Midterm 1 Flashcards
Cost Accounting Definition
the process of collecting, analyzing, and reporting financial and nonfinancial information related to the costs of acquiring or using resources in an organization
Strategy
specifies how a firm matches its own capabilities with the opportunities in the marketplace
cost leadership
providing high quality products at the lowest cost possible
product differentiation
providing unique or differentiated products that appeal to customers
Questions asked by Management
Who are our most important customers, and how can we be competitive and deliver value to them?
What substitute products exist in the marketplace, and how do they differ from our own?
Will adequate cash be available to fund the strategy or will additional funds need to be raised?
What is our most critical capability?
Value
the usefulness a customer gains from a company’s product or service
Value Chain
sequence of steps is necessary to create value
Inbound Logistics, Operations, Outbound Logistics, Marketing Sales, Services
Supply-Chain
Production and Distribution functions of the Value Chain
Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer
Key Success Factors
Cost and efficiency Quality Time Innovation Sustainability
The Five Step Decision-Making Process
- Identify the problem and uncertainties
- Obtain information
- Make predictions about the future
- Make decisions by choosing alternatives
- Implement the decision, evaluate performance, and learn
Planning through 1-4 and take control on step 5
Cost object
anything for which a cost measurement is desired
Cost Object BMW Example
Product: BMW Car
Service: Telephone hotline providing info and assistance to BMW dealers
Project: R&D project on GPS systems for cars
Customer: South Motors, a dealer
Activity: Setting up machines for production or maintaining production equipment
Department: Assembly, Quality Control, Customer service
Cost accumulation
collection of data in an organized way by means of an accounting system
Examples: Raw materials + Production + Quality check + Packaging = accumulated cost
Cost assignment
General term that encompasses the gathering of accumulated costs to cost an object in two ways
- Tracing accumulated costs with direct relationship to the cost object
- Allocating costs with indirect relationship
Direct Costs
Can be conveniently and economically traced to a cost object. These expenses go into directly producing goods/providing services
Ex: Direct Labor, Direct materials, manufacturing supplies
Indirect Costs
Cannot be traced easily, instead requires judgement . General business expenses that keep you operating
Ex: Rent, Utilities, General office expenses
Factors that affect Direct/Indirect Costs
- Materiality of the cost
- Available info-gathering technology
- Design of operations
Electricity is direct for whole factory while it’s also indirect for each department
Cost driver
variable, such as level of activity or volume, that casually affects cost at a given time span
of miles, # of units, square feet that increases costs
Variable costs
remain unchanged in total, for a given time period, despite changes in the related level of activity of output produced
More output = lower cost per unit
Merchandising companies
purchase and sell tangible products without changing basic form
- merchandise inventory
Manufacturing companies
purchase materials and components and convert them to finished products
- Raw materials
- Work in Process
- Finished goods
Service companies
provide services (intangible) like legal advice or audits
Raw materials
resources in-stock and available for use
Work-in-process (WIP)
Products started but not let completed
Finished goods
products ready for sale
Direct Materials
acquisition costs of all materials that will become part of the cost object
Direct Labor
Compensation of all manufacturing labor that can be traced to cost objects
Overhead Costs
factory costs that are not traceable to the product in an economically feasible way
Includes lubricants, indirect manufacturing labor, utilities, and supplies
Inventoriable Costs
Costs of a product that are considered assets in a company’s balance sheet when costs are incurred and that are expensed as cost of goods sold only when the product is sold
All manufacturing costs are inventoriable costs for manufacturing companies
Period Costs
All costs in the income statement other than COGS. Treated as expenses of the accounting period that they occurred
Used Inventory Formula
Beginning Inventory + New Inventory - Ending Inventory
Prime Costs Formula
Direct Materials + Direct Labor
Conversion Costs
Direct Labor + Overhead
Overtime Labor
Considered part of indirect overhead costs
Costs of Goods Sold Formula (Other)
Beg Inv + Purchases + Freight-In Costs - End Inv
Direct Materials Inventory Formula
DM Beg + DM Purch - DM Used
Fixed Over Head Costs Formula
Total MO - Var MO
WIP Formula
Beg WIP + Total MO Incurred - Cost of Goods Manuf
Objective for Cost-Volume-Profit Analysis
To see how profits will change as the units sold of a product or service changes
Understanding the relationship among the selling price, variable costs, and fixed costs
Operating Leverage
Describes the degree to which to which fixed costs exist in a company’s cost structure
How sensitive your company is to fixed costs
Contribution Margin / Operating Income
Effects of multiple products on CVP
Use weighted average contribution margin of a product
Assumes a constant mix of different levels of total unit sales
Assumptions for CVP
Number of units sold is the only revenue and cost driver
Total costs consist of fixed and variable costs
Revenue and costs behave and can be graphed as a linear function
Selling price, variable cost per unit, and fixed costs are ll known and constant
Single product (unless weights are known)
Time value of money is ignored
Job-costing system
Cost object is a unit or multiple units of a distinct and unique product or service
Each job uses different amounts of resources
Process-costing system
Cost object is masses of identical or similar units of a product or service
Flow of costs in job costing
Purchase materials and other manufacturing inputs
Conversion into work in process inventory
Conversion into finished goods inventory
Sale of finished goods
Journal Entries
Every job/product is unique, so journal entries are made at each step of the process
Supposed to reflect the actual state of business, its inventories, and its production process
All product costs are accumulated in the work-in-process account (DM used, DL incurred, Factory overhead allocated)
Actual indirect costs (overhead) are accumulated in the manufacturing overhead account
Actual overhead never posted in WIP
Why are Traditional Cost Systems used
Manufacturing processes were mainly labor intensive
Allocated through company-wide overhead rate
Labor Intensive Process
Overhead costs are small
Overhead allocations may be inaccurate, but the amounts are relatively insignificant
Automated Process
Overhead costs are large
Inaccurate overhead allocation can lead to misleading product cost information
Activity Based Costing
Taking a closer look at the manufacturing process to understand what exactly drives OH costs
Cost pool
cost of economic resources needed or consumed in performing an activity
Ex: personnel, supplies, salaries
Cost object
any product, service, customer, activity, or organizational unit to which costs are accumulated for some management purposes
Ex: any item for which you are separately measuring costs
Types of Production Activities
Unit Level
Batch Level
Facility Level
Product Level
Unit Level
Performed for each unit
Inserting a component
Labeling each unit produced
Batch level
Performed for each batch of product
Setting up equipment
Inspecting a batch
Facility Level
Required for the entire manufacturing process to occur
Factory Utilities, Rent, Security
Product Level
Performed to support each type of product Ex: Fitbit, iPhone, Caramel Frappuccino Designing the product Engineering the product Marketing or advertising the product
ABC effects on Employees
May lead to cost-cutting, which could be lay-offs
Impacts employee personal lives and morale
Could lead to employees being less cooperative which leads to inaccurate data
ABC effects on Management
They seek to use ABC to improve the value of products and increase the firm’s competitiveness and profitability
Two types of ABM
Operational
Strategic
Operational ABM
Performing activities more efficiently to lower costs
Use techniques like business engineering, total quality management, performance measurement, and activity analysis
Strategic ABM
Increase demand for certain activities and increase profitability
Achieved by eliminating non-essential activities and selecting the most profitable customers
Value-Added Analysis
Eliminating activities that add little to no value reduces resource consumption and allows the firm to focus on activities that will increase customer satisfaction
High-value added
Low-value added
High-Value Added
Significantly increases the value of the product or service to customers
Essential to the process
Accuracy or effectiveness would be effected if eliminated
Contribute to customer satisfaction
Ex: Designing a product, Order Processing, Delivering product
Low-Value Added
Consumes time, resources, or space but adds little to no value and does not contribute to satisfying the customer
Duplicates work
Produces an unnecessary or unwanted output
Performed by request of an unhappy customer
Ex: Setting up Machines, Moving Inventory, Storing, Inspecting
Customer Profitability Analysis
ABC is useful for satisfying customers (advertising, sales calls, delivery, billing, and other customer services)
Customers are the cost objects
Activities are the customer services needed to complete the sale and satisfy the customer
CPA helps identify most profitable customers and market towards them and away from unprofitable customers
Process Costing Objective
To match manufacturing COSTS to UNITS produced
Costs are accumulated according to processes or departments, NOT jobs
Units move along a conveyor belt through the departments – as units travel through the departments, they acquire costs
Account WIP
Shows the dollar value of all materials, labor, and overhead that has been issued to production but has not yet produced a finished good.
Production Cost Report
summarizes the physical units of a department, the costs incurred during the period, and the costs assigned to units completed and to units in ending work-in-process inventories.
Weighted Average
Assumes all beginning WIP was produced this period
Incorrect assumption but acceptable when prices (e.g., cost of labor, cost of raw materials, etc.) do not fluctuate from period to period
FIFO
FIFO takes into account that this period’s beginning WIP was produced last period (at last period’s prices).
More accurate accounting for unfinished inventory when prices change dramatically from period to period
Follows FIFO like in financial accounting.
Handling of partially completed beginning WIP
WA: No separate treatment
FIFO: Separates the units in the beginning WIP (and their costs) from the units started and completed during the period
Ease of calculation and appropriateness
WA: Easier; best in situations where WIP is small and prices/costs are stable
FIFO: More difficult; best in situations where prices/costs fluctuate; better for “control” purposes
Backflush Costing
simplified approach to determining cost that charges current production costs directly to finished goods inventory using a standard unit cost (without accounting for WIP and/or flow in and out of WIP)
For companies that have little to no raw materials, WIP, or finished goods
No process costing needed
