C251 Cost Accounting

fixed cost behavior per unit

FC per unit decreases as the activity level rises and increases as the activity level falls

variable cost behavior per unit

VC per unit remains constant

sunk cost

a cost that has already been incurred and that cannot be changed by any decision now or in the future

differential cost

a difference in costs between any two alternatives

differential revenue

a difference in sales between two alternatives

manufacturing overhead

all manufacturing cost except direct materials and direct labor (aka factory overhead, indirect manufacturing costs, or factory burden)

period costs

all the costs that are not product costs (selling/admin) expensed when incurred

dependent variable

amount of cost incurred during a period depends on the level of activity for the period

contribution margin

amount remaining from sales revenue after variable expenses have been deducted; COGS is considered variable

account analysis

an account is classified as either variable or fixed based on analyst's prior knowledge of how the cost behaves

discretionary fixed costs

annual decisions by management to spend on certain fixed costs items like advertising, research, public relations

cost object

anything for which cost data are desired

cost of goods sold

beginning inventory + purchases - ending inventory

independent variable

causes the variations in the cost

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 poor performance

corporate social responsibility

concept whereby organizations consider the needs of all stakeholders when making decisions

managerial accounting

concerned with providing information to managers for use within the organization

financial accounting

concerned with reporting financial information to external parties

value chain

consists of major business functions that add value to products or services

mixed cost

contains both variable and fixed cost elements (aka semi-variable cost)

Describe cost classifications.

cost are classified differently according to need/purpose assigning costs to cost objects manufacturing companies for preparing financial statements predicting cost behavior making decisions

direct costs

cost that can be easily and conveniently traced to a specific cost object

indirect costs

cost that cannot be easily or conveniently traced to a specific cost object; considered a conversion cost

common costs

cost that is incurred to support a number of cost objects but cannot be traced to the individually

fixed cost

cost that remains constant in total regardless of changes in the level of activity

administrative costs

costs associated with general management of organization

indirect labor

costs that cannot be physically traced to a product

engineering approach

detailed analysis of what cost behavior should be based on an industrial engineer''s evaluation of the production methods to be used, the material specifications, labor requirements, equipment usage, production efficiency, etc

budget

detailed plan for future that is expressed in formal quantitative terms

least squares regression method

diagnose cost behavior with a scattergraph plot if linear proceed uses all the data points uses regression line y=a+bx where y=total fixed costs and b=variable cost/unit computes the regression line that minimizes the sum of regression errors carried out by software

high-low regression method

diagnose cost behavior with a scattergraph plot if linear proceed variable cost=slope of line=rise/run rise over run = y2-y1/x2-x1 y2=cost at the highest level of activity y1=cost at the lowest level of activity x2=highest activity level x1=lowest activity level can also be expressed variable cost =change in cost/change in activity fixed cost element = total cost - variable cost element

conversion cost formula

direct labor + manufacturing overhead

prime cost formula

direct materials + direct labor

product cost formula

direct materials + direct labor + manufacturing overhead

planning

establish goals and how to achieve them

key difference b/t financial and managerial accounting

financial: outside, past activities, objective, verifiable, precision, GAAP/IFRS, external reports managerial: inside, affect future decisions, relevant, timely, not mandatory, need not follow GAAP, used for internal decision making

strategy

game plan

controlling

gathering feedback to ensure properly executed or modified when needed

net operating income

gross margin - selling - admin

product costs

include all costs involved in acquiring or making a product; attach to units of product; inventory; when sold COGS to match against revenue (aka inventoriable costs)

selling costs

include all costs that are incurred to secure customer orders and get finished product to customer (ex. advertising, shipping, commissions, and salary)

indirect materials

insignificant materials to end products (solder, glue, etc) included in manufacturing overhead

direct labor

labor costs that can be easily traced to individual units of product

lean production

management approach that organizes resources around the flow of business processes and that only produce units in response to customer orders

activity base

measure of whatever causes the incurrence of a variable cost (aka cost driver)

segment

part of an activity about which managers would like to cost, revenue or profit

opportunity cost

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

enterprise risk management

process used to identify risks and develop responses to them

contribution approach

provides managers with an income statement that distinguishes between fixed and variable costs

relevant range

range of activity within which the assumption that cost behavior is strictly linear is reasonably valid

cost behavior

refers to how a cost reacts to changes in the level of activity; as activity level rises and falls, a particular costs may rise, fall or remain constant

linearity assumption

relation b/t cost and activity can be represented by a straight line

curvilinear

relation b/t cost and activity is a curve

committed fixed costs

represents organizational investments with multiyear planning horizons that cannot be significantly reduced even for short periods of time without making fundamental changes

gross margin

sales - COGS

decision making

selecting course of action from competing alternatives

period cost formula

selling expenses + admin expenses

business process

series of steps that are followed in order to carry out some task

conversion costs

sum of direct labor and manufacturing overhead costs

prime costs

sum of direct material cost and direct labor cost

cost structure

the relative proportion of each type of cost

direct materials

those materials that become an integral part of the finished product and whose can be easily traced

fixed cost behavior in total

total FC is not affected by changes in the activity level within the relevant range

variable cost behavior in total

total VC increases/decreases in proportion to changes in activity

scattergraph plot

total maintenance cost = y plotted on vertical axis the activity = x plotted on horizontal axis if linear, make sense to perform high-low or least squares regression to separate mixed costs into its variable and fixed components if not linear, no sense for further analysis

the difference between a traditional income statement and a contribution format statement

traditional income statements are prepared primarily for external purposes; does not distinguish b/t fixed and variable costs contribution format statement breaksdown variable and fixed costs separately

variable cost

varies, in total, in direct proportion to changes in level of activity (constant if "per unit")

mixed cost formula

y=a+bx where y=total mixed costs a=total fixed cost b=variable cost per unit of activity (slope) x=the level of activity