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40 Cards in this Set
- Front
- Back
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What is the ultimate goal of process costing? |
To get the cost per unit number |
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What department are the manufacturing costs (i.e. direct materials, direct labor, and manufacturing over head) assigned to? |
The Processing Departments |
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What in general are the five steps to process costing? |
1. Summarize the flow of physical units 2. Compute output in terms of physical units 3. Summarize total costs to account for 4. Compute the cost per equivalent unit 5. Assign total costs to units completed and to units ending working in process inventory |
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What must be true about the total physical units to account for and the total physical units accounted for when summarizing the flow of physical units in process costing? |
Total physical units to account for and total physical units accounted for must be equal |
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What is the formula for computing the amount of equivalent units? |
Number of Physical Units x Percentage of Completion |
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What is the formula for cost per equivalent unit? |
Total Cost to Account for / Total equivalent unit |
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Why do managers compare the actual cost to cost per equivalent unit for DM and CC? |
Because if the cost per equivalent unit is the same or lower than the budgeted, the manager has successfully controlled costs |
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How do you assign total costs to units completed and to units ending work in process inventory? |
The equivalent units are multiplied by the cost per equivalent unit to assign costs to units |
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Definition of average unit costs |
The sum of the direct materials costs per equivalent unit and the conversion cost per equivalent unit |
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How do you calculate conversion costs? |
Direct Labor + Manufacturing Overhead |
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What is the definition of conversion costs? |
Cost to convert direct materials into new finished products |
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Definition of equivalent units? |
Amount of work done during a period in terms of fully completed units of output or when partially completed units are converted into a comparable number of completed units |
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What is important to remember about journal entries in a process costing system? |
Manufacturing costs are assigned to processing departments, at the end of the month journal entries are made to transfer cost to the next processing department, in process costing each processing department has a separate work in process inventory account |
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Definiton of cost behavior |
how costs change as volume changes |
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What are variable costs? |
Costs that are incurred for every unit of volume |
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How do total variable costs react to changes in volume? |
Direct proportion |
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Describe the Graphs of Variable Costs |
Always begin at the origin which is the point that represents zero volume and zero cost, the slope represents the variable costs per unit of activity, the y axis always shows total costs, the x axis shows the volume of activity |
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What happens to total fixed cost over a wide range of volume? |
Stays constant |
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What is the relationship between fixed cost per unit of activity and volume? |
FC per unit of activity varies inversely with changes in volume: when volume increases, FC per unit of activity decreases and vise versa, when volume decreases, FC per unit of activity increases |
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Define Committed Fixed Costs and how they affect management decisions? |
Def: costs that are locked because of previous management decisions; management has little or no control over committed fixed costs in the short run |
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Describe Discretionary Fixed Costs and how they affect management decisions? |
Result from annual management decisions; management has more control over these in the short run |
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What is the cost equation for a fixed cost? |
TFC (y) = Fixed amount over a period of time (f) or y = f |
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What is the relationship between the total mixed cost line and the volume of activity? |
TMC line increases as the volume of activity increases but not in a direct proportion |
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What is the relationship between mixed costs per unit and volume? |
MC per unit decreases as volume increases |
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Whats special about the graph for mixed costs? |
Does not begin at the origin Intersects the y-axis at the level equal to the fixed cost component |
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What is the cost equation total mixed costs? |
TMC (y) = VC Component (vx) + FC component (f) |
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Definition of cost equation |
A mathematical equation for a straight line to predict total costs |
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How can any variable cost line be mathematically expressed? |
TVC (y) = VC per unit of activity (v) * Volume of activity (x) |
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What are the steps to the high low method? |
1. Find VC per unit (slope) of the cost line 2. Find the FC (vertical intercept) : FC= TMC-TVC 3. Create the cost equation |
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What does the Contribution Margin Income Statement look like? |
Sales Revenue Less: Variable Expenses Contribution Margin Less: Fixed Expenses Operating Income |
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Definition of Contribution Margin Ratio |
A percentage of each sales dollars that is available for covering fixed expenses and generating a profit |
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Formulas for Contribution Margin Ratio |
Contribution Margin per unit / Sales Price per unit or CM/Sales Revenue |
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Definition of the breakeven point |
Sales level at which operating income is zero |
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What does it mean if sales are above breakeven point? |
Profit |
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What does it mean if sales are below breakeven point? |
Loss |
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What is true about the relationship between fixed expenses and total contribution margin? |
They are equal |
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What is true about the relationship between total sales and total expenses? |
They are equal |
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Definition of Margin of Safety |
Excess of actual or expected sales over breakeven sales |
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What is the margin of safety used for? |
Used to evaluate the risk of current operations as well as the risk of new plans |
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What does the operating leverage factor show? |
How responsive a company's operating income is to changes in volume |
