ACCT208
Factors in determining the markup percentage using the absorption costing approach to cost plus pricing include
Absorption costing unit product cost selling, general and adminsistrative expenses adequate return on investment
The manufacturing cycle effiency is computed by relating the value added time to the ________ time
throughput time
The costs provided by a well designed activity based costing system are ______ relevant to a decision
potentially
The absorption costing approach to cost plus pricing
relies on forecasted unit sales assumes that customers will pay whatever price the company decides to charge
The formula used to calculate markup percentage on absorption cost includes
selling, general and administrative expenses unit product costs multiplied by unit sales required ROI multiplied by investment
Which evaluation measures are used for investment center managers only--- not for cost or profit center managers
Residual Income and Return on Investment
Deciding what to do with a joint product at the split off point is a _______ or ____ decision
Sell or Process Further Decision
Why is the unit product cost different from the cost that would be incurred if another (additional_ unit were produced?
The cost to produce another unit is the incremental or marginal cost
Joint Costs
The costs incurred up to the split off point in a process in which two or more products are produced from a common input
Price elasticity of demand
The degree to which a change in price affects unit sales of a product or service
The Target costing approach was developed because
The market really determines prices Most of a product's cost is determined in the design stage
Residual Income
The net operating income that an investment center earns above the minimum required return on its average operating assets
Economic Value to the Customer
The price of a customer's best available alternative plus the value of what differentiates the product from that alternative
Target Costing
The process of determining the maximum allowable cost for a product and developing a profitable prototype
When there is a constrained resources such as time
The product that has the greater contribution margin per minute should be produced first to meet customer demand and then any remaning capacity should be used to produce the secondary product
When all overhead is assigned using direct-labor hours, the company has chosen to use
a plantwide predetermined overhead rate
Absorption Costing
all manufacturing costs, both fixed and variable are assigned to units of products conversely all non manufacturing costs are treated as period costs and not assigned to units of products
The formula to calculate the target cost includes
anticipated selling price desired profit per unit
Total Manufacturing costs is caluculated using
applied, not actual overhead
Profit Center Managers
are often evaluated on actual vs budgeted net income
Customers and Competitors play important roles in determining a company's price
ceiling
Martin Industries had unadjusted cost of goods sold of $450,000. Overhead was underapplied by $30,000. Adjusted cost of goods sold is
480,000
Differential Cost
Also known as an incremental or Avoidable cost A future cost that is not the same between any two alternatives
A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?
Alternative uses for the equipment & salvage value NOT depreciation which is a sunk cost
Why do companies use a predetermined overhead rate rather than an actual overhead rate?
An actual overhead rate is not known until the end of the period
Balanced Scorecard
An integrated set of performance measures that are derived from the company's strategy
Target Cost
Anticipated selling price - Desired Profit
Cost Plus Pricing
Applying a predetermined markup percentage to a cost base to determine the selling price
To calculate cost of goods manufactured
Beginning work in process + Total manufacturing costs - Work In Process
If some products must be cut back because of a constraint, produce the products with the highest
Contribution margin per unit of constrained resource
Value Added Time
Process Time
Throughput or Manufacturing Cycle Time
Process Time + Inspection Time + Move time + Queue Time
Steps of decision making
Define the alternatives Identify relevant costs and benefits Perform a differential analysis
At Breakeven total contribution margin is
Equal to fixed costs
Value Based Pricing
Establishing selling prices based on the economic worth of benefits their goods and services provide to customers
Four groups of performance measures typically used in the balanced scorecard approach
Financial, customer, internal business processes, and learning and growth
Pricing all a company's products above the price floor does not guarantee a profit because all ____ costs may not be covered
Fixed Costs
Costs and benefits that ALWAYS differ between alternatives
Relevant Costs and Benefits
Elastic Demand
If price changes significantly impact product sales
Inelastic Demand
If the change in price does not greatly impact sales
Using net book value (instead of gross cost) to calculate average operating assets
Increases ROI over time
The manager of an ________ center has control over costs, revenue, and investments in operating assets
Investment Center
Isolating relevant costs is desirable because
Irrelevant costs may be used incorrectly in the analysis All information needed for the total cost approach is rarely available Critical information may be overlooked with the total cost approach
Joint costs are
Irrelevant in decisions regarding what to do with a product after split off
Value Based Price
Is less than the EVC which = reference value + diffrential value Greater than or equal to the reference value
Disadvantage of Residual Income approach
It cannot be used to compare the performance of divisions of different sizes
When is it profitable to continue processing a joint product after the split off point?
It is profitable when the incremental revenue exceeds the incremental processing cost
ROI Formula
Margin x Turnover (Net Operating Income / Sales ) x (Sales / Average Operating Assets)
Steps in the absorption costing approach are
Multiply unit product costs by 1+ markup percentage Calculate unit product costs Determine markup percentage on absorption cost
Residual INcome
Net operating income - ( average operating assets x minimum required rate of return)
When a manager is evaluated on Residual Income, an investment is acceptable when
Net operating income for the investment is above the minimum required return on average operating assets
Joint Products
Two or more products produced from a common input
Total cost approach
Uses both relevant and irrelevant costs when using this decision making approach
Manufacturing Cycle Efficiency (MCE)
Value added time "Process Time" / Throughput Time Process Time / (Process Time + Move Time + Queue Time + INspection Time)
Non Value Added Time
Wait Time Inspection Time Move Time Queue Time
Delivery Cycle Time
Wait Time + Throughput Time = Wait Time + Process Time + Inspection Time + Move Time
Markup Percentage Formula on absorption costing
[(Required ROI x Investment) / Selling and administrative Expenses ] / (unit product cost x unit sales)
Lower level management goals that are inconsistent with company goals are a possible disadvantage of
decentralization
To effectively deal with a constraint
efforts should be focused on the weakest link improvements should focus on the constraint
Predetermined overhead rate is calculated by
estimated total manufacturing overhead / estimated total amount of the allocation base
The lowest price a company can charge and still make incremental profits on the sale is the price ____
floor
Irrelevant Costs
future costs that do not differ between alternatives sunk costs
Relevant costs when analyzing a special order
incremental costs and benefits only since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant
When in a Make or Buy Decision the cost incureed to buy the equipment to make the part
is a sunk cost; the depreciation simply spreads this sunk cost over the equipment's useful life
Shortcoming of allocating common fixed costs
is that such allocations can make a product line look less profitable than it really is