Midterm I Flashcards
How does management accounting differ from financial accounting?
Management accounting measures, analyzes, and reports financial and nonfinancial info that helps managers make decisions to fulfill the goals of an organization. It is not restricted by GAAP.
Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks. It measures and records business transactions and is based on GAAP.
Cost object
Anything for which a separate measurement of costs is desired (product, service, project, customer, etc.)
Cost-volume-profit analysis
examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product.
Cost pool
Grouping of individual indirect cost items
The assigning of direct costs to the chosen cost object
Cost tracing
Cost allocation
Assigning of indirect costs to the chosen cost object
A factor that links in a systematic way an indirect cost or group of indirect costs to cost objects
Cost-allocation base
Costs related to the particular cost object and can be traced to that cost object in an economically feasible way
Direct costs
Indirect costs
costs related to the particular cost object but cannot be traced to that cost object in an economically feasible way
Assumptions underlying the CVP analysis:
- Changes in level of revenues and costs arise only because of changes in the number of product units sold.
- Total costs can be separated into a fixed component that does not vary with the units sold and a variable component that changes with respect to the units sold.
- When represented graphically, the behaviors of total revenues and total costs are linear in relation to units sold within a relevant range and time period.
- The selling price, variable cost per unit, and fixed costs are known and constant.
The term direct costing is a ________ for variable costing because variable costing does not include all direct costs as _______ costs. Variable costing includes as inventoriable costs not only direct manufacturing costs but also some _______ costs.
misnomer; inventoriable; indirect
Why do managers consider direct costs to be more accurate than indirect costs?
Because when costs are allocated, managers are less certain whether the cost allocation base accurate measures the resources demanded by a cost object.
Difference between total revenues and total variable costs
Contribution margin
Difference between selling price and variable cost per unit
Contribution margin per unit
The contribution margin per unit divided by selling price
Contribution-margin percentage (ratio)
The business functions in the value chain are:
Research & development Design of products & processes Production Marketing Distribution Customer service
5-step decision-making process:
- Identify the problem & uncertainties
- Obtain information
- Make predictions about the future
- Make decisions by choosing among alternatives
- Implement the decision, evaluate performance, and learn
______ decisions focus on selecting organization goals and strategies, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and communicating the goals and how to attain them to the entire organization.
Planning
______ decisions focus on taking actions that implement the planning decisions, deciding how to evaluate performance, and providing feedback and learning to help future decision making.
Control
Institute of Management Accountants sets standards of ethical conduct in the four following areas:
Competence
Confidentiality
Integrity
Credibility
Factors affecting the classification of a cost as direct or indirect include:
- the materiality of the cost in question
- available information-gathering technology
- design of operations
A _____ cost changes in total proportion to changes in the related level of total activity or volume.
variable
A _____ cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume.
fixed
A variable that causally affects total costs over a given time span.
cost driver
Relevant range
The band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question
Three types of inventory manufacturing companies have:
Direct materials inventory
Work-in-process inventory
Finished goods inventory
Costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold
Inventoriable costs
Costs in the income statement other than costs of goods sold
Period costs
Acquisition costs of all materials that eventually become part of the cost object and can be traced to the cost object in an economically feasible way
Direct material costs
Include the compensation of all manufacturing labor that can be traced to the cost object in an economically feasible way
Direct manufacturing labor costs
Manufacturing costs that are related to the cost object that cannot be traced to that cost object in an economically feasible way
Manufacturing overhead costs
All direct manufacturing costs
Prime costs
All manufacturing costs other than direct material costs
Conversion costs
Overtime premium
The wage rate paid to workers in excess of their straight-time wage rates
Idle time
A subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.
The sum of the costs assigned to a product for a specific purpose
Product cost
Three common features of cost accounting and cost management are:
- calculating the costs of products, services, and other cost objects
- obtaining information for planning and control and performance evaluation
- analyzing the relevant information for making decisions
Examines the behavior of total revenues, total costs, & operating income as changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product
Cost-volume-profit (CVP) analysis
How does an increase in the income tax rate affect the breakeven point?
An increase in the income tax rate does not affect the breakeven point. Operating income at the breakeven point is zero, and no income taxes are paid at this point.
What is operating leverage?
Operating leverage describes the effects that fixed costs have on changes in operating income as changes occur in units sold, and hence, in contribution margin
How is knowing the degree of operating leverage helpful to managers?
Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes.
7 Steps in Job Costing
- Identify the job that is the chosen cost object
- Identify the direct costs of the job
- Select the cost-allocation bases to use for allocating indirect costs to the job
- Identify the indirect costs associated with each cost-allocation base
- Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job
- Compute the indirect costs allocated to the job
- Compute the total cost of the job by adding all direct and indirect costs assigned to the job
3 major documents used in job-costing systems:
job cost record
materials requisition record
labor-time sheet
This form of costing uses actual rates for direct and indirect cost rates
Actual Costing
This form of costing uses actual rates for direct-cost rates and budgeted rates for indirect-cost rates
Normal Costing
What are the factors that affect the breakeven point under variable costing?
- Fixed (manufacturing and operating) costs
2. Contribution margin per unit
What are the factors that affect the breakeven point under absorption costing?
- Fixed (manufacturing and operating) costs
- Contribution margin per unit
- Production level in units in excess of breakeven sales in units
- Denominator level chosen to set the fixed manufacturing cost rate
