Module 2 : Calculation and Cost systems Flashcards
cost-volume-profit analysis: defintion
some costs are fixed while others change in proportion to the volume of output
contribution margin: definition
corresponds to the incremental value generated by a product and is used to cover a company’s fixed costs
The contribution margin per unit : definition
the difference between the selling price and the variable cost per unit
The contribution margin : calculation
Revenu - variable cost
Contribution margin percentage : definition
shows the contribution margin in relation to the revenues
Contribution margin percentage: calculation
dividing the contribution margin by the revenues
the operating income margin (in percentage) : definition
shows the relation of the operating income to the revenues
breakeven: definition
denotes the critical output quantity x at which the total revenue is just as large as the total cost.
Profit calculation (at break even)
Sales - costs
ou
Contribution Margin - Fixed costs
Break-Even-Quantity
Fixed cost/ Contribution Margin per unit
Break Even Sales
Fixes cost / 1 - variable cost/ selling price per unit
Degree of employment
which covers the total fixed costs and the variable costs attributable to the quantities sold
Assumptions: Break event point
–> All costs are recorded and divided into fixed and variable costs.
–> Selling price and variable costs per unit are independent of the quantity
–> Fixed costs are independent of the quantity
–> There is no warehouse (sales = production)
Revenues
Cout variable - Cout fixe
or
Contribution margin/ contribution margin in percentage
Process-Costing Systems
Cost accumulation on masses of identical or similar units of a product or service based on average costs.
Job-Costing: definition
Calculation of costs for a cost object through direct accumulation of costs on a distinct, identifiable cost object (product, service).
Job = distinct mandate (usually directly for clients)
Process : Manufacturing overhead Costs –> direct manufacturing Labour hours –> CHF direct manufacturing per labour unit
Difference between Process-Costing Systems and Job Costing ?
Process : each process, production cost reports
Job: each job, Job costs sheets
Job Costing : calculation
Costs of each job / Units produced for the job
costs are calculated by direct accumulation on a distinct, identifiable cost object (eg. product or service)
Process Costing: calculation
Total manufacturing costs / units produced during the period
For which kind of company what cost system makes more sense?
- Job Costing : For manufactured batches of unique products or specialzed services
- Process costing: For Companies that produce identical units through a series of processes
Overhead Calculation (Uniform Costings)
Allocation of costs based on product costs
page 25
Manufacturing Overhead cost –> % cost allocation based on product cost
Activity based Costing
Cost allocation is based on the processes required
Process (deisgn, Setup, Manufacturing) –> look at part Square feet, setup hours and Maschine hours
Cost pool
the grouping of individual indirect cost items.
–> not every single cost has to be allocated individually
–> simplifies the assignment of indirect costs to the cost objects
–> allows the grouping of indirect costs with the same cost-allocation base together.
Activity based Management (ABM): definition
describes management decisions that use activity-based costing information to satisfy customers and improve profits
Process in the ABM
- Cost reduction and process improvement
-Design decisions
-Product pricing and mix decisions
Cost reduction and process improvement
- Manufacturing and distribution personnel use ABC systems to focus on cost reduction efforts
- Managers set cost-reduction targets in terms of reducing the cost per unit of the cost-allocation base
Design decisions
- Management can identify and
evaluate new designs to improve
performance by evaluating how product and process designs affect activities and costs - Companies can work with their
customers to evaluate the costs and
prices of alternative design
choices
Product pricing and mix decisions
- ABC gives management insights into the cost structures for making and selling diverse products
- It provides more accurate product cost information and more detailed information on costs of activities and the drivers of those costs
ABM Systems Are Most Beneficial When..
- Significant amounts of indirect costs are allocated using only one or two cost pools
- All or most costs are identified as output unit-level costs (lowest level activities identified)
- Products make diverse demands on resources because of differences in:
- Volume
- Process steps
- Batch size
- Complexity
- Products that a company is well-suited to make and sell show small profits while products for which a company is less suited show large profits
- Complex products appear to be very profitable and simple products appear to be losing money
- Operations staff have significant disagreements with the accounting staff about the costs of
manufacturing and marketing products and service
Limitations of ABC Systems
ABC systems require management to:
- estimate costs of activity pools and to identify and measure cost drivers for these pools
- Activity-cost rates also need to be updated regularly
- Very detailed ABC systems are costly to operate and difficult to understand
ABM in Service and Merchandising companies
Costs are divided into homogeneous cost pools and classified as:
Output unit-level
Batch level
Product, or service-sustaining
Facility sustaining costs
–> The cost pools correspond to key activities
Costs are allocated to products or customers using activity drivers or cost-allocation bases that have
a cause-and-effect relationship with the cost in the cost pool
