Midterm Flashcards
Direct Material
Raw material that becomes part of the product
Easy to trace in quantity
Direct Labour
Salaries, wages, any labour cost associated with manufacturing (benefits, ect.)
Manufacturing Overhead
Indirect labour
Indirect material
Any other cost in manufacturing (electricity, equipment, salaries to security guards, toilet paper, ect.)
Product Cost (Manufacturing Cost)
Raw Materials
Direct Labour
Manufacturing
Terms like equipment, workers, ect. Are manufacturing
Period Cost (Non-Manufacturing Cost)
Administration Cost (people like secretaries, ceo’s, ect. Who are not part of the physical process)
Selling Cost (All costs associated with the final sale of the product)
Any cost associated with the product outside manufacturing
Relevent Range
Range of activity over which company expects to operate during a year
MIxed cost high-low method
Change in total costs / change in activity levels = variable cost per unit
Mixed cost
y = a + bx
Total cost = fixed cost + variable cost per unit (activity)
Process Costing
Company produces many units of a single product
Job Order Costing
Many different products
Products are manufactured to order.
POHR
Estimated Manufacturing Overhead/Estimated Direct Labour Cost
Manufacturing Overhead
Overapplied : when the accrued overhead is less than applied.
Underapplied : When the accrued overhead is more than applied.
Reconcile in Journal with COGS
Production Cost Report
An internal document for management
Shows production quantity and cost data for a department
Presents results of the four steps in system (Prepare a physical unit schedule, Calculate the equivalent units, Calculate the unit costs, Prepare a cost reconciliation schedule
Assumptions underlying CVP Analysis
Selling price is constant
All costs can be classified as either a variable or fixed with reasonable accuracy
Behaviors of both costs and revenues is linear through the relevant range of activity index
Sales mix is constant
Units produced = units sold
Contribution Margin
Unit selling price - Unit variable cos
Contribution Margin Ratio
Contribution Margin Per Unit / Unit selling price
or
Contribution Margin / Sales
Break Even in Units
Fixed costs / Contribution Margin per unit
Break Even in Dollars
Fixed costs / Contribution Margin Ratio
Equation Approach
x (Q) = FC + Total Variable Costs
Selling price x units sold = Fixed cost + (unit variable cost x units sold)
Target operating Income before tax (level of sales to achieve target profit)
Fixed Costs + Target Operating Income / Contribution Margin Per Unit
Target Operating income after tax (level of sales to achieve target operating income after tax)
Fixed cost + Target Operating income after tax / Contribution Margin per unit
Target Operating income after tax
Target Operating income before tax / 1 - Tax %
Activity
Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
Activity Cost Pool
distinct type of activity. For example, ordering materials or setting up machines.
Cost Drivers
Any factors or activities that have a direct cause-effect relationship with the resources consumed.
Traditional Costing vs. ABC
ABC does not replace an existing job order/process cost system.
ABC does segregate overhead into various cost pools to provide more accurate cost information.
ABC, thus, supplements – it does not replace – the traditional cost system.
Classification of Activity Levels
Unit-level activities (Performed for each unit of production)
Batch-level activities (Performed for each batch of product)
Product-level activities (Performed in support of an entire product line, but not always performed every time a new unit or batch is produced)
Facility-level activities (Required to support or sustain an entire production/process)
Limitation of ABC Method
Can be expensive to use
Some arbitrary allocations continue
A larger proportion of overhead costs are company-wide costs that cannot be directly traced to specific services.
When to use ABC
Products differ greatly in volume/manufacturing complexity
Products lines are:
- Numerous
- Diverse
- Require different degrees of support services
Overhead costs are a significant portion of total costs
Significant change in manufacturing process or number of products
Managers ignore data from existing system and instead use “bootleg” costing data
