Acct II

The cost of capital

. The cost of capital is the average rate of return that the company must pay to its long-term creditors and its shareholders for the use of their funds.

labor efficiency variance

The labor efficiency variance measures the difference between the actual hours used and the standard hours allowed for the actual output, multiplied by the standard hourly rate.

balanced scorecard

A balanced scorecard consists of an integrated set of performance measures that are derived from and support a company's strategy.

cash budget

A cash budget is a detailed plan showing how cash resources will be acquired and used.

mixed cost

A cost that contains both variable and fixed cost elements.

sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future. (p. 16)

labor rate variance

The labor rate variance measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period.

Direct Labor

Direct labor consists of labor charges that are easily traced to a particular job.

COGM

The cost of goods manufactured includes the manufacturing costs associated with the goods that were finished during the period

Work in process

Work in process consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Notice that direct labor costs are added directly to Work in Process—they do not flow through Raw Materials inventory. consumed by each job

Direct cost

easily and conveniently traced to a specified cost object.

fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. (p. 3)

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.

Make or Buy

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a make or buy decision.

differential cost

A difference in cost between two alternatives. Also see <i>Incremental cost.</i> (p. 15)

A materials price variance

A materials price variance measures the difference between an input's actual price and its standard price, multiplied by the actual quantity purchased.

high low method

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels. (p. 9)

Revenue Variance

A revenue variance is the difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period.

Contribution approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes. (p. 14)

batch level activities

Batch-level activities are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities. They are incurred once for each batch (or customer order). Costs at the batch level depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume. For example, the cost of setting up a machine for batch processing is the same regardless of whether the batch contains one or thousands of items.

activity variance

Because all of the variances on this report are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period, they are called activity variances.

Spending Variance

By definition, a spending variance is the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity.

Contribution margin

Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted.

customer level activities

Customer-level activities relate to specific customers and include activities such as sales calls, catalog mailings, and general technical support that are not tied to any specific product.

Steps for Implementing Activity-Based Costing:

Define activities, activity cost pools, and activity measures. Assign overhead costs to activity cost pools. Calculate activity rates. Assign overhead costs to cost objects using the activity rates and activity measures. Prepare management reports.

Conversion cost

Direct labor cost plus manufacturing overhead cost. convert to the final product

Finished goods

Finished goods consist of completed units of product that have not yet been sold to customers. The amount transferred from Work in Process to Finished Goods is referred to as the cost of goods manufactured.

Flexible budget

Flexible budgets take into account how changes in activity affect costs. A flexible budget is an estimate of what revenues and costs should have been, given the actual level of activity for the period.

Manufacturing overhead cost

Manufacturing overhead is an indirect cost. This means that it is either impossible or difficult to trace these costs to a particular product or job. Manufacturing overhead consists of many different types of costs ranging from the grease used in machines to the annual salary of the production manager

organization sustaining activities

Organization-sustaining activities are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. This category includes activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, and so on.

product level activities

Product-level activities relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold. For example, activities such as designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.

Decision Criteria

Recall that when considering investment opportunities, managers must make two types of decisions—screening decisions and preference decisions. Screening decisions, which come first, pertain to whether or not a proposed investment is acceptable. Preference decisions come after screening decisions and attempt to answer the following question: "How do the remaining investment proposals, all of which have been screened and provide an acceptable rate of return, rank in terms of preference? That is, which one(s) would be best for the company to accept?"

Budgeted income statement

The budgeted income statement provides an estimate of net income for the budget period and it relies on information from the sales budget, ending finished goods inventory budget, selling and administrative expense budget, and the cash budget.

Net present value method

The difference between the present value of these cash flows, called the net present value, determines whether or not a project is an acceptable investment.

Direct labor budget

The direct labor budget shows the direct labor-hours required to satisfy the production budget. By knowing in advance how much labor time will be needed throughout the budget year, the company can develop plans to adjust the labor force as the situation requires.

Direct Materials budget

The direct materials budget details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

Budgeted Balance sheet

The final schedule of the master budget is the balance sheet, which estimates a company's assets, liabilities, and stockholders' equity at the end of a budget period.

Sales Budget

The first step in the budgeting process is the preparation of the sales budget, which is a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process

The manufacturing overhead budget

The manufacturing overhead budget lists all costs of production other than direct materials and direct labor.

The margin of Safety

The margin of safety is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred Area between Profit and total cost =total budgeted- break even

The materials quantity variance

The materials quantity variance measures the difference between the actual quantity of materials used in production and the standard quantity of materials allowed for the actual output, multiplied by the standard price per unit of materials.

predetermined overhead rates

The predetermined overhead rate is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base as follows: Predetermined overhead rate equals Estimated total manufacturing overhead cost divided by Estimated total amount of the allocation base.

applying MOH

The process of assigning overhead cost to jobs is called overhead application. The formula for determining the amount of overhead cost to apply to a particular job is: Overhead applied to a particular job equals Predetermined overhead rate times Amount of the allocation base incurred by the job.

Production budget

The production budget lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending finished goods inventory.

relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid. (p. 4)

The selling and administrative expense budget

The selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing.

Joint products

Two or more products that are produced from a common input are known as joint products.

Unit level activities

Unit-level activities are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced. For example, providing power to run processing equipment would be a unit-level activity because power tends to be consumed in proportion to the number of units produced.

Cost pool

activity cost pool is a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system.

manufacturing cost

all manufacturing cost except for direct materials and labor

period cost

all the cost that are not product costs like selling and admin exp are

Nonmanufacturing cost

are also often called selling, general, and administrative (SG&A) costs or just selling and administrative costs

Internal failure cost

are incurred because defects occur despite efforts to prevent them Failure costs are incurred when a product fails to conform to its design specifications.

external failure cost

are incurred because defects occur despite efforts to prevent theminclude warranty repairs and replacements, product recalls, liability arising from legal action against a company, and lost sales arising from a reputation for poor quality.

appraisal cost

are incurred in an effort to keep defective products from falling into the hands of customers.

prevention cost

are incurred in an effort to keep defective products from falling into the hands of customers.

Break even analysis

for the moment, note that the break-even point is the level of sales at which profit is zero. Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold. Profit =Unit CM x Q - FC=MC ratio x sales -FC units sales to break even =FC/ Unit CM

opportunity cost

he potential benefit that is given up when one alternative is selected over another. (p. 16)

product cost

include all costs involved in acquiring or making a product.

indirect cost

is a cost that cannot be easily and conveniently traced to a specified cost object.

prime cost

is the sum of direct materials cost and direct labor cost