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78 Cards in this Set
- Front
- Back
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3 categories of mfg costs |
DM, DL, MOH |
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Direct materials |
integral part of finished product; traceable |
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Indirect materials |
small items that may become part of finished product, but cost of tracing exceed benefit |
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Direct labour |
traced easily |
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Mfg OH |
indirect labour/materials, maintenance, etc |
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Conversion cost |
DL + MOH |
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Prime costs |
DM + DL (used to be that these were biggest drivers in mfg costs, but now technology is making MOH bigger and bigger) |
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Overtime premiums |
for all workers: part of mfg overhead; product specific OT: part of DL |
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2 Non-mfg costs |
- mkting or selling costs - admin costs |
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Basic equation for Inventory Accts |
Beginning balance + Additions to inventory - Withdrawals = Ending balance |
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Schedule of COGM |
DM, DL, and MOH associated w/ GOODS THAT WERE FINISHED DURING THE PERIOD (WiP not included) |
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Product costs v period costs |
- Product: costs going into acquiring or making a product, go directly into inventory accts as they're incurred (AKA mfg costs, AKA inventoriable costs) - Period: all costs not included in product costs (AKA non-mfg costs) |
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FCs v VCs |
-FCs: don't change w/ output - VC: vary w/ output at same rate for each unit |
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Cost Driver (activity base) |
measure of what causes incurrence of a VC |
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Relevant range |
range of activity w/in which assumptions re VCs and FCs are valid |
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Differential cost (or differential revenue_ |
difference in cost (or rev) b/w any two alternatives (AKA incremental cost) |
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opp cost |
potential benefit given up |
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Cost classifications for predicting cost behaviour |
VC, FC, relevant range, mixed costs (eg. sales people paid partly by salary, partly by commission) |
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Cost classification for assigning costs to cost objects |
Direct (easily traced), indirect (not easily traced), common (can be traced to a number of cost objects, but not any individually) |
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Cost classifications for decision making |
differential, opportuniy, sunk |
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Cost structure |
relative amt of variable, fixed, and mixed costs in an organization |
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True VC |
when amt varies IN DIRECT PROPORTION to level of activity (straight line VC) |
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Step-Variable costs |
resource only attainable in large chunks (eg. maintenance workers), so costs increase or decrease in response to fairly wide changes |
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Extent of VCs |
- companies w/ very large investments in capital equipment (equipment that'll last longer than a year), usually have higher proportion of FCs (ie. utility companies) - services generally have higher VCs, same w/ merch companies |
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Types of FCs |
- Committed: long-term, can't be significantly reduced in short term (egs. depreciation on equipment, real estate taxes) - Discretionary: may be altered in short-term by managerial decisions (egs. advertising, R&D) |
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Mixed cost equation |
y = a + bX |
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Analysis of MCx |
- Acct analysis: each acct classified of V or F based on ANALYST's knowledge of how acct behaves - Engineering Approach: cost estimates based on industrial engineer's evaluation of production methods, material, labour and OH reqs |
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High-low method |
- method for determining VC per unit of activity - Change in cost (b/w highest and lowest level) divided by change in activity level |
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3 methods for predicting VCs per unit of activity |
- scattergram plot - HIGH-LOW METHOD - Least-Squares regression method |
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Contribution format |
an (internal) income stmt where costs separated into F or V |
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Contribution margin |
Sales rev - VCs - this amt contributes to fised costs then to profit - we want CM to grow by lowering VCs - used for CVP analysis |
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Cost-volume-profit analysis (5 elements) |
- prices of products - volume or level of activity - per unit VCs - total FCs - mix of products sold |
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Attributable OH v Allocated OH |
- Attributable: can be traced to different products - Allocated: split up per unit of production |
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CM Ratio |
CM (per unit or not)/ Total sales (per unit or not) eg. 80,000/ 200,000 = 40% - so each $1 increase in sales results in total CM increase of $0.40 |
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2 methods for BE analysis |
1. Equation method 2. Formula method |
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Margin of safety |
excess of budgeted (or actual) sales over BE volume of sales |
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Advantages of high FC v low FC |
- Advantage of high: income higher in good years - Disadvantage of high: income lower in bad yrs - Advantage of low FC: greater stability in income across good and bad yrs |
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Operating leverage |
- measure of how sensitive net operating income is to % change in sales |
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Sales mix |
relative proportion in which a company's products are sold |
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Assumptions of CVP analysis |
1. selling P is constant 2. costs are linear and can be accurately divided into V and F 3. in multiproduct companies, product mix is constant 4. in mfg companies, inventories don't change |
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Types of product costing systems |
- process costing (identical nature of each unit of product enables assigning same avg cost per unit) - Job-order costing (unique nature of each order reqs tracing or allocating costs to each job, and maintaining cost records for each) |
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Absorption costing |
costing mehod where all costs (DM, DL, MOH) counted as part of cost of finishing unit of product |
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Bill of materials |
record of type/ quantity of each material needed to make unit of product |
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Materials requisition form |
after production order is made for materials need, this doc specifies materials to be drawn and IDs which job to cost them to |
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Job cost sheet |
after accting dept is notified of materials needed, they draft this form to record costs charged to particular job (THESE ADD UP TO BALANCE IN WiP) |
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Why use an allocation base? |
1. it's impossible or tough to trace OH costs to particular jobs 2. MOH consists of many different items 3. Many MOH costs are fixed 4. Timing of payment of MOH costs often varies |
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Underapplied OH |
amt of OH applied to jobs is less than total OH actually incurred |
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Overapplied OH |
amt of OH applied is more than total OH actually incurred |
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2 methods for adjusting under or overapplied OH |
1. Close to COGS 2. Allocation to WiP, FG, COGS (IFRS reqs this method!) |
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2 Elements of Budgeting |
Planning: devlping objectives and prepping budgets to acheive them Control: steps taken by mgmt to ensure objectives are reached |
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Participative budget |
all members get involved; sr mgmt gotta be careful to watch out for BUDGETARY SLACK |
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Zero-based budgeting |
Start from scratch every year (v expensive/ time-consuming) |
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9 Budget steps |
1. Sales budget (includes CASH COLLECTIONS) 2. Production budget 3. DM budget 4. DL budget 5. MOH budget 6. Ending finished goods inv budget 7. Selling and admin expenses 8. Cash budget (RECEIPTS, DISBURSEMENTS, CASH EXCESS/ DEFICIENCY, FINANCING) 9. Budgeted fin stmts (BS and IS) |
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Static v flexible budgets |
- prepared only for planned level of activity - may be prepared for any activity w/in relevant range (shows what revs SHOULD BE at specified activity level) |
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Sensitivity Analysis |
- planning for alternatives; part of flexible budgeting |
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How to flex a budget |
- DM, DL, VOH, variable selling and admin given per unit amts - subtract from sales for CM - subtract fixed MOH and fixed S+A from CM to get OPERATING INCOME |
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Static budget variance |
difference b/w actual and static budget amts |
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Sales volume variance |
difference b/w flexible and static budget amts caused by actual activity levels differing from static budget estimates |
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Mgmt by exception |
deviations from standards that are deemed significant are reported to mgmt |
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Setting standard costs (two types) |
- ideal - practical |
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Decentralization (benefits) |
- experience in decision making for LLM - top mgmt freed to concentrate on strategy - decisionmaking authority leads to job satisfaction - lower-level decisions often based on better info - LLM can respond quickly to customers |
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Decentralization (disadvantages) |
- LLM may make decisions w/o seeing big picture - possible lack of coordination - LLM objectives may not align w/ organization's - can be difficult to spread innovative ideas in organization |
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2 keys to segmented income stmts |
- CONTIBUTION FORMAT should be used - TRACEABLE FCs should be separated from COMMON FCs to enable calculation of SEGMENT MARGIN |
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Responsibility centres |
costprofitorinvestment |
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ROI formula |
= Operating income/ avg operating assets = Margin x Turnover |
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3 criticisms of ROI |
- mgmt may not know how to increase it (w/o BScore) - mgrs often inherit lots o committed costs that they can't control - mgrs evaluated on ROI may reject profitable investment opportunities |
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Residual income |
BENEFIT: more investment in profitable investments DISADVANTAGES: - can't compare performance of different-sized divisions - doesn't indicate what earnings should be - berry berry complicated/ costly calculation - doesn't incorporate non-financial indicators |
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Residual income formula |
= Operating income - (avg operating assets x min req'd rate of return) |
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3 potential strats (bases of BScore) |
- cost leadership - differentiation - focus or niche |
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Lag indicators |
- fin measurements in BScroe, summarize results of past actions |
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Leading indicators |
- non-fin measures of future performance |
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Top mgrs v LLM in BScore |
- top mgrs generally responsible for fin measures - LLM generally responsible for non-fin |
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4 categories of BScore measures |
financial customer internal business processes learning and also growth |
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5 keys to effective BScores |
- focus on improvement (not just meeting specific targets) - measures gotta be linked (cause and effect) - incentive compensation gotta be linked to BScore performance measures - performance measures gotta be consistent w/ company strategy - can't have too many performance measures |
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2 step relevant cost analysis |
1. eliminate costs/ benefits that don't differ b/w alternatives 2. use remaining costs/ benefits that differ in making decisions |
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Differential cost approach (benefits) |
- we rarely have enough info to prep detailed stmts for both alternatives - mingling relevant and irrelevant costs = hella confusion |
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Adding/ dropping segments (2 approaches) |
- CM approach: only drop if FC savings EXCEED lost CM - Comparative income approach: prep comparative income stmts showing results w/ and w/o segment |
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Vertical integration (advantages and disadvantage) |
- smoother flow of materials - better quality control - realize profits BUT... may fail to take advantage of suppliers' econs of scale |
