Cost Accounting Exam 1 Chapters 1-4

Factors to Determine Whether or not ABC is useful

-Number of diversity of products or services produced -Diversity and differential degree of support services used for different products -Extent to which common processes are used -Effectiveness of current cost allocation methods -Rate of growth of period costs

Absorption Costing

Absorption Costing treats the cost of all manufacturing components (direct material, direct labor, variable overhead, and fixed overhead) as inventoriable, or product, costs in accordance to GAAP. Absorption Costing is also known as Full Costing. Under this method, cost incurred in non-manufacturing areas of the organization are considered period cost and are expensed in a manner that properly matches them with revenues.

Types of activities that are value added

Anything that falls under processing time

Characteristics of Scorecards

Balanced Scorecard- framework that translates an organization's strategy into clear and objective performance measures that focus on customers, internal business processes, employees, and shareholders. The BSC provides a means by which actual business outcomes can be evaluated against performance targets. Four perspectives: Learning and Growth, Internal Business, Customer Value, Financial Performance.

Conversion Costs

Costs that are incurred to convert materials into products

Nature of Fixed Costs and Variable Costs

Fixed Cost- a cost that remains constant in total within the relevant range of activity Variable Cost- a cost that varies in total proportionately with activity

Impacts of Activity Based Management

Helps companies to produce more efficiently, determine product or service costs more accurately, and control and evaluate performance more effectively.

Degrees of conversion (high, medium, low) and where sample companies would fit

High- causing a major transformation from input to output- manufacturing, construction, agriculture, architecture, auditing firms, mining and printing companies, restaurants Medium- washing, testing, packaging, labeling- retailing companies that make visible additions prior to sale, florists, meat markets, oil-change Low- adding only the convenience of having merchandise when and where and in the assortment needed by customers- dept stores, gas stations, jewelry stores, travel agencies

Method for disposing of material under/over applied factory overhead

If underapplied, debit COGS (increase), credit FOH. If overapplied, debit VOH, credit COGS(decrease)

The formula for computing manufacturing cycle efficiency

MCE = Total Value-Added Time / Total Cycle Time

Phantom Profits

Phantom Profits are temporary absorption costing profits caused by producing more inventory than is sold. When previously produced inventory is sold, the Phantom Profits disappear.

Major differences between Financial and Management Accounting Financial Accounting

Primary Users: External Primary Organizational Focus: Whole Aggregated Information Characteristics: Must be Historical, Quantitative,Monetary, Verifiable Overriding Criteria: GAAP Consistency, Verifiability Record Keeping: Formal

Major differences between Financial and Management Accounting Managerial Accounting

Primary Users: Internal Primary Organizational Focus: parts (Segmented) Information Characteristics: May be Current or Forecasted, Quantitive or Qualitative, Monetary or Non-Monetary, Timely and at a Minimum reasonably estimated. Overriding Criteria: Situational Relevance (Usefulness) Benefits in Excess of Costs, Flexibility Record Keeping: Combination of Formal and Informal

Product Costs vs. Period Costs

Product Costs- costs related to making or acquiring the products or providing the services that directly generate the revenues of an entity Period Costs- costs related to business functions other than production, such as selling and administration

Product Contribution Margin

Sales - Variable Cost of Goods Sold Product Contribution Margin indicates how much revenue is available to cover all period expenses and to provide net income.

Cost Behavior

The reaction of expenses to alterations in the amount of some business activity.

Prime Costs

The sum of direct material and direct labor

Reasons to Use Predetermined Overhead Rates

They facilitate overhead assignment during a period as goods are produced or sold and services are rendered (improve timeliness of info), they adjust for variations in actual overhead costs that are unrelated to fluctuations in activity, they overcome the problem of fluctuations in activity levels that do not impact fixed overhead costs, and they allow managers to be more aware of individual product or product line profitability as well as the profitability of business with a particular customer or vendor.

Total Contribution Margin

Total Revenues - Total Variable Expenses The Total Contribution Margin measures the dollars available to contribute to cover all fixed expenses, both manufacturing and non-manufacturing and to provide net income.

Variable (Direct) Costing

Variable Costing, also known as Direct Costing, is a cost accumulation method that includes only direct material, direct labor, and variable overhead as product costs. This method treats fixed manufacturing overhead as a period cost. Like Absorption Costing, Variable Costing treats costs incurred in the organizations selling and administrative area as period costs.