Managerial Accounting

cost structure

the relative proportion of each type of cost in an organization

fixed costs are NOT affected by changes in activity..

..they remain constant unless an outside source interferes, EX: a landlord raising rent price

3 reasons for difficulties in recorder man. overh. on job sheet

1. Man. O. is an indirect cost (its impossible or difficult to trace these costs to a particular job or product) 2. Man. O. consists of many different types of costs. some are variable and some are fixed. 3. bc fixed costs in M. O., total MO costs tend to remain constant from period to next, even though # of units produced can fluctuate widely. -the avg. cost per unit will vary from one period to the next.

steps for finding P.O.R. (determined before period begins with 4 steps)

1. est. total amount of allocation base required for next periods est. production (denominator) 2. est. the total fixed man. over. cost for the coming period and variable man. over. cost per unit of the alloc. base 3. use Y=a+bX (cost formula) to est. total manu. over. (numerator for coming period. 4. compute POR

1. plot data 2. if reveals linear cost behavior.. 3. perform high low or least squares regression calculations to separate mixed costs into its variable and fixed components

1. plot data 2. if reveals no line 3. do not proceed in analysis

mixed costs are very common

EX: overall cost of providing X-ray service to patients

average fixed cost per unit generally gets small as variation gets larger

EX: the more customers, the less each one pays for rent expense

a variable cost is constant if expressed on a per unit basis...

EX: units all cost same amount, but overall total cost increases as you add more units

sunk cost

a cost that has already been incurred and that cannot be changed by any decision made now or in the future. these are NOT differential costs. sunk costs can be ignored in decision making because they are not relevant (bc they're not differential costs)

fixed cost

a cost that remains constant, in total, regardless of changes in the level of activity. EX: straight line depreciation, insurance, property taxes, rent, salaries of admin and supervisors, advertising Ex: a rent price stays same no matter how many people use property/enter building

differential cost (used when compared alternatives. you must weigh costs and benefits of all options)

a difference in cost between any two alternatives

differential revenue (used when compared alternatives. you must weigh costs and benefits of all options)

a difference in revenues (usually just sales) between any two alternatives

bill of materials

a document that lists the type and quantity of each type of direct material needed to complete a unit of product. available for all standard company products

activity base

a measure of whatever causes the incurrence of a variable cost. Also called a cost driver. EX: units produced/sold, direct labor/machine hours

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.

absorption costing

all manufacturing costs, both fixed and variable, are assigned to units of product-units are said to fully absorb manufacturing costs

discretionary fixed costs

also called managed fixed costs, usually arise from annual decisions by management to spend on certain fixed cost items EX: advertising, PR, research, internships for students. can be cut for short periods of time with minimal damage to long term goals

contribution margin

amount remaining from sales revenue after variable expenses have been deducted.

account analysis

an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves. EX: direct materials is a variable and a building lease cost is fixed because of nature of these costs

time ticket

an hour by hour summary of the employee's activities throughout the day. usually done by scanning bar codes electronically, they are automatically inputed on job cost sheet

differential costs can also be known as... because (it encompasses both of these costs)

an incremental cost-an increase in cost from one alternative to another decremental costs-decrease in cost

example of cost structure

an organization might have many fixed costs but few variable costs. or it might have many variable costs and few fixed or mixed

don't try to use average fixed costs on avg. per unit basis on internal reports...

because they aren't the same as variable costs

independent variable

causes variations in dependent variable

fixed costs are either...

committed or discretionary

predetermined overhead rate

computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base.

mixed costs

contains both variable and fixed cost elements. also called semi variable costs. EX: rafting company has to pay state a license fee of $25,000 plus $3 per party. the total cost line slopes upward as the variable cost of $3 per party is added to the fixed cost of $25000 per year.

linear

cost behavior is linear when a straight line is a reasonable approximation for the relation between cost and activity

*chart on cost and behavior of cost within relevant range fixed cost (per unit)

decreases as the activity level rises and increases as the activity level falls

most widely used allocation bases in manufacturing?

direct labor hours, direct labor cost, machine hours, and units of product (where a company has only a single product)

curvilinear curve between activity and cost

economists

step-variable costs

ex: cost behavior patterns such as salaried employees. when you work 0-2,000 hours, you get $40000. when you work 2,001-4,000 hours, you get $80000. can often be adjusted quickly as conditions change

y=a+bx

in this equation.. y=total mixed cost a=total fixed cost (vertical intercept of the line) b=variable cost per unit of activity (slope of line) x=level of activity

production order

issued when an agreement has been reached with the customer concerning the quantities, prices and shipment date for the order

linear relationship between activity and cost

management accountants

other activity bases...

number of miles driven by a salesperson, pounds of laundry done at a laundromat, occupied beds number in hosptial

Pred. overh. rate formula?

pred. overh. rate = est. total man. overh. cost / est. total amount of allocation base

man. overh. is commonly assigned to products using a...?

predetermined overhead rate

materials requisition form

prepared by the production department. a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. used to control the flow of materials into production and also for making entries in the accounting records

contribution approach (contribution income statement)

provides managers with an income statement that clearly distinguishes fixed and variable costs which therefore aids in planning, controlling and decision making. internal planning and decision making tool

relevant range

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

job cost sheet

records the materials, labor, and manufacturing overhead costs charged to that job. this occurs after a production order has been issued. generated by accounting dep. software.

cost behavior

refers to how a cost reacts to changes in the level of activity; for planning, a boss must know how to predict these changes, like rising or falling or remaining constant.

committed fixed costs

represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for shorts periods of time without making fundamental changes. EX: real estate taxes, investments in equipment/facilities, salary of top management can't be cut for short periods because it would be more trouble to pay them back in the long term

for a cost to be variable, it must be variable with..

respect to something (activity base)

opportunity cost

the potential benefit that is given up when one alternative is selected over another. These costs are not usually found in accounting records but they must be considered in every decision.

economists have a similar concept to differential..

they use the terms marginal revenue and marginal cost

variable cost

this varies in total in direct proportion to changes in the level of activity. EX: COGS, direct materials/labor, manufacturing overhead elements, supplies, shipping/commission costs.

engineering approach

to cost analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, production efficiency, power consumption and so on.

*chart on cost and behavior of cost within relevant range fixed cost (in total)

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

in POR solve for alloc. base first because...

total man. overh. cost includes variable over. costs that depend on the amount of alloc. base

*chart on cost and behavior of cost within relevant range variable cost (in total)

total variable cost increases and decreases in proportion to changes in the activity level

assume that the activity base under consideration is..

total volume of goods and services provided by the organization. only specify the AB when its something other than total output

example of cost behavior

under armor wants to estimate the impact a 5 percent increase in sales would have on the company's total direct materials cost

traditional income statement

used for external financial reporting but has limitations when used to internal used. It lumps together fixed and variable cost. These need to be separate for managers for reasons to help will planning, controlling and decision making.

job-order costing

used in situations where many different products, each with individual and unique feature, are produced each period

*chart on cost and behavior of cost within relevant range variable cost (per unit)

variable cost per unit remains constant

to find COGS the formula is..

variable cost=change in cost/change in activity

if a cost is expected to rise, a manager must figure out by how much by using the distinctions...

variable, fixed, or mixed cost

dependent variable

when the variable depends on the level of activity for the period