Managerial Accounting Exam 3
Benefits in selecting one alternative over another.
- Difference between the net operating income for the alternatives. -Analysis that just looks at the relevant cost and benefits. -Analysis that looks at all costs and benefits and identifies that those are differential.
Avoidable Cost
-Cost that can be eliminated by choosing one alternative over another. -Are relevant cost
Differences between Absorption and Variable Costing?
-How Fixed overhead is treated -Wether or not contribution margin is reported -How classifications are defined
Synonyms for avoidable cost
-Incremental cost -Differential cost
Opportunity cost
-The potential benefit that is given up when one alternative is selected over another. -Not usually found in accounting records
Fixed Manufacturing overhead, under Absorption.
-Treated as part of the per unit product cost and expended as the units are sold. -Treated like a variable cost, because a portion of the total cost is allocated to each unit produced.
What is happening when the Number of units produced equals the number of units sold?
-Under both absorption and variable costing, all fixed overhead incurred flows through the income statement. -Absorption costing net income is equal to variable costing net income.
2 reasons crucial for distinguishing relevant and irrelevant cost and benefits
1. Irrelevant data can be ignored 2. Bad decisions can easily result from including irrelevant cost and benefits when analyzing alternatives.
categories of cost that are never relevant in decisions.
1. Sunk cost
Make or Buy decision
A decision to carry out one of the activities in the value chain internally, rather than to buy externally from supplier.
Differential Cost
A difference in cost between any two alternatives.
Variable and Fixed cost distinctions are ignored when a company prepares income statements using?
Absorption costing
What is required by GAAP and IFRS
Absorption costing
Under Absorption costing how is manufacturing cost treated?
All manufacturing costs are treated as product cost.
Constraint
Anything that prevents your from getting more of what you want.
Whats another name for a constraint?
Bottleneck
Avoidable Cost
Cost that can be eliminated by choosing one alternative over another.
Sunk cost
Cost that has already been incurred and cannot be avoided regardless of what a manager decides to do.
Dangers of Allocating Fixed costs
Dangers in allocating common fixed costs is that such allocations can make a product line look less profitable than it really is.
Differential Revenue
Difference in revenue between any two alternatives.
Variable costing can also be referred to as?
Direct costing or Marginal Costing
Under Absorption costing the cost of a unit of product consists of?
Direct materials Direct Labor Both variable and Fixed manufacturing overhead
Variable costing includes?
Direct materials Direct labor Variable portion of Manufacturing overhead
Absorption costing is used for?
External reports and Internal reports
Traceable Fixed cost
Fixed cost that is incurred because the existence of a segment. -Ex. Mgmt salaries, maintenance cost, and insurance
What is variable costing used for?
Internal Decision making purposes
Under absorption costing What account is Fixed manufacturing overhead accumulated in, until units of products are sold?
Inventory (this is on the balance sheet)
Unavoidable cost are?
Irrelevant cost
Prepared Segmented Income statements
May be prepared for activities at many levels in the company.
What happens if there is no change in Inventory?
Net operating income will be the same under both Absorption and Variable costing.
Variable costing (calculating net income)
Number of units sold x Contribution Margin - Total fixed expense
Special Order
One-time order that is not considered part of the company's normal ongoing business.
Identifying relevant cost and benefits
Only those costs and benefits that differ in total between alternatives are relevant in a decision.
Segment break-even calculations include?
Only traceable Fixed expenses
When calculating the Segment Margin what is charged to the segment?
Only traceable fixed cost
Segment
Part or Activity within an organization about which managers would like cost, revenue or profit data.
In variable costing how is Manufacturing overhead treated?
Period cost
Because differential costs and differential Revenues are the only inputs that are relevant to decision making, they can also be called?
Relevant cost and Relevant benefits
Variable costing Income statements
Rely on the contribution format.
What should you do if products must be cut back because of constrain?
The correct solution is to favor the products that provide the highest contribution margin per unit of the constrained resource.
How is selling and Admin, expensed under Variable costing?
The end of each period.
What should be considered when deciding to add or drop a segment?
The impact it will have on Net operating income
Split-off Point
The point in the manufacturing process at which the joint products can be recognized as separate products.
Economic Depression
The reduction in resale value of an asset through use or over time.
What happens when a segment is eliminated?
Traceable Fixed cost will disappear, and common fixed cost will remain the same.
When reporting a Segment
Traceable fixed cost are charged to segments, but common fixed cost are not.
Joint Products
Two or more products that are produced from a common input.
Selling and Administrative Expenses
Under both variable costing and Absorption costing are always treated as period cost and are expensed as incurred.
Joint Cost
Used to describe the costs incurred up to the split-off point.
Vertically Integrated
When a company is involved in more than one activity in the entire value chain.
Relaxing the Constraint
When a manager increases the capacity of the bottleneck.
How do units flow through the income statement under Absorption costing?
When units are produced
Do opportunity cost need to be considered when making Decisions?
YES
Differential costs are also referred to as
relevant costs or avoidable costs