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26 Cards in this Set
- Front
- Back
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Cost Pool: Unit level |
Activity must be done on each unit produced. Ex: Machinery cost pool (maintenance, depreciation, computer support, lubrication, electricity, calibration) |
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Cost Pool: Batch level |
Activity must e performed on each batch of products, rather than each unit. Ex: Setup, inspection, purchasing, material handling, quality assurance, and packing/shipping |
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Cost Pool: Product-sustaining level |
Activity needed to support a product line, but are not performed each time on a new unit or batch of products. Ex: Engineering, research and development |
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Cost Pool: Facility level |
Required in order for the production process to occur. Ex: Salaries, plant depreciation, property taxes, plant maintenance, and insurance |
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What is the main advantage to using activity-based costing (ABC) over traditional costing? |
ABC costing yields better costing and pricing of products to compete with the industry. |
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Customer-service items to review when looking at ABC costing: |
Frequent ordering Small orders Special packaging/shipping Order changes |
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Variable cost |
Stays the same per unit, increases in total as activity increases. Ex: The more pay-per-view movies you watch, the more your pay-per-view bill increases. |
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Step-variable cost |
Variable with small levels of consistency. Ex: 3 cashiers needed at a store when slow, more needed when busy. Cost per unit (hourly rate) stays the same, but total cost increases at higher range of activity. |
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Fixed cost |
Stays the same in total, decreases per unit as activity increases. Ex: Monthly cable bill does not change no matter how many hours are watched. Average cost per hour decreases as hours watched increases. |
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Step-fixed cost |
Fixed with increases at certain large activity levels (long time period). Ex: Office space is rented for $30,000/year for 1,000 sq. ft. As the business grows, more space is rented, increasing the total cost. |
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Semi-variable cost |
Has both a fixed and variable component. Ex: A fixed monthly rental charge plus variable cost depending on a charge per hour. |
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Relevant range |
Level where management expects to operate on a normal basis. |
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Discretionary cost |
Cost that can be changed in the short term by current management decisions. Ex: Advertisement, research and development. |
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Engineered cost |
Physical relationship with activitymeasure. Ex: Direct materials. |
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Committed cost |
Long-term, cannot be changed in the short-term. Ex: Depreciation on buildings and equipment. |
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Visual-fit method of Cost Estimation |
A scatter diagram of monthly activity levels; use points to estimate fixed and variable expenses. Benefit: Visual side of outliers. |
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Contribution margin ratio (CMR) |
(Sales-Var. Costs)/Sales or Cont. Margin/Sales |
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Break-even point |
When revenues and expenses are equal. |
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Break-even point formula (profit) |
(Un. sales price x sales vol.) - (Un. var. exp x sales vol.) - Fixed expenses = Profit |
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Unit contribution margin (UCM) |
Units - variable expenses |
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Break-even point formula (in units) |
FE/UCM or FE/un. - var. exp = BE in units |
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Break-even point formula (in sales dollars) |
FE/CMR = BE in sales dollars |
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Target net profit |
(FE + Target Profit)/UCM = Units sold to earn target profit |
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Safety margin |
The difference between budgeted sales and break-even sales. Amount by which sales can drop before losses occur. SM = bud. sales - BE sales |
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Assumptions of CVP analysis |
Sales price is constant Expenses are constant Sales mix is constant Inventories are not held (everything made is sold during the period) |
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Difference between traditional income statement format and the contribution format? |
Traditional shows expenses broken out by product and period costs; Contribution shows expenses broken out by variable and fixed costs. |
