M/A - Costing behaviour and Job costing Flashcards
What are the three factors that makeup product cost
- Direct material
- Direct labour
- Manufacturing overhead
- Which are all cost of inventory
What makes up prime cost, conversion cost, and period cost
- Direct material + Direct labour
- Direct cost used to manufacture a product
- DM & DL, you can easily trace the cost
Conversion costs - that are not directly related to DM
- These are DL & MOH, cost is converting raw material to finished product
Period cost - cost that does not count as product cost
Ex. Non-manufacturing, selling, administrative, R&D
Explain what fixed, variable, and mixed cost
Fixed cost - a cost that remains constant regardless of level of activity
Variable cost - Cost that increases in constant proportion with changes in activity level, cost per unit stays the same
Mix cost - a cost that possesses both variable and fixed cost
What are some examples of fixed and variable cost
Ex. Can have a fixed amount of payment each month and the variable would be the data of GB used in the month.
Ex. Variable utilities - electricity bill - depending on the amount used
Fixed - Car loan payment
How does relevant range effect different costing and provide an example
- Relevant range - is the level of cost that doesn’t change for a certain level of output
Ex. equipment are produce 0-250000 unit. If the company needs say 275000 in a year, needs to purchase other equipment
Step variable cost - varies due to activity level but is incremental.
Ex. Fixed costs are fixed up to a certain point, at which stage they incrementally increase. Large and significant
What is the formula for the cost function
TC = FC + VC*(Activity level (X))
Total cost/number of units = average cost per unit
How do you determine the cost function using high low method
Simple approach that uses the high and low observation
1. Select the high and low points of activity
2. Determine the variable cost per unit by calculating. Change in total cost/ change in activity level
3. Determine the fixed cost by using either the high or low activity level to solve the cost function
4. Determine the cost function
Advan - Easy to apply, very little information is require
Disadvan - Uses very limited data to draw a conclusion on behavior
What is account analysis
Require analyst to gather information from account to determine cost behavior (Variable, fixed, mixed)
Advan - very effective with strong knowledge of behavior and account
Disadvan - over implied, if best guess can lead to significant errors
Assumptions
- Not always clear if there is a cause or effect relationship, cost driver in the real world can be difficult
- High/low method - difficult to take advantage of economies of scale
What are some additional costs that can help make a decision
Responsibility account - managers are accountable for controlling costs in units of organization
- Controllabble cost - a cost that changes from management, not made quickly
- Non-controllable cost - cost can’t be changed from management decision Ex. Depreciation, lease cost
- Discretionary cost - cost incurred because of past commitment by an organization
- Committed cost - cost incurred because of past commitment by an organization
- Engineer cost - cost driver by production level, material cost, labor cost
Explain what opportunity, sunk and differntial income are
Opportunity cost - Cost benefit forgone when choosing one decision from another
Sunk cost - cost incurred in the past and not altered in the future for decision-making
Differential income - Difference in income from two alternative
Relevant cost - cost that will occur in the future that differs between courses of account
Irrelevant information - consists of figures that do not differ between alternatives or cannot be changed
What is the job costing method
Job costing method - This is a method that tracks the cost of units of inventory to a particular job
DM & DL can be traced easily (single product, unit, product, batch)
Ex. Vacuum repairs shop uses a job costing system to trace parts and labor used for each repair
What is the job cost for two reasons and examples
- Provide documentation to service as a basis for charging the customer
- Compare the cost of fixed fee contract with the revenue received from the customer in order to evaluate the efficiency in executing the contract
Ex. Building a cost, repair at car shop, lawyer working on a case
Provide the job cost system
1.Direct material, Direct labour (traced)
1. Manufacturing overhead (allocated) -
2. Cost object
3. WIP inventory
4. Finished goods inventory
5. Cost of goods sold
What are the job-costing steps
- Identify the cost object. It will be a unique job or service
- Assign the DM and DL cost to the cost object
- Allocate manufacturing or service-related overhead to the cost object either by using a separate rate or by including a component for overhead in the cost material or labor
How is the allocation of overhead determined
A critical element in job order system is how the management account handles manufacturing or service
Ex. Depreciation, supervisory salaries, utilities, factory property taxes, Repairs and maintenance
Manufacturing overhead rate = Manufacturing overhead cost / Cost driver (Denominator activity)
Cost driver - Direct labour hours, machine hour, unit of output
