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89 Cards in this Set

  • Front
  • Back
What is conversion cost?
the sum of the direct labor and manufacturing OH
- represents the mfg costs to convert raw materials to FG
What are period costs?
- costs that are not incurred in the production of physical units and are not inventoried
- charged to expense in the period in which incurred
Ex: all selling & admin costs
What is prime cost?
Prime cost is the sum of the direct materials and direct labor costs.
What are committed costs?
FC tha arise from having PPE and a functioning organization
- they remain even when production volume is zero
- include depreciation of buildings and LT lease payments
What are committed costs?
FC tha arise from having PPE and a functioning organization
- they remain even when production volume is zero
- include depreciation of buildings and LT lease payments
What are Discretionary Costs?
represent annual budget appropriations
- often unrelated to volume
- include advertising costs and R&D
What type of relationship do average fixed costs have with volume?
- avg FC per unit decreases as volume increases (spread over more units)
What type of relationship do average variable cost per unit have with changes in volume?
direct - VC per unit remains constant with changes in volume
What is the basic difference between the 2 COGS sections in manufacturing firm vs. merchandising firm?
In a mfg firm, "Cost of Goods Manufactured" replaces "Purchase"
What is the typical account activity for Raw Material Inventory?
Beginning Balance
+ Purchases
= RM Avail for use
- RM used (to WIP)
= Ending Balance
What is the typical account activity for Work-in-Process Inventory?
Beginning Balance
+ RM, Labor, OH Used
= Available to Finish
-Goods Finished (to FG)
= Ending Balance
What is the typical account activity for Finished Goods Inventory?
Beginning balance
+ Goods Finished (from WIP)
= Avail for sale
= Ending Balance
What does COGM represent?
The cost of the products *completed* during the period and transferred to the FG inventory
What does a Cost-Volume-Profit chart show?
The CVP chart shows the profit or loss potential for the range of volume within the relevant range.
- at any given output level, the predicted P/L is the vertical difference between the sales line and the total cost line
Where on a CVP chart can you find the break even point?
intersection of sales and total costs
On a CVP chart, where can you find the contribution margin?
At any level of output, its the vertical difference between the sales and variable costs
What is the Income Equation Method that you can use to for BEP analysis?
Sales = Variable expenses + Fixed expenses + Net Income


Net Income = Sales - Variable Expenses - Fixed Expenses
What is the equation to find the Contribution Margin?
Contribution margin = Sales - VC
What is the equation to find the Unit Contribution Margin?
Unit Contribution Margin = Unit Sales Price - VC per unit
What are the 2 equations to find the Contribution margin ratio?
CM ratio = Unit CM / Unit SP


CM ratio = Total CM / Total sales
What is the equation to find the Variable Cost ratio?
Variable cost ratio = Variable Cost / Sales
What is the equation to find the Break-Even point in units?
BE (units) = Fixed expenses / CM ratio
What is the equation to find the Break-even point in dollars?
BE ($) = Fixed expenses / CM ratio
What is the equation to find the Dollar sales to achieve a desired profit?
Dollar sales to achieve a desired profit = (FC + Desired Net Income)/ Unit CM
What is the equation to find the Unit Sales to achieve a desired profit?
Unit sales to achieve a desired profit = (FC + Desired Net Income) / CM ratio
What is the margin of safety?
The excess of budgeted (or actual) sales over BE volume of sales.
- amt by which sales can drop before losses begin to be incurred in an organization
M/S = Total sales - Break Even Sales
What is job order costing?
accumulation of costs by specific jobs (physical units, distinct batches, job lots)
What is the overhead application rate formula?
OH application rate = Estimaged Factory OH / Estimated DL hours
What happens to the difference between OH applied and actual OH incurred at the end of a period?
Closed to COGS
What is Process Costing?
cost accumulation method that aggregates production costs by departments or by production phases
What fields usually use process costing?
- enterprises that produce a continuous mass of like units through operations/processes. (chemicals, petroleum, textiles, paint)
What are the two cost flow assumptions used in process costing?
FIFO and weighted average
What is spoilage?
Production that does not result in good finished units
How is normal spoilage handled in relation to product cost?
- considered inherent in the mfg process and uncontrollable in the short run, so mgmt establishes a "normal spoilage rate", which is a cost of goods produced, and inventoried as a product cost.
What is abnormal spoilage, and how is it handled in relation to product cost?
- spoilage beyond the normal spoilage rate
- considered controllable b/c its a result of inefficiency
- not a cost of good production, but a LOSS for the period
Whats the difference between spoiled and defective goods?
- both dont meet quality or dimension standards, but spoiled goods are junked or sold for salvage value, where defective goods are sold at a reduced price or reworked and sold at regular or reduced price.
What are by-products?
products that have minor sales values as compared with the sales value of the main products and are not identifiable as separate produts until their split-off point
Which are included in cost of units produced - scrap, normal spoilage, abnormal spoilage.
Scrap and normal spoilage.
If a company follows a practice of isolating variances at the earliest point in time, what would be the appropriate time to isolate and recognize a direct material price variance?
When a material is purchased?
When is Job-Order Costing appropriate, and what industries typically use it?
-suitable when direct costs can be identified with specific jobs
-commonly used in construction, auto repair, printing, custom mfg, and profressional service firm
How and when do you compute the overhead application rate?
OH App Rate = (Est. Mfg OH cost / Est. units of activity base)

- done at the beginning of the period
Under process costing, how is the cost of spoiled units assigned?
-cost of spoiled units is assigned to good units after spoilage discovered
-abnormal spoilage is included in EUP calc to the extent of the completion stage
Under job order costing, how is abnormal spoilage recgonized?
-recognized when a loss is discovered
-asset is recognized for the salvage value of the spoiled units

dr spoilage inventory (salvage)
dr abnormal spoilage loss
cr WIP/Job 101
Under Job Order Costing, how is normal spoilage treated, if it is estimated and included in the OH application rate?
-MOH bears cost of normal spoilage, net of salvage value

dr Spoilage Inventory (salvage)
dr MOH (diff)
cr WIP (cost)
How is normal spoilage handled in Job Order Costing if NOT included in the OH app rate?
-spoilage is attributable to specific jobs
dr Spoilage Inventory (Salvage)
cr WIP/Job 101 (salvage value)

-remaining good units in the specific job bear the cost of normal spoilage, net of salvage value
What is the split-off point?
stage of production where the various individual products become identifiable as indiv. products
- at split off point, company can sell products at that point or process further
What are joint product costs?
costs incurred before the split off point. must be allocated to the joint products.
- not relevant to decision to sell or process further
What is the Net Realizable Value (NRV) of joint products or by products?
NRV = Estimated Sales Value - Costs to complete and sell the product
How is net revenue from by-products treated?
As a reduction of the COGS of the main products, or the NRV is deducted from the cost of producing the main products
- allocate the benefit between inventory and COGS
What are the two basic methods for allocating service department costs?
1. Direct Method
2. Step Method
How does the Direct Method allocate service department costs?
- on the basis of services provided to producing departments only, and ignores services performed for other service deptartments
How does the Step Menod allocate service department costs?
-allocates costs to other service departments and to producing departments
-costs in SD with the greatest cost are allocated first
-once costs are allocated from a SD, costs may not be allocated again to that department (reciprocal service is ignored)
What are the four levels that ABC views cost occuring on?
1. Unit (to make 1 product)
2. Batch (to make a group of product)
3. Product sustaining (to maintain product line)
4. Facility or organizational (to maintain plant/company as a whole)
What is a cost driver?a
activity that causes a cost to be incurred
What is an ABC cost center?
lowest level of detail for which costs are accumulated and distributed. can be a single activity or group of activities.
What are the three types of diversity that can occur in ABC?
1. Product
2. Volume
3. Material
What are the steps involved in establishing ABC?
1. Identify relevant activities
2. Organize activities by cost centers
3. Identify major elements of OH costs
4. Identify cost drivers
5. Assign costs to activities
6. Assign activities to products
7. Establish a cost flow chart
8. Establish appropriate cost conversion tools
9. Gather data
10. Establish the cost flow model to develop costing rates
How does ABM classify activities?
As value-added or non-value-added (NVA)
What is a value-added activity?
activity customers are willing to pay for (actual processing time)
What are NVAs?
activities customers are not willing to pay for (scrap, rework, material moves, inspections, wait time)
What is a standard cost?
budgeted cost per unit operating under efficient "standard" conditions
How do you find the Material Price Variance?
(Actual Price - Standard Price) x Actual Quantity

- if positive, unfavorable variance (AP>SP)
- if negative, favorable variance (AP<SP) - drop negative sign!
What is the Material Quantity Variance?
-diff b/w actual and standard amounts of quantity used

(Actual Quantity - (Standard Quantity/unit * units produced)) x Standard Price
What is the Total Material Variance?
(Actual Price x Actual Quantity) - (Standard Price x Standard Quantity)
materials price variance + quantity variance
What is the Labor Rate Variance?
(Actual Labor Rate - Standard Labor Rate) x Actual Labor Hours
What is the Labor Efficiency variance?
(Actual Labor Hours - Standard Labor Hours) x Standard Labor Rate
What is the Total Labor Variance?
(Actual Labor Rate x Actual Labor Hours) - (Standard Labor Rate x Standard Labor Hours)
What is the Variable OH Spending Variance?
(Actual Rate - Standard Rate) x Actual Hours
- formula assumes labor hours or machine hours, but other bases can be used to apply MOH
What is the Variable OH Efficiency Variance?
(Actual Hours - Standard Hours) x Standard Rate
What is the Total Variable OH Variance?
(Actual Rate x Actual Hours) - (Standard Rate x Standard Hours)
the sum of the variable OH spending variance and the variable OH efficiency variance
What is the Fixed OH Budget Variance?
Actual FOH - Budgeted FOH

-caused by unexpected events including changes in prices of the components of FOH
What is the Fixed OH Volume Variance?
Budgeted FOH - Applied FOH

-caused by not operating at the budgeted activity level
-could be the result of sales not meeting budget or idleness due to machine breakdowns
What is the Total FOH variance?
Actual FOH - Applied FOH
Fixed OH budget variance + FOH volume variance
What is an annuity?
series of equal cash flows at equal intgervals
What is an ordinary annuity?
annuity in which payment occurs at end of year
What is an annuity due?
annuity in which payment occurs at the beginning of the year
What is capital budgeting?
-allocates capital among alternative investment opportunities and seeks the most profitable investments
-considers cost of capital, and the effect of dep. on the tax shield
What is the formula for the ARR? (Accounting Rate of Return)
ARR = (Avg Net Income / Avg Investment)

ignores TVM
What is the Payback Period (PBP)?
time required to recover the original investment

for equal cash flows --> PBP= (Cost of investment/cash flow per year)

-ignores TVM and VF after PBP, doesnt measure profitability
What is the IRR (Internal Rate of Return)?
that rate of return that, when used as the discount rate in the NPV model, causes the NPV to be exactly zero
What is the decision rule when using the IRR?
If IRR > Cost of Capital, accept the project
What is the NPV method?
PV of the cash inflows - PV of the cash outflows

-cost of capital is used as discount rate
What is the decision rule when using the NPV method?
If NPV > 0, accept the project
What is the Profitability Index?
PI = (PV of future cash flows / Cost of intital investment)

-used to compare investments of diff sizes
-choose investment with highest PI
What is ROI (Return on Investment)?
ROI = (Operating Income / Average Operating Assets)

Op Income = EBIT
What is Residual Income (RI)?
RI = Operating Income - (Target ROI x Average Operating Assets)
What is the Economic Order Quantity (EOQ)?
-when a company reaches the reorder point, it places an order equal to the EOQ

sq.rt of (2 x Order cost x Annual Demand) / Annual Carrying Cost per unit)
Where is under or over applied OH prorated to?
A standard cost system may be used in what type of costing systems?
Joborder cosing or process costing