Bmgt 221 Exam 1 Key Terms

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Activity-based management (ABM)

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Managing organization activities to add the greatest value by developing products that satisfy the needs of the organization's customers.

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Average Cost: (per unit)

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The total cost of making products divided by the total number of products made.

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Benchmarking

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Identifying best practices used by world-class competitors in a given industry.

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Best Practices

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Identifiable procedures used by world-class companies.

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Continuous Improvement:

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An ongoing process through which employees learn to eliminate waste, reduce response time, minimize defects, and simplify the design and delivery of products and services to customers; a feature of total quality management (TQM).

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Cost Allocation:

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Process of dividing a total cost into parts and assigning the parts to relevant objects.

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Cost-plus Pricing

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Strategy that sets the selling price at cost plus a markup equal to a percentage of the cost.

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Direct Labor

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Wages paid to production workers whose efforts can be easily and conveniently traced to products.

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Direct Raw Materials

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Costs of raw materials used to make products that can be easily and conveniently traced to those products.

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Downstream Costs

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Costs incurred after the manufacturing process is complete, such as delivery costs and sales commissions.

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Financial Accounting

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Branch of accounting focused on the business information needs of external users (creditors, investors, governmental agencies, financial analysts, etc.); its objective is to classify and record business events and transactions to produce external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).

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Financial Accounting Standards Board (FASB):

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Private, independent standard-setting body established by the accounting profession that has been delegated the authority by the SEC to establish most of the accounting rules and regulations for public financial reporting.

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Financing Activities:

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Cash inflows and outflows from transactions with investors and creditors (except interest), including cash receipts from issuing stock, borrowing activities, and cash disbursements to pay dividends

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Finished Goods:

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Completed products resulting from the manufacturing process; measured by the accumulated cost of raw materials, labor, and overhead

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General, Selling, and Administrative Costs

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All costs not associated with obtaining or manufacturing a product; sometimes called period costs because they are normally expensed in the period in which the economic sacrifice is incurred.

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Generally Accepted Accounting Principles (GAAP):

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Rules and practices that accountants agree to follow in financial reports prepared for public distribution.

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Indirect Costs:

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Cost that either cannot be easily traced to a cost object or for which it is not economically feasible to do so. See also overhead.

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Inventory Holding Costs

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Costs associated with acquiring and retaining inventory including cost of storage space; lost, stolen, or damaged merchandise; insurance; personnel and management costs; and interest.

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Investing Activities

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Cash inflows and outflows associated with buying or selling long-term assets and cash inflows and outflows associated with lending activities (loans to others—cash outflows; collecting loans to others—cash inflows)

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Just In Time (JIT):

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Inventory management system that minimizes the amount of inventory on hand by avoiding inventory acquisition until products are demanded by customers, therefore eliminating the need to store inventory. The system reduces inventory holding costs including financing, warehouse storage, supervision, theft, damage, and obsolescence. It can also eliminate opportunity costs such as lost revenue due to the lack of availability of inventory.

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Managerial Accounting

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Branch of accounting focused on the information needs of managers and others working within the business. Its objective is to gather and report information that adds value to the business. Managerial accounting information is not regulated or reported to the public.

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Manufacturing Overhead

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Production costs that cannot be easily or economically traced directly to products.

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Nonvalue-added Activities

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Tasks undertaken that do not contribute to a product's ability to satisfy customer needs.

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Operating Activities

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Cash inflows from and outflows for routine, everyday business operations, normally resulting from revenue and expense transactions including interest.

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Opportunity Cost:

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Cost of lost opportunities such as revenue forgone because of insufficient inventory.

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Overhead:

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Costs associated with producing products or providing services that cannot be traced directly to those products or services in a cost-effective manner; includes indirect costs such as indirect materials, indirect labor, utilities, rent, depreciation on manufacturing facilities and equipment, and planning, design, and setup costs related to the product or service.

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Period Costs

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General, selling, and administrative costs that are expensed in the period in which the economic sacrifice is incurred. (Contrast with product costs.)

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Product Costs

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All costs related to obtaining or manufacturing a product intended for sale to customers; accumulated in inventory accounts and expensed as cost of goods sold at the point of sale. For a manufacturing company, product costs are direct materials, direct labor, and manufacturing overhead. (Contrast with period costs.)

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Product Costing:

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Classifying and accumulating the costs of individual inputs (materials, labor, and overhead) to determine the cost of making a product or providing a service.

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Productive Assets:

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Assets used to operate the business. May also be called long-term assets.

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Raw Materials

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Physical commodities (e.g., wood, metal, paint) transformed into products through the manufacturing process.

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Reengineering

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Business practices companies design to improve competitiveness in world markets by eliminating or minimizing waste, errors, and costs in production and delivery systems.

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Sarbanes-Oxley Act of 2002

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A federal law that regulates corporate governance.

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Securities and Exchange Commission (SEC):

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Government agency authorized by Congress to regulate financial reporting practices of public companies; requires companies that issue securities to the public to file audited financial statements with the government annually.

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Statement of Cash Flows

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The financial statement that classifies and reports a company's sources and uses of cash during an accounting period.

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Total Quality Management (TQM):

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Management strategy that focuses on (1) continuous systematic problem-solving by personnel at all levels of the organization to eliminate waste, defects, and nonvalue-added activities; and (2) managing quality costs in a manner that leads to the highest level of customer satisfaction.

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Upstream Costs

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Costs incurred before beginning the manufacturing process, such as research and development costs.

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Value-added Activity:

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Any part of business operations that contributes to a product's ability to satisfy customer needs.

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Value-added Principle

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The benefits attained (value added) from a process should exceed the cost of the process.

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Value Chain

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Linked sequence of activities that create value for the customer.

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Activity Base

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Factor that causes changes in total variable cost; usually some measure of volume when used to explain cost behavior

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Contribution Margin

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The difference between sales revenue and variable cost; the amount available to pay for fixed cost and thereafter to provide a profit.

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Cost Averaging

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Measuring the cost per unit of a product or service by dividing the total production cost by the total activity base to which the cost pertains; average cost is often more relevant to pricing, performance evaluation, and control than actual cost.

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Cost Behavior

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How a cost changes (increase, decrease, remain constant) relative to changes in some measure of activity (e.g., the behavior of raw materials cost is to increase as the number of units of product made increases).

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Cost Structure

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The relative proportion of a company's variable and fixed costs to total cost. The percentage change in net income a company experiences for a given percentage change in sales volume is directly related to the company's cost structure. The greater a company's percentage of fixed to total costs, the more its net income will fluctuate with changes in sales.

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Fixed Cost

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: Cost that remains constant in total regardless of changes in the volume of activity; per unit amount varies inversely with changes in the volume of activity.

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High-low Method

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: Method of estimating the fixed and variable components of a mixed cost; the variable cost per unit is the difference between the total cost at the high- and low-volume points divided by the difference between the corresponding high and low volumes. The fixed cost component is determined by subtracting the variable cost from the total cost at either the high- or low-volume level.

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Least Squares Regression

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A technique used to draw a line through a data set by minimizing the sum of the squared deviations between the line and the points in the data set.

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Mixed Cost (semivariable costs)

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Costs that have both fixed and variable components.

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Operating Leverage

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: Cost structure condition that produces a proportionately larger percentage change in net income for a given percentage change in revenue; measured by dividing the contribution margin by net income. The higher the proportion of fixed cost to total costs, the greater the operating leverage.

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Relevant Range

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Range of activity over which the definitions of fixed and variable costs are valid.

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Scattergraph

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Method of estimating the variable and fixed components of a mixed cost by plotting cost data on a graph and visually drawing a regression line through the data points so that the total distance between the points and the line is minimized.

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Variable Cost

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Cost that in total changes in direct proportion to changes in volume of activity; remains constant per unit regardless of changes in activity volume.

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Visual Fit Line

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: Line drawn by visual inspection on a scattergraph of data points to minimize the total distance between the data points and the line; used to estimate fixed and variable cost.

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Break-even Point

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Sales volume at which total revenue equals total cost; can be expressed in units or sales dollars.

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Contribution Margin per Unit

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The sales price per unit minus the variable cost per unit.

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Contribution Margin Ratio

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The contribution margin per unit divided by the sales price per unit; can be used in cost-volume-profit analysis to calculate in dollars the break-even sales volume or the level of sales required to attain a desired profit.

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Cost-plus Pricing

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Strategy that sets the selling price at cost plus a markup equal to a percentage of the cost.

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Cost-volume-profit (CVP) Analysis

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: Management tool that reflects the interrelationships among sales prices, volume, fixed costs, and variable costs; used in determining the break-even point or the most profitable combination of these variables.

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Equation Method

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Cost-volume-profit analysis technique that uses the algebraic relationship among sales, variable costs, fixed costs, and desired net income before taxes to solve for required sales volume.

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Margin of Safety

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Difference between break-even sales and budgeted sales expressed in units, dollars, or as a percentage; the amount by which actual sales can fall below budgeted sales before incurring losses.

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Prestige Pricing

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Strategy that sets the selling price at a premium (more than average markup above cost) under the assumption that customers will pay more for the product because of its prestigious brand name, media attention, or some other reason that has piqued the interest of the public.

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Sensitivity Analysis

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Spreadsheet tool used to answer "what-if" questions to assess the sensitivity of profits to simultaneous changes in fixed cost, variable cost, and sales volume.

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Target Pricing (target costing)

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Strategy that sets the selling price by determining the price at which a product that will satisfy market demands will sell and then developing that product at a cost that results in a profit.

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The more________a company has the greater the fluctuation in net income

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The more Fixed Costs a company has the greater the fluctuation in net income.

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If a manager expects revenues to increase should use _________cost structure

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If a manager expects revenues to increase
should use fixed cost structure

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If manager expects revenues to decline or is sales growth is uncertain should use ________ cost structure

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- If manager expects revenues to decline or
is sales growth is uncertain should use variable cost structure

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Operating Leverage
- Definition: Cost structure condition that produces a proportionately larger percentage change in net income for a given percentage change in revenue; measured by dividing _________ by __________. The higher the proportion of _________ to total costs, the greater the operating leverage.

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Cost structure condition that produces a proportionately larger percentage change in net income for a given percentage change in revenue; measured by dividing the contribution margin by net income. The higher the proportion of fixed cost to total costs, the greater the operating leverage.

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Contribution Margin (CM)/ Net Income (NI) =

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magnitude of operating leverage

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Revenue - Variable costs =

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Contribution margin

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Relevant Range

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Range of activity over which the definitions of fixed and variable costs are valid.

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Sales Price Per Unit - Variable Cost Per Unit=

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contribution margin per unit

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CM-unit/Sales price-unite =

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Contribution margin ratio

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Contribution Margin Ratio: The __________ per unit divided by the ________per unit; can be used in ___________ analysis to calculate in dollars the _________ or the level of sales required to attain a ___________.

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The contribution margin per unit divided by the sales price per unit; can be used in cost-volume-profit analysis to calculate in dollars the break-even sales volume or the level of sales required to attain a desired profit.

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Break-even Point IN UNITS

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(Fixed costs + desired profit)/CM per unit

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Break-even point IN DOLLARS

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(fixed costs + desired profit/CM Ration

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Margin of Safety; Difference between __________ and _________ expressed in units, dollars, or as a percentage; the amount by which actual sales can fall below budgeted sales before incurring ______.

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Difference between break-even sales and budgeted sales expressed in units, dollars, or as a percentage; the amount by which actual sales can fall below budgeted sales before incurring losses

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Manufacturing Overhead (Indirect Costs):

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Costs associated with producing products or providing services that cannot be traced directly to those products or services in a cost-effective manner; includes indirect costs such as indirect materials, indirect labor, utilities, rent, depreciation on manufacturing facilities and equipment, and planning, design, and setup costs related to the product or service.