Unit 7: Cost Management Concepts Flashcards
What is the principal concern of management accounting?
The principal concern of management accounting is to provide reports that improve organizational decision making to internal users.
Define cost object.
A cost object is any object to which costs can be attached.
Define cost driver.
A cost driver is the basis used to assign costs to a cost object.
Define direct costs.
Direct costs are costs that can be associated with a particular cost object in an economically feasible way.
Define indirect costs.
Indirect costs are costs that cannot be associated with a particular cost object in an economically feasible way and thus must be allocated to that object.
What is a common cost?
A common cost is a cost that is incurred for the benefit of more than one cost object.
What are the three types of manufacturing costs?
Direct materials
Direct labor
Manufacturing overhead
What is a prime cost?
A prime cost is a cost that is directly attributable to a product and equals direct materials plus direct labor.
What is conversion cost?
Conversion cost is a cost incurred in converting raw materials into the finished product. Conversion cost equals direct labor plus manufacturing overhead.
Nonmanufacturing costs include
Selling (marketing) expenses
Administrative expenses
Define product cost.
Product costs are costs that are capitalized as part of finished goods inventory, including direct materials, direct labor, and sometimes manufacturing overhead.
How are period costs accounted for?
Period costs are expensed as incurred.
What is a relevant range?
A relevant range is a range of values that defines the limits within which per-unit variable costs remain constant and fixed costs are not changeable. It is synonymous with the short run.
Define variable cost.
Variable costs are those that vary depending on the volume of production.
What type of relationship exists between variable costs and production volume?
Variable costs are directly related to production volume. As one increases, so does the other and vice versa.
Define fixed cost.
Fixed costs are those that remain constant regardless of production levels.
Methods of estimating mixed costs include
The regression (scattergraph) method
The high-low method
When applying the high-low method, how is the variable portion of a mixed cost calculated?
Variable portion of mixed cost using high-low method =
Cost at highest activity level – Cost at lowest activity level
Driver at highest activity level – Driver at lowest activity level
What is actual costing?
Actual costing is the recording of product costs based on actual
Cost of materials
Cost of labor
Overhead incurred
How is normal costing applied?
Normal costing charges actual direct materials and direct labor to a specific product or a production department but applies overhead on the basis of a budgeted rate.
How is the fixed portion of manufacturing overhead treated under absorption costing?
Fixed manufacturing overhead is “absorbed” into the cost of each unit of product.
How is gross margin calculated under absorption costing?
Gross margin (gross profit) = Sales revenue – Absorption cost of goods sold
How is the fixed portion of manufacturing overhead treated under variable costing?
Fixed manufacturing overhead is expensed as a period cost.
How is contribution margin calculated?
Contribution margin = Sales revenue – Variable costs (including variable S&A)
How does the treatment of fixed and variable costs differ under absorption and variable costing?
Absorption cost: Includes Fixed OH in product cost
When production exceeds sales, does absorption costing or variable costing produce a higher operating income?
Operating income is higher under absorption costing because some fixed costs are embedded in ending inventory rather than expensed.
When production is less than sales, does absorption costing or variable costing produce a higher operating income?
Operating income is higher under variable costing because under absorption costing, the fixed costs embedded in beginning inventory are expensed in addition to the current period’s fixed costs.
