Managerial Accounting

Direct Cost

-A cost that can be easily and conveniently traced to a specified cost object. -For example, if Adidas is assigning costs to its various regional and national sales offices, then the salary of the sales manager in its Tokyo office would be a direct cost of that office.

Sunk Cost

-A cost that has already been incurred and cannot be changed regardless of what a manager decides to do. -Have no impact on future cash flows and they remain the same no matter what alternatives are being considered.

Common Cost

-A cost that is incurred to support a number of cost objects but cannot be traced to them individually. -Type of indirect cost

Sell or Process Further Decision

-A decision as to whether a joint product should be sold at the split-off point or processed further. 1.Ignore all joint costs (all costs incurred up to the split-off point) 2.Determine the incremental revenue that is earned by further processing the joint product. 3.Take the incremental rev. from step two and subtract the incremental costs associated with processing the joint product beyond the split-off point. If positive/process further. If negative/joint product should be sold at the split-off point.

Make or Buy Decision

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

Budget

-A detailed plan for the future that is usually expressed in formal quantitative terms.

Bill of Materials

-A document that lists the quantity of each type of direct material needed to complete a unit of product.

Cost Driver

-A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Traceable Fixed Cost

-A fixed cost that is incurred because of the existence of the segment--if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear. Examples: -The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo -The maintenance costs for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing -The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of The Walt Disney Corporation

Common Fixed Cost

-A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments. Examples: -The salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors -The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the store's various departments--groceries, produce, bakery, meat, and so forth -The cost of the receptionist's salary at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office, but not to individual doctors

Differential Cost

-A future cost that differs between any two alternatives is known as... -Always relevant costs -Incremental/Avoidable cost

Operating Leverage

-A measure of how sensitive net operating income is to a given percentage change in dollar sales

Allocation Base

-A measure such as direct labor-hours (DLH) or machine-hours (MH) that is used to assign overhead costs to products and services.

Degree of Operating Leverage

-A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. -CM/NOI

Special Order

-A one-time order that is not considered part of the company's normal ongoing business.

Segment

-A part or activity of an organization about which managers would like cost, revenue, or profit data. -Examples: product lines, customer groups (segmented by age, ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and departments.

Manufacturing Overhead

-All factory costs that are 1) factory costs but 2) are not direct costs. That is, such costs are not directly traceable to the final product. Here are some typical manufacturing overhead costs: 1.Depreciation on factory machinery and buildings 2.Heating, lighting, and electricity costs in the factory 3.Costs of indirect laborers, such as the cleanup crew who sweep up the factory--they do not work directly on the product, but incur factory costs nonetheless. 4.Indirect materials: lubricants, small parts, sandpaper, screws, or other items of insignificant cost that are necessary to the manufacturing operation, but are too small and insignificant to measure. 5.Factory supervisory costs. The cost of the factory or plant manager is considered manufacturing overhead.

Period Costs

-All the costs that are not product costs. -All selling and administrative expenses are treated as period costs. -For example, sales commissions, advertising, executive salaries, public relations, and rental costs of administrative offices are all period costs. -Expensed on the income statement.

Direct Labor

-Analogous to Direct Material, Direct Labor cost is directly traceable to the cost of the final product. Some people call Direct Labor "hands-on" labor, suggesting that the worker holds, saws, drills, or otherwise applies labor directly to the product.

Cost Object

-Anything for which cost data are desired-including products, customers, and organizational subunits.

Constraint

-Anything that prevents you from getting more of what you want. Every individual and every organization faces at least one constraint, so it is not difficult to find examples of constraints.

Activity-based Absorption Costing

-Assigns all manufacturing overhead costs to products based on the activities performed to make those products.

Volume Trade-Off Decisions

-Companies are forced to make these types of decisions when they do not have enough capacity to produce all of the products and sales volumes demanded by their customers. -In these situations, companies must trade off, or sacrifice production of some products in favor of others in an effort to maximize profits.

Performance Report

-Compares budgeted data to actual data in an effort to identify and learn from excellent performance and to identify and eliminate sources of unsatisfactory performance. -Can also be used as one of many inputs to help evaluate and reward employees.

Raw Materials Inventory

-Consists of the materials that will be made into the final product. These raw materials wait in storage until they are requisitioned into production.

Mixed Cost

-Contains both a fixed and variable cost component. -Example : Begins at the fixed point on the Y-axis ($20). The variable potion of the cost puts the cost function above the $20 level based on the number of calls made. At 10 calls for example, the total phone cost is $20 + 10*.10 = $21.

Working Capital

-Current assets less current liabilities. -When a company takes on a new project, the balances in the current asset accounts often increase. For example, opening a new Nordstrom's department store requires additional cash in sales registers and more inventory. These additional working capital needs are treated as part of the initial investment in a project. Third, many projects require periodic outlays for repairs and maintenance and additional operating costs.

Standard Hours Per Unit

-Defines the amount of direct labor-hours that should be used to produce one unit of finished goods.

Standard Quantity Per Unit

-Defines the amount of direct materials that should be used for each unit of finished product, including allowance for normal inefficiencies, such as scrap and spoilage.

Period Costs

-Depreciation on a salesman's car or the president's secretary's computer. -Non-manufacturing costs. 1.Marketing and selling costs 2.Administrative costs 3.Research and Development costs. -Expensed immediately, they cannot be added to the cost of inventory.

Bottleneck

-Determined by the step that limits total output because it has the smallest capacity--in this case surgery. The total number of patients processed through the entire system cannot exceed 15 per day--the maximum number of patients who can be treated in surgery.

Variable Cost

-Directly proportional to changes in the cost driver. -Example : If hours worked doubles, the total pay doubles as well.

Differential Revenue

-Future revenue that differs between any two alternatives is known as.... -Example of a relevant benefit

Administrative Costs

-Include all costs associated with the general management of an organization rather than with manufacturing or selling. -Examples include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole.

Product Costs

-Include all costs involved in acquiring or making a product. -"Attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.

Selling Costs

-Include all costs that are incurred to secure customer orders and get the finished product to the customer. -Sometimes called order-getting and order-filling costs. -Examples include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. -Selling costs can be either direct or indirect costs. For example, the cost of an advertising campaign dedicated to one specific product is a direct cost of that product, whereas the salary of a marketing manger who oversees numerous products is an indirect cost with respect to individual products.

Postaudit

-Involves checking whether or not expected results are actually realized.

Direct Materials

-Materials that become an integral part of a finished product and whose costs can be conveniently traced to the finished product.

Materials Price Variance

-Measures the difference between a direct material's actual price per unit and its standard price per unit, multiplied by the actual quantity purchased.

Variable Overhead Efficiency Variance

-Measures the difference between the actual level of activity and the standard activity allowed for the actual output, multiplied by the variable part of the predetermined overhead rate.

Variable Overhead Rate Variance

-Measures the difference between the actual variable overhead cost incurred during the period and the standard cost that should have been incurred based on the actual activity of the period.

Segment Margin

-Obtained by deducting the traceable fixed costs of a segment from the segment's contribution margin. It represents the margin available after a segment has covered all of its own costs.

Variable Costing

-Only those manufacturing costs that vary with output are treated as product costs. -This would usually include direct materials, direct labor, and the variable portion of manufacturing overhead.

Indirect Materials

-Raw materials, such as the solder used to make electrical connections in a Samsung HDTV and the glue used to assemble an Ethan Allen chair, whose costs cannot be easily or conveniently traced to finished products.

Time Value of Money

-Recognizes that a dollar today is worth more than a dollar a year from now if for no other reason than you could put the dollar in a bank today and have more than a dollar a year from now.

Job Cost Sheet

-Records the materials, labor, and manufacturing overhead costs charged to that job.

Indirect Labor

-Refers to employees, such as janitors, supervisors, materials handlers, maintenance workers, and night security guards, that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product.

Cost Structure

-Refers to the relative proportion of fixed and variable costs in an organization.

Sales Mix

-Refers to the relative proportions in which a company's products are sold. -The idea is to achieve the combination, or mix, that will yield the greatest profits. -Profits will be greater if high-margin rather than low-margin items make up a relatively large proportion of total sales.

Conversion Cost

-Refers to the sum of Direct Labor Cost + Manufacturing Overhead Cost.

Prime Cost

-Refers to the sum of Direct Labor cost + Direct Material cost.

Conversion Cost

-Refers to the sum of direct labor and manufacturing overhead. -Used to describe direct labor and manufacturing overhead because these costs are incurred to convert direct materials into finished products.

Cost-Volume-Profit (CVP) Analysis

-Requires that we break costs down into their variable and fixed components -Because variable costing income statements categorize costs as variable and fixed, it is much easier to use this income statement format to perform CVP analysis than attempting to use the absorption costing format, which mixes together variable and fixed costs.

Contribution Margin

-The amount remaining from sales revenue after variable expenses have been deducted. -Thus it is the amount available to cover fixed expenses and then to provide profits for the period.

Finished Goods Inventory

-The cost of goods that are complete and ready to sell.

Work in Process Inventory

-The cost of partially finished goods. The three major manufacturing costs come together in this account: the cost of the Raw Materials requisitioned into production (called Direct Materials), Direct Labor costs, and Manufacturing Overhead costs. The goods stay in Work in Process until the moment they are finished.

Price Variance

-The difference between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual amount of input purchased.

Margin of Safety

-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. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

Incremental Cost

-The increase in cost between two alternatives -Always relevant costs

Payback Period

-The length of time it takes for a project to recover its initial cost from the net cash inflows that it generates. This period is sometimes referred to as "the time it takes for an investment to pay for itself."

Raw Materials

-The materials that go into the final product are called raw materials. -Refers to any materials used in the final product

Opportunity Cost

-The potential benefit that is given up when one alternative is selected over another.

Internal Rate of Return

-The rate of return of an investment project over its useful life.

Prime Cost

-The sum of direct materials cost and direct labor cost

Absorption Costing

-Treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. -The cost of a unit of product under the absorption costing method consists of direct materials, direct labor and both variable and fixed manufacturing overhead. -Full cost method

Joint Products

-Two or more products are produced from a single raw material input

Fixed Cost

-Unresponsive to changes in a particular cost driver. -Example : The rent on a factory is $1,000 per month. Although the production level of the factory varies from month to month, the factory rent does not change. The fixed cost per unit declines as the number of units increases.

Job-order Costing

-Used in situations where many different products, each with individual and unique features, are produced each period. -For example, a Levi Strauss clothing factory would typically make many different types of jeans for both men and women during a month.

Overapplied Overhead

-When a company applies more overhead to production than it actually incurs, it results in this.

Vertically Integrated

-When a company is involved in more than one activity in the value chain.

Avoidable Cost

-a cost that can be eliminated by choosing one alternative over another -Example: Going to movie theater or renting a movie. The cost of the ticket is avoidable and the rental fee is avoidable. -Always relevant costs

Indirect Cost

-a cost that cannot be easily and conveniently traced to a specified cost object. -For example, Campbell Soup factory may produce dozens of varieties of canned soups. The factory manager's salary would be an indirect cost of a particular variety such as chicken noodle soup. The reason is that the factory manager's salary is incurred as a consequence of running the entire factory-it is not incurred to produce any one soup variety.

Direct Labor

-consists of labor costs that can be easily traced to individual units of product. -Examples: Assembly-line workers at Toyota, carpenters at the home builder KB Home, and electricians who install equipment on aircraft at Bombardier Learjet.

Manufacturing Overhead

-includes all manufacturing costs except direct materials and direct labor -For example, this includes a portion of raw materials known as indirect materials as well as indirect labor.

Nonmanufacturing Costs

-selling costs and administrative costs

Direct Material

-the cost of material that is directly traceable to the final product. An example would be the wood in a wooden table. The cost of the wood is traceable and bears a significant cost to the final product. Direct Material is almost always considered a variable cost; as more tables are built, the total cost increases in a directly proportional way.

CM Ratio

CM/Sales

Planning

Involves establishing goals and specifying how to achieve them.

Decision Making

Involves selecting a course of action from competing alternatives.

Split-Off Point

The point in a manufacturing process where joint products (such as gasoline and jet fuel) can be recognized as separate products.

underapplied overhead

When a company applies less overhead to production than it actually incurs, it creates this.

Inventory Costs

When units of product are sold, their costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales on the income statement.

Manufacturing Costs

direct materials, direct labor, manufacturing overhead

Controlling

involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change

Net Present Value

the present value of current and future benefits minus the present value of current and future costs

Relaxing (or elevating) the Constraint

when a manager increases the capacity of the bottleneck