Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
24 Cards in this Set
- Front
- Back
|
Basic Cost Definition |
Cost: the measure of a resource used up for some purpose. - For financial reporting, a cost can be capitalized as an asset or expensed.
Cost Object: any entity to which costs can be attached. - Ex: products, processes, employees, departments, facility
Cost Driver: the basis used to assign costs to a cost object. - It is an activity measure, such as DL hours or machine hours, that is a factor in causing the occurrence of cost.
|
|
|
Manufacturing Costs |
Direct Materials: tangible inputs to manufacturing process that can be directly traced to product. - includes transportation in
Direct Labor: the cost of human labor that directly can be traced to product
Manufacturing OH: all costs of manufacturing that are not DM or DL; indirect costs that cannot be directly traced
OH components: 1. Indirect Materials - Example: welding compound
2. Indirect Labor - Example: Executive, Janitor
3. Factory Operating Costs - Example: utilities, taxes, insurance, deprec. |
|
|
Classifications of Manufacturing Costs |
1. Prime costs = DM + DL
2. Conversion costs = DL + Manufacturing OH
Non-manufacturing Costs 1. Selling (marketing) costs incurred factory to consumer
2. Administrative expenses: incurred for activities not directly related to producing or marketing (i.e. Executive salaries or depreciation) |
|
|
Product vs Period |
Issue is whether to capitalize a cost as part of finished goods inventory or to expense it as incurred.
1. Product Costs: capitalized as part of finished goods inventory. Eventually become a component of cost of goods sold.
2. Period Costs: expensed as incurred. Not capitalized in finished goods inventory and are thus excluded from CoGS. |
|
|
Direct vs Indirect |
Direct Costs: associated with a particular cost object in an economically feasible way.
Indirect Costs: cannot be associated with a particular cost object in an economically feasible way and must be allocated to that object; indirect costs often collected in cost pools.
Cost pools: an account into which similar cost elements with a common cause are accumulated; MFG OH is a commonly used cost pool into which various untraceable costs of MFG process are accumulated.
Common Costs: indirect costs shared by 2 or more users. Bc cannot be directly traced, must be allocated on a systemic and rational basis. Ex: depreciation on HQ building, common cost of departments located in building and must be allocated
|
|
|
Variable Costs |
Costs vary directly with the volume of production, such as DL
Variable cost per unit is constant in the short term regardless of level of production; however, VC on total vary directly & proportionally with changes in volume. |
|
|
Fixed Costs |
Costs remain in total unchanged in the short run regardless of production level.
Fixed costs per unit vary indirectly with activity level (FC per unit goes down as activity level increases) |
|
|
Mixed (semi-variable) Costs |
Combine fixed and variable elements. Example: rental car has fixed daily ride + miles driven
Estimating mixed cost methods:
1. High-low: generates a regression line by basing the equation on only the highest and lowest values in the series of observations.
(Highest cost - lowest cost) Divided by: (Difference in activity level)
Con: highest and lowest points may be abnormalities
2. Regression (scatter graph) Method: determines the avg rate of variability of a mixed cost rather than the variability betw high & low points in the range. |
|
|
Relevant Range & Marginal Cost |
1. Relevant Range: defines the normal limits within which per-unit variable costs remain constant and fixed costs do not change. Valid for specified time. - established by such factors as the efficiency of an entity's current MFG plant & its agreements w unions & suppliers
2. Marginal Costs: the additional (incremental) cost incurred by generating 1 additional unit of output. MC remains constant across relevant range.
- Since relevant range exists for specified timespan, all costs are variable in long run.
- Investments in new, more productive equipment results in higher total FC but also may result in lower total and per-unit VC. |
|
|
Marginal Cost (MC) & Average Total Cost (ATC) |
Total costs of production (TC) consist of total fixed costs (FC) and total variable costs (VC).
Average total cost (ATC) = TC / Quantity of output (Q)
An increase in FC results in: 1. Increase in FC and AFC; 2. Increase in TC and ATC; 3. No effect on VC or AVC
The marginal cost curve always intersects with the ATC curve and the AVC curve at their minimum points.
|
|
|
Absorption Costing |
The fixed portion of mfg overhead is included in the cost of each product.
Product cost includes all mfg costs, both fixed and variable;
[Sales - absorption basis CGS] = Gross Margin
Operating Inc = [Gross Margin - Total Selling & Admin Expenses]
For external reporting purposes, product cost should include all MFG costs. |
|
|
Variable Costing |
Product cost includes only variable MFG costs.
Contribution Margin = [Sales - Variable CGS and Variable Selling and Administrative Costs] |
|
|
Income effects of Absorption & Variable Costing |
When production and sales are equal for a period, 2 methods report same operating income. -Total FC for period are expensed
When production & sales are not equal, 2 methods report different operating income.
When production exceeds sales, ending inventory increases: 1. Absorption: some fixed costs are still in ending inventory. 2. Variable: all fixed costs have been expensed.
Result: Operating income is higher under absorption costing
When production less than sales, ending inventory decreases: 1. Absorption: fixed costs in beginning inventory expensed. 2. Variable: only the current period's Fixed costs expensed.
Result: operating income is higher under variable costing |
|
|
Benefits of Variable Costing (Prohibited by GAAP & IFRS) |
1. Production manager cannot manipulate income by overproducing. Income based on sales, not production.
2. Cost data for profit planning & decision making are readily available from accounting records & statements.
3. Profits & losses reported under variable costing have a direct relationship to sales revenue and are not affected by inventory or production variability.
4. Absorption cost income statements may report decreases in profits when sales are increasing & increases in profits when sales are decreasing
5. A favorable margin between selling price & variable cost is a reminder of profits foregone bc of lack of sales volume. A favorable margin justifies higher production.
6. Full effect of FC on net income, partially hidden in inventory amounts under absorption costing, is emphasized by the presentation of costs on a variable costing income stmt.
7. Fixed MFG OH may be more closely correlated with capacity to produce than production of individual units. |
|
|
Process Costing |
Assigns costs to inventoriable goods or services. Applies to relatively homogeneous products that are mass produced on a continuous basis (i.e. thread).
Instead of using subsidiary ledgers to track specific jobs, process costing typically uses a work-in-process account for each department through which the production of output passes.
Calculates the average cost of all units as follows: 1. Costs are accumulated for a cost object that consists of a large number of similar units;
2. Work-in-process is stated in terms of equivalent units;
3. Unit costs are established |
|
|
Accumulation of Costs (Process Cost Accounting) |
1. By department instead of proj;
2. Physical inputs for production are obtained from suppliers;
3. DM are added by 1st department in process;
4. Second department adds more DM & conversion costs;
Conversion costs = DL + MOH
5. When process is finished in last department, all costs are transferred to finished goods.
6. As products are sold, sales are recorded & costs are transferred to cost of goods sold. |
|
|
Equivalent Units of Production (EUP) |
Number of finished goods that could've been produced using inputs consumed during period.
EUP Conversion Process 1. Equivalent units determined 2. Per-unit cost calculated
*Calculations made separately for DL, conversion costs; *Transferred-in costs 100% complete; *Conversion costs uniformly incurred
Calculation inputs - 3 Groups:
a) Beginning WIP units = [units transferred out + Ending WIP - units started]
b) Units started & completed = [Units transferred out - Beg WIP] Or [Units started - Ending WIP]
c) Ending WIP = [Beg WIP + Units Started - Units Transferred Out] |
|
|
Methods for Calculating EUP |
1. Weighted Average: units in Beginning WIP inventory are treated the same units started & completed in current period. *Beginning WIP is not backed out during EUP calculation
Per-unit Cost Calculation *DM & conversion costs incurred in current period + Beg WIP are averaged
2. FIFO: only units started & completed in current period are included in EUP calculation. *Beginning WIP backed out
Per-unit cost calculation *Only costs incurred in current period are included
|
|
|
Job Order Costing |
Appropriate when producing products with individual characteristics or when identifiable groupings are possible.
1. Costs are attached to specific jobs. Each job will result in a single, identifiable end product.
2. Examples: custom built products such as ship building |
|
|
Back-flush Costing |
Delays the assignment of costs until the goods are finished.
1. After production is finished for the period, standard costs are flushed backward through the system to assign costs to products; detailed tracking of costs is eliminated.
2. Companies that maintain low inventories (JIT) bc costs can flow directly to CGS. |
|
|
Spoilage & Scrap |
1. Normal Spoilage: occurs under normal operating conditions. Uncontrollable in short-run. Treated as product cost (absorbed into CGS)
2. Abnormal Spoilage: not expected to occur in normal, efficient conditions. Treated as a period cost (loss).
3. Scrap: consists of materials left over from production process. If sold, reduces factory OH; if discarded, it is absorbed into CGS. |
|
|
Activity Based Costing |
Attaches costs to activities and then rationally allocated to end products; refinement of basic costing systems.
May be used by Mfg, service, retailing entities & may be used in job-order/process cost system.
ABC is a result of advances in technology & increased incurrence of indirect costs = need for more cost assignment.
ABC involves: 1. Identifying organizational activities that result in overhead. 2. Assigning the costs of resources consumed by activities 3. Assigning the costs of the activities by appropriate cost drivers to final cost objectives. |
|
|
Peanut Butter (Volume-based) Costing |
Inaccurate averaging or spreading of indirect costs over products or service units that use different amounts of resources.
Results in product-cost cross-subsidization (mis-costing of 1 product affects other products)
*Accumulates OH in single indirect cost pool, assigned using single rate. |
|
|
ABC Steps |
1. Activity Analysis: cost pool is established for each activity; analysis identifies value-adding and eliminates non value-adding activities; activities ranked according to level of production process where they occur.
2. Assign resource costs to activities (1st stage allocation): Resource drivers (measures of resources consumed) are designated to allocate costs to activity cost pools.
*Cost Pools: amounts paid for resources used; homogenous (have cause-and-effect relationship with items)
3. Allocate activity cost pools to final cost objects (2nd stage allocation): reassigned to final-stage cost objects based on activity cost drivers (measures of demands made such as # of parts) |
