Are - Cost And Managerial

Front 1

What is conversion cost?

Back 1

the sum of the direct labor and manufacturing OH
- represents the mfg costs to convert raw materials to FG

Front 2

What are period costs?

Back 2

- 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

Front 3

What is prime cost?

Back 3

Prime cost is the sum of the direct materials and direct labor costs.

Front 4

What are committed costs?

Back 4

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

Front 5

What are committed costs?

Back 5

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

Front 6

What are Discretionary Costs?

Back 6

represent annual budget appropriations
- often unrelated to volume
- include advertising costs and R&D

Front 7

What type of relationship do average fixed costs have with volume?

Back 7

inverse
- avg FC per unit decreases as volume increases (spread over more units)

Front 8

What type of relationship do average variable cost per unit have with changes in volume?

Back 8

direct - VC per unit remains constant with changes in volume

Front 9

What is the basic difference between the 2 COGS sections in manufacturing firm vs. merchandising firm?

Back 9

In a mfg firm, "Cost of Goods Manufactured" replaces "Purchase"

Front 10

What is the typical account activity for Raw Material Inventory?

Back 10

Beginning Balance
+ Purchases
= RM Avail for use
- RM used (to WIP)
= Ending Balance

Front 11

What is the typical account activity for Work-in-Process Inventory?

Back 11

Beginning Balance
+ RM, Labor, OH Used
= Available to Finish
-Goods Finished (to FG)
= Ending Balance

Front 12

What is the typical account activity for Finished Goods Inventory?

Back 12

Beginning balance
+ Goods Finished (from WIP)
= Avail for sale
- COGS
= Ending Balance

Front 13

What does COGM represent?

Back 13

The cost of the products *completed* during the period and transferred to the FG inventory

Front 14

What does a Cost-Volume-Profit chart show?

Back 14

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

Front 15

Where on a CVP chart can you find the break even point?

Back 15

intersection of sales and total costs

Front 16

On a CVP chart, where can you find the contribution margin?

Back 16

At any level of output, its the vertical difference between the sales and variable costs

Front 17

What is the Income Equation Method that you can use to for BEP analysis?

Back 17

Sales = Variable expenses + Fixed expenses + Net Income

OR

Net Income = Sales - Variable Expenses - Fixed Expenses

Front 18

What is the equation to find the Contribution Margin?

Back 18

Contribution margin = Sales - VC

Front 19

What is the equation to find the Unit Contribution Margin?

Back 19

Unit Contribution Margin = Unit Sales Price - VC per unit

Front 20

What are the 2 equations to find the Contribution margin ratio?

Back 20

CM ratio = Unit CM / Unit SP

or

CM ratio = Total CM / Total sales

Front 21

What is the equation to find the Variable Cost ratio?

Back 21

Variable cost ratio = Variable Cost / Sales

Front 22

What is the equation to find the Break-Even point in units?

Back 22

BE (units) = Fixed expenses / CM ratio

Front 23

What is the equation to find the Break-even point in dollars?

Back 23

BE ($) = Fixed expenses / CM ratio

Front 24

What is the equation to find the Dollar sales to achieve a desired profit?

Back 24

Dollar sales to achieve a desired profit = (FC + Desired Net Income)/ Unit CM

Front 25

What is the equation to find the Unit Sales to achieve a desired profit?

Back 25

Unit sales to achieve a desired profit = (FC + Desired Net Income) / CM ratio

Front 26

What is the margin of safety?

Back 26

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

Front 27

What is job order costing?

Back 27

accumulation of costs by specific jobs (physical units, distinct batches, job lots)

Front 28

What is the overhead application rate formula?

Back 28

OH application rate = Estimaged Factory OH / Estimated DL hours

Front 29

What happens to the difference between OH applied and actual OH incurred at the end of a period?

Back 29

Closed to COGS

Front 30

What is Process Costing?

Back 30

cost accumulation method that aggregates production costs by departments or by production phases

Front 31

What fields usually use process costing?

Back 31

- enterprises that produce a continuous mass of like units through operations/processes. (chemicals, petroleum, textiles, paint)

Front 32

What are the two cost flow assumptions used in process costing?

Back 32

FIFO and weighted average

Front 33

What is spoilage?

Back 33

Production that does not result in good finished units

Front 34

How is normal spoilage handled in relation to product cost?

Back 34

- 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.

Front 35

What is abnormal spoilage, and how is it handled in relation to product cost?

Back 35

- 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

Front 36

Whats the difference between spoiled and defective goods?

Back 36

- 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.

Front 37

What are by-products?

Back 37

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

Front 38

Which are included in cost of units produced - scrap, normal spoilage, abnormal spoilage.

Back 38

Scrap and normal spoilage.

Front 39

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?

Back 39

When a material is purchased?

Front 40

When is Job-Order Costing appropriate, and what industries typically use it?

Back 40

-suitable when direct costs can be identified with specific jobs
-commonly used in construction, auto repair, printing, custom mfg, and profressional service firm

Front 41

How and when do you compute the overhead application rate?

Back 41

OH App Rate = (Est. Mfg OH cost / Est. units of activity base)

- done at the beginning of the period

Front 42

Under process costing, how is the cost of spoiled units assigned?

Back 42

-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

Front 43

Under job order costing, how is abnormal spoilage recgonized?

Back 43

-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

Front 44

Under Job Order Costing, how is normal spoilage treated, if it is estimated and included in the OH application rate?

Back 44

-MOH bears cost of normal spoilage, net of salvage value

dr Spoilage Inventory (salvage)
dr MOH (diff)
cr WIP (cost)

Front 45

How is normal spoilage handled in Job Order Costing if NOT included in the OH app rate?

Back 45

-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

Front 46

What is the split-off point?

Back 46

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

Front 47

What are joint product costs?

Back 47

costs incurred before the split off point. must be allocated to the joint products.
- not relevant to decision to sell or process further

Front 48

What is the Net Realizable Value (NRV) of joint products or by products?

Back 48

NRV = Estimated Sales Value - Costs to complete and sell the product

Front 49

How is net revenue from by-products treated?

Back 49

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

Front 50

What are the two basic methods for allocating service department costs?

Back 50

1. Direct Method
2. Step Method

Front 51

How does the Direct Method allocate service department costs?

Back 51

- on the basis of services provided to producing departments only, and ignores services performed for other service deptartments

Front 52

How does the Step Menod allocate service department costs?

Back 52

-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)

Front 53

What are the four levels that ABC views cost occuring on?

Back 53

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)

Front 54

What is a cost driver?a

Back 54

activity that causes a cost to be incurred

Front 55

What is an ABC cost center?

Back 55

lowest level of detail for which costs are accumulated and distributed. can be a single activity or group of activities.

Front 56

What are the three types of diversity that can occur in ABC?

Back 56

1. Product
2. Volume
3. Material

Front 57

What are the steps involved in establishing ABC?

Back 57

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

Front 58

How does ABM classify activities?

Back 58

As value-added or non-value-added (NVA)

Front 59

What is a value-added activity?

Back 59

activity customers are willing to pay for (actual processing time)

Front 60

What are NVAs?

Back 60

activities customers are not willing to pay for (scrap, rework, material moves, inspections, wait time)

Front 61

What is a standard cost?

Back 61

budgeted cost per unit operating under efficient "standard" conditions

Front 62

How do you find the Material Price Variance?

Back 62

(Actual Price - Standard Price) x Actual Quantity

- if positive, unfavorable variance (AP>SP)
- if negative, favorable variance (AP<SP) - drop negative sign!

Front 63

What is the Material Quantity Variance?

Back 63

-diff b/w actual and standard amounts of quantity used

(Actual Quantity - (Standard Quantity/unit * units produced)) x Standard Price

Front 64

What is the Total Material Variance?

Back 64

(Actual Price x Actual Quantity) - (Standard Price x Standard Quantity)
OR
materials price variance + quantity variance

Front 65

What is the Labor Rate Variance?

Back 65

(Actual Labor Rate - Standard Labor Rate) x Actual Labor Hours

Front 66

What is the Labor Efficiency variance?

Back 66

(Actual Labor Hours - Standard Labor Hours) x Standard Labor Rate

Front 67

What is the Total Labor Variance?

Back 67

(Actual Labor Rate x Actual Labor Hours) - (Standard Labor Rate x Standard Labor Hours)

Front 68

What is the Variable OH Spending Variance?

Back 68

(Actual Rate - Standard Rate) x Actual Hours
- formula assumes labor hours or machine hours, but other bases can be used to apply MOH

Front 69

What is the Variable OH Efficiency Variance?

Back 69

(Actual Hours - Standard Hours) x Standard Rate

Front 70

What is the Total Variable OH Variance?

Back 70

(Actual Rate x Actual Hours) - (Standard Rate x Standard Hours)
or
the sum of the variable OH spending variance and the variable OH efficiency variance

Front 71

What is the Fixed OH Budget Variance?

Back 71

Actual FOH - Budgeted FOH


-caused by unexpected events including changes in prices of the components of FOH

Front 72

What is the Fixed OH Volume Variance?

Back 72

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

Front 73

What is the Total FOH variance?

Back 73

Actual FOH - Applied FOH
or
Fixed OH budget variance + FOH volume variance

Front 74

What is an annuity?

Back 74

series of equal cash flows at equal intgervals

Front 75

What is an ordinary annuity?

Back 75

annuity in which payment occurs at end of year

Front 76

What is an annuity due?

Back 76

annuity in which payment occurs at the beginning of the year

Front 77

What is capital budgeting?

Back 77

-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

Front 78

What is the formula for the ARR? (Accounting Rate of Return)

Back 78

ARR = (Avg Net Income / Avg Investment)

ignores TVM

Front 79

What is the Payback Period (PBP)?

Back 79

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

Front 80

What is the IRR (Internal Rate of Return)?

Back 80

that rate of return that, when used as the discount rate in the NPV model, causes the NPV to be exactly zero

Front 81

What is the decision rule when using the IRR?

Back 81

If IRR > Cost of Capital, accept the project

Front 82

What is the NPV method?

Back 82

PV of the cash inflows - PV of the cash outflows

-cost of capital is used as discount rate

Front 83

What is the decision rule when using the NPV method?

Back 83

If NPV > 0, accept the project

Front 84

What is the Profitability Index?

Back 84

PI = (PV of future cash flows / Cost of intital investment)

-used to compare investments of diff sizes
-choose investment with highest PI

Front 85

What is ROI (Return on Investment)?

Back 85

ROI = (Operating Income / Average Operating Assets)

Op Income = EBIT

Front 86

What is Residual Income (RI)?

Back 86

RI = Operating Income - (Target ROI x Average Operating Assets)

Front 87

What is the Economic Order Quantity (EOQ)?

Back 87

-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)

Front 88

Where is under or over applied OH prorated to?

Back 88

WIP, FG, COGS

Front 89

A standard cost system may be used in what type of costing systems?

Back 89

Joborder cosing or process costing