Exam 2: Chapters 1, 2, 3 Flashcards
Cost
Any expenditure or resource that we use in order to achieve an objective
Actual cost
Historical cost, objective, verifiable, not a projection and can prove that it happened because we have evidence of cost through an invoice or receipt
Cost object
Anything for which we desire a measure of cost
Two costing system stages
Accumulation and assignment
Two parts of assignment
Tracing and allocation
Accumulation
Collect costs into natural categories
Tracing
Tracing the cost directly to the cost object
Allocation
Figure out a reasonable method to split a cost among the cost objects that use that resource
Trace or allocate: direct cost
Trace
Direct costs
Trace, more exact but might be more expensive
Trace or allocate: indirect costs
Allocate
Indirect costs
Allocate, less exact but may be cheaper and easier
Three factors affecting cost classification
More technology (trace), materiality or expensiveness (trace), fewer products or cost objects (trace)
Variable costs
Stay at a constant dollar amount per unit produced within the relevant range of output, changes total dollars paid out based on number of units produced
Fixed costs
Total dollars paid out stay constant within the relevant range, dollar amount per unit produced changes based on number of units produced
Relevant range
Range of output in which the variable cost and fixed cost assumptions remain true
Service companies
Revenue - operating expenses = net income
Merchandising companies
Revenue - COGS = gross profit - operating expenses = net income
Manufacturing companies
Revenue - COGS = gross profit - operating expenses = net income
3 different types of inventory
Direct materials, work-in-process, finished goods
Direct materials
“Ingredient” that becomes part of a product and leaves with the product when the product is sold
Work-in-process
Unfinished product
Finished goods
Product ready to ship to customer
Three manufacturing cost classifications
Direct materials costs, direct manufacturing labor, indirect manufacturing costs (manufacturing overhead)
Direct materials costs
Become part of the finished product that is sold to customers, “dm”
Direct manufacturing labor
Converts direct materials into finished goods, “dl”
Indirect manufacturing costs (manufacturing overhead)
All other costs in the factory that are not dm or do, “moh”
Inventoriable costs
Factory costs, dm + dl + moh
Period costs
“Operating expenses:” selling expenses and general & administrative expenses: accounting, R&D, HR
Prime costs
Direct manufacturing costs - dm + dl
Conversion costs
Dl + moh, all costs necessary to “convert” dm into finished goods (fg)
Product costs
Factory costs, dm + dl + moh
Contribution margin income statement
Groups costs by behavior
Financial reporting income statement
Groups costs by function/location
How does contribution margin differ from gross profit?
GP- profit from selling products, CM- profit available to cover fixed costs
Six foundational assumptions in CVP
-changes in production/sales volume are the sole cause for cost and revenue changes
-total costs consist of fixed costs and variable costs
-revenue and costs behave and can be graphed as a linear function (a straight line)
-selling price, variable costs per unit, and fixed costs are all known and constant
-in many cases only a single product will be analyzed. If multiple products are studied, their relative sales proportions are known and constant
-the time value of money (interest) is ignored
Basic CVP formula
Revenue - variable costs - fixed costs = operating income
Two supporting CVP formulas
Revenue = selling price x quantity sold
Variable costs = variable cost per unit x quantity sold
Contribution margin
Revenue - VC
Contribution margin per unit
USP - UVC
Contribution margin percentage (ratio)
CM/sales or UCM/USP
Broken down cost-volume-profit equation
(Selling price x sales quantity) - (unit variable costs x sales quantity) - fixed costs = operating income
Break even point definition
No profit or loss at the given sales level
Break even point
Sales - variable costs - fixed costs = 0
Break even number of units
Fixed costs / contribution margin per unit, round up
Break even revenue
Fixed costs / contribution margin percentage
Quantity of units required to be sold
(Fixed costs + operating income) / contribution margin per unit
After-tax profit
Net income = operating income x (1-tax rate)
Operating income
Net income / (1-tax rate)
Margin of safety definition
Indicator of risk, measures the distance between budgeted sales and break even sales
MOS
Budgeted sales - BE sales
MOS ratio
MOS / budgeted sales
Operating leverage definition
The effect that fixed costs have on changes in operating income as changes occur in units sold, expressed as changes in contribution margin
Operating leverage
Contribution margin/operating income
(Sales-VC)/(sales-VC-FC)
