Test #1 Flashcards
Direct Materials
Materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.
Direct Labor
Labor costs that can be easily traced to individual units of product.
Manufacturing Overhead
All manufacturing costs except DM and DL.
Product Cost
All costs involved in acquiring or making a product. Inventoriable costs – assigned to inventory account on the balance sheet.
Period Cost
All costs that are not product costs. Selling and admin expenses.
Variable Cost
Same per unit, change in total dependent on activity level.
Fixed Cost
Change per unit, same in total over a relevant range.
Why is it important for management to understand the company’s cost structure?
Predicting how a certain cost will behave (cost behavior) in response to a change in activity for planning purposes.
Direct Cost
A cost that can be easily and conveniently traced to a specific cost object. (ex: raw materials)
Indirect Cost
A cost that cannot be easily and conveniently traced to a specific cost object. (ex: manager’s salary)
Differential Cost/Revenue
A difference in cost/revenue between two alternatives.
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another.
Sunk Cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future. Should be ignored.
Job-Order Costing
Used in situations where many different products, each with individual and unique features, are produced each period. (ex: aircrafts)
Bill of Materials
A document that lists the type and quantity of each type of direct material needed to complete a unit of product.
Materials Requisition Form
A document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. Controls for flow of materials and accounting records.
Job Cost Sheet
Records the materials, labor, and MOH costs charged to that job.
Time Ticket
An hour-by-hour summary of the employee’s activities throughout the day to assign labor to specific jobs.
Pred. OH Rate =
Est. total man. overhead cost / Est. total amount of the allocation base
Why use estimated overhead costs?
Using an actual rate computed monthly or quarterly can allow for season factors in overhead to produce fluctuations in the overhead rate. For example, heating and cooling. Two identical jobs in fall and winter would have different costs.
MOH application to WIP =
Pred. OH rate X Actual amount of allocation base incurred by the job
Under-applied OH
Actual > Applied, debit balance, so credit COGS
Over-applied OH
Actual
ABC
Attempts to assign overhead costs more accurately than simpler methods. A number of allocation bases for assigning costs, each representing an activity.
Activity cost pool
Activity measure
Activity rate
Different than plantwide and departmental.
Product costs under traditional system:
OH costs on high-volume products
Products costs under ABC:
OH costs shift to low-volume products because of high batch/product-level costs
Advantages of ABC
Improves accuracy of product costs
Better understanding of causes of OH costs
Highlights the activities that could benefit most from process improvement initiatives
Disadvantages of ABC
Cost may outweigh the benefits
Relies on critical assumptions that may not be true - costs are proportional to activity level
Why do orgs. prepare budgets?
- Communicate
- Think about and plan for the future
- Means of allocating resources
- Uncover potential bottlenecks
- Coordinate activities by integrating plans
- Define goals to serve as benchmarks
Processes for making budgets
First project sales
Make assumptions
May use self-imposed (participative) budget
