. These are the general plant organizational structure cost (insurance, tax, amort, plant mgmt salaries). Activity measure: arbitrary usually DLhrs.
FACILITY LEVEL/SUSTAINING ACTIVITY
A cost that is never relevant
Sunk Cost
a fixed cost incurred because of the existence of a particular business segment (a FC that can be directly traced to an individual segment)
TRACEABLE FIXED EXPENSES/COST
shows the firms earnings over a period of time (usually quarterly or annually)
income statement
Cost object - department, division, product, product line, customer, territory
cost classification by traceability
M, DM, DL, MOH
product cost
inventoriable cost
Product Cost
Expensed on the IS in the period incurred
period cost
does not capture difference in consumption of MOH resources; relies on volume based allocation bases (eg DL hours); may lead to cost distortions and inappropriate pricing.
LIMITATIONS OF PLANT WIDE ALLOCATION OVERHEAD ALLOCATION
A cost that varies in direct proportion to changes in activity level.
Variable Cost
difficult to adjust in short term, will impair profitability or long-term goals
Committed Fixed Cost
is the range of activity within which the assumptions made about cost behavior are valid
relevant range
Inventoriable accts: DM, WIP, FG
Balance sheedt
an average cost based on a certain volume.
Unitized Fixed Costs
a tool that helps managers understand the interrelationships between cost, volume, and profit
CVP ANALYSIS
a measure, at a given level of sales, of how a % change in sales volume will affect profits. DOL = CM$/Net Income$
DOL (DEGREE OF OPERATING LEVERAGE)
an organizational segment whose manager is responsible for the segment’s profitability and has the authority to strongly influence both cost and revenues
PROFIT CENTRE
has a significant impact on decision making and planning
Cost Structure
relevant costs: differential and opportunity Non-relevant costs: sunk costs
cost classification by relevance
an organization where decision making is not confined to a few top executives but, rather, is spread throughout the organization
DECENTRALIZED ORGANIZATION
VC = Change in cost/change in activity FC = total cost - VC element Y = a + bx Y = TMC; a = TFC; b = unit variable cost; x = activity level
Mixed Cost Formulas
continuous flow (gasoline, cement) of homogeneous units results in average costing. Large batch (new auto’s) “discrete process” with distinct units.
PROCESS COSTING
a measure of how sensitive net income is to a given % change in sales. OL = CM$/Net income$
Operating leverage
a segment manager who is responsible and accountable for costs, revenues, profits, or investments
RESPONSIBILITY CENTRE
all costs not included in product costs
period cost
the level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equal total fixed expenses
BREAK EVEN POINT
the net operating profit after tax that an investment centre earns above the cost of capital. Similiar to residual income.
ECONOMIC VALUE ADDED
A cost that can be easily and economically traced to a cost object (direct or indirect)
Cost classification by tracibility
the excess of budgeted (or actual) sales over the break-even volume of sales
MARGIN OF SAFETY
(full costing)
FULL ABSORPTION COSTING
all cost associated with manufacturing except DM, DL, Indirect Labor
MOH
the costs incurred to generate particular revenue should be recognized as an expense in the same period that the revenue is recognized
accrual accounting and matching principle