Definitions Flashcards
Cost object
Anything for which costs are measured and assigned. Examples include: activities, products, plants, and projects
Activity
An activity is a basic unit of work performed within an organization. Examples include materials handling, inspection, purchasing, billing and maintenance.
Quality product/service
One that exceeds expectations
Quality of performance
measure of how a product meets its specifications
Defective product
One that does not conform to specifications
Robustness
Exact conformance to target value
Cost of quality
Costs that exists because poor quality may or may not exist
Control activities
Performed by an organization to prevent or detect poor quality
Failure activities
Performed by an organization or its customers in response to poor quality
Failure costs
costs incurred by an organization because failure activities are performed
Just-in-time manufacturing, what is it and how does it decrease costs?
- Production is made in cycles (“small factories”) when needed and quantity demanded
- Decreases costs by multitasking skills (eliminate e.g. inspection and decentralization.
Lean manufacturing
Persistent pursuit and elimination of waste
The controller (management accountant):
Supervises accounting departments. Participates in planning, controlling and decision-making activities Responsible for both internal and external accounting requirements
The treasurer
Responsible for the finance function, raises capital and manages cash, investments and investor relations. In charge of credit and collections as well as insurance
Direct tracing
Process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object.
Overhead
production costs other than direct materials and direct labor, i.e. depreciation, taxes, indirect costs.
Prime cost:
Sum of direct labor and direct material
Conversion cost:
Sum of direct labor and overhead cost
Period costs
Expenses not inventoried, and accounted for in the period they are incurred, e.g. marketing or administrative
Learning-Curve
Labor hours per units decrease with units increase
Experience-Curve
The more you perform a task, the lower the cost is of doing it
Traditional cost accounting
Assumes that all costs can be classified as fixed or variable with respect to changes in the units or volume. Uses only unit-based activity drivers to assign costs
Activity-based cost accounting
Emphasizes tracing over allocation (i.e. putting the costs to the direct cost object instead of allocating the indirect costs) Uses both unit- and non-unit based activity drivers
Cost behavior
The term is used to describe whether a cost changes when the level of output changes, e.g. fixed or variable cost
Practical capacity
The activity level where the activity is performed efficiently
The industrial engineering method
A forward-looking method of determining, through physical observation and analysis, just what activities, in what amounts, are needed to complete a process.
Operating leverage
Use of fixed costs to extract higher percentage changes in profits as sales activity changes. The greater the operating leverage, the more the changes in sales activity will affect profits. The mix of costs that an organization chooses can have a considerable influence on its operating risk profit level.
Flexible budgets
Total budgeted production costs increase as output increases. Flexible budget variances are generated by comparing budgeted costs for the actual level of activity with actual costs for the same level
Responsibility center
A part of the business whose managers is accountable for specified activities. Types e.g. revenue center (responsible only for revenues), profit center (responsible for both revenues and costs)
Responsibility accounting
A system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome.
Residual income
Difference between operating income and the minimum dollar return required by a company’s operating assets
Economic Value Added (EVA)
After-tax operating profit minus the total annual cost of capital (i.e. After tax OI – Capital*WACC). If positive, the company is creating wealth. If negative, the company is destroying wealth
Transfer prices
The prices charged for goods produced in one division and transferred to another. The area between the floor and the ceiling is called bargaining range. If division is operating on full capacity, it will only accept market price or more In general: Multinational companies might shift costs to high tax countries and revenue to low tax countries with the purpose to evade taxes.
Competitive advantage
creating customer value for the same or lower cost than competitors
Customer value
difference between customer realization and customer sacrifice (i.e. experienced value compared to what you pay).
Internal linkages:
Relationships among activities within a firm’s value chain.
External linkages:
Relationships among activities outside a firm’s value chain, i.e. with suppliers and customers.
Value chain analysis
(Identifying and exploiting internal and external linkages to strengthen a firm’s strategic position)
TQC:
Strives for a defect-free product design and manufacturing process
AQL:
Permits or allows defects to occur provided that it do not exceed a predetermined level
Value adding activities:
Necessary to remain in business. Contribute to customer value and/or help to meet an organization’s needs
Value added costs:
The costs to perform value added activities with perfect efficiency. If the following conditions are met the activity is seen as value adding: The activity produces a change of state. The change of state was not achievable by previous activitiesThe activity enables other activities to be performed
Non value adding activities:
Unnecessary and are not valued by internal or external customers. Fail to produce a change in the product’s state or replicate work because it wasn’t done correctly the first time
Manufacturing cycle efficiency:
measures the proportion of manufacturing cycle time attributable to value-added processing: Without waste, ratio should be 1. Formula: Processing time/(Processing time + Non value added time, i.e. waste)
Velocity:
number of units of output that can be produced in a given period of time
Cycle time:
is the length of time it takes to produce a unit of output.
Activity capacity:
The number of times an activity can be performed
Kaizen costing:
characterized by constant , incremental improvements to existing processes and products. Kaizen costing is concerned with reducing costs by identifying small, continuous improvements for existing products and processes
Non value added costs:
Costs that are caused either by non-value-adding activities or the inefficient performance of value-adding activities. Examples of non value adding activities: Scheduling, Moving, Waiting, Inspecting, Storing
