Managerial Flashcards
Variable Cost
as production increases, so does total cost. 1 unit =$5, 5 units = $25 - cost per unit does not change
Fixed Cost
total costs are predetermined, producing more makes the cost per unit lower. fixed cost of $10 to produce 10 units = 1 dollar per, $10 to produce 100 units = 1- cents per
Mixed Cost
The sum of the total fixed and variable costs
C = VX + F
Product Cost
identifiable materials used in the end product - direct and indirect
Direct Costs
costs that are directly involved in making the product - labor, materials
Indirect Costs
almost anything other or not directly identifiable that cost to make the product - insurance, taxes, misc materials, manufacturing overhead
Period Costs
normal non-manufacturing costs that are incurred every period, have nothing to do with making the product - ads, sales, admin expense
2 types of manufacturing overhead allocation
Traditional and Activity Based
POH rate
Predetermined overhead rate, used in traditional costing
POH rate formula
Estimate of annual overhead / Estimated annual cost driver
Activity based costing
assigning overhead costs to products based on how much they consume in each activity
what type of firm should use activity based costing
firms where there is a difference in quality,
complexity, manufacturing process (built to order)
steps to implement activity based costs (ABC)
- Identify major activities in manufacturing process
- Allocate overhead to each major activity
- Identify cost drivers for each major activity
- Calculate activity-based rates (AB rates = Allocated overhead / Estimated
driver) - Apply overhead to each product (Applied OH = AB rate * Activity driver
volume)
Job order costing
costs are tracked on a per job/batch basis - used in high costs or unique item production, where costs differ from all other items the company is working on
Process Costing
assumes all units are the same and cost the same to produce. cost is determined by total cost / number of units produced in a period
CVP analysis - Cost-Volume-Profit
a process where decision makers estimate profitability based on changes in cost, pricing, and volume - needed for breakeven analysis and target profit analysis
ways to calc CVP
a. Contribution margin per unit (CM) = Sales per unit – variable cost (VC)
per unit
b. Contribution margin ratio (CMR) = CM per unit / Sales price per unit
c. Break-even point in units = Fixed cost (FC) / CM per unit
d. Break-even point in dollars = FC / CM ratio
e. Target profit in units= (FC + target profit) / CM per unit
f. Target profit in dollars = (FC + target profit) / CM ratio
g. Net income = Sales – variable costs – fixed costs
Contribution margin
portion of sales that is not absorbed by variable costs, used to cover fixed costs and contribute to bottom line
Incremental Analysis
process of making a decision between alternatives based on the financial data
Opportunity cost
cost of what is being given up by choosing an alternative
Sunk Cost
costs already incurred and paid
Responsibility Accounting
accumulation and reporting of relevant
information to a manager
relevant information
relevant costs and relevant revenues
responsibility center
segment/division/subunit of a company that a manager has control/authority over
