137a mt 2

Margin of safety Ratio

(Sales $ - BE $)/Sales $

Transaction drivers in ABC?

simple counts of the number of times an activity occurs, such as the number of bills sent out to customers

if say a corvette division had depreciation cost related to production of corvettes is that a traceable fixed costs to the division?

yes

is Absorption costing required by GAAP and the IFRS?

yes

is preparing annual reports an organization sustaining activity?

yes

when absorption costing is used, are there fluctuations in net operating income that can be caused by changes in inventories as well as changes in unit sales?

yes

Benchmarking?

is a systematic approach to identifying the activities with the greatest room for improvement. It is based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance. If a particular part of the organization performs far below the world-class standard, managers will be likely to target that area for improvement.

segment margin

is 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. The segment margin is the best gauge of the long-run profitability of a segment because it includes only those costs that are caused by the segment.

Asset turnover

sale/average assets

product margin

the amount the product sells for above the cost of manufacturing the product. In other terms, product margin is used to determine how much of the products selling fee is a markup

Absorption Costing

treats all manufacturing costs as product costs, regardless of whether they are variable or fixed

T or F? In an activity-based costing system, the greater the level of detail the company wants to collect, the greater the chance of misclassifying some costs and activities.

true for some reason

direct labor and direct materials are what kind of costs?

variable

the number of new units produced has no effect on net operating income when using which costing method?

variable costing

what do financial statement users need to be aware of when comparing net income under absorption and variable costing?

whether there were changes in inventory levels

Are total sales, net operating income, and total costs the same under ABC and traditional costing?

yes

In traditional absorption costing, are manufacturing costs assigned to products and nonmanufacturing costs not assigned to product?

yes

When there is no change in inventory, do absorption and variable costing produce the same net income?

yes

are external reports less detailed than internal ones?

yes

can highly correlated activities be combined in ABC?

yes

can net operating incomes be different under variable and absorption costing?

yes

does activity-based costing generally provides more accurate product costs than traditional costing methods?

yes

does an activity based costing system use numerous overhead cost pools?

yes

activity-based costing is designed for external or internal use?

internal

contribution income statement 5 items?

1.Revenue 2. variable expenses 3. Contribution Margin 4. Fixed Expenses 5. Net income

how can you tell if a company should eliminate a devision? (2 reasons)

1.if the overhead saved from removal is greater than the contribution 2.if it losing money

T or F? A simple ABC model can have fewer than 20 activities; a complex model may include up to 100 activities, but no more

A simple ABC model can have fewer than 20 activities; a complex model may include over 500 activities

Break even in unit sales ratio

Fixed Expenses/cm per unit

Return on investment ratio

Profit Margin/Asset Turnover

Profit formula using CM Ratio, FC, and Sales

Profit= (CM ratio * Sales) - FC

activity-based management

involves focusing on activities to eliminate waste, decrease processing time, and reduce defects. Activity-based management is used in organizations as diverse as manufacturing companies, hospitals, and the U.S. Marine Corps.

segment in an organization?

is a part or activity of an organization about which managers would like cost, revenue, or profit data

facts about variable income costing?

-rely on contribution formT -used for internal reporting purposes

examples of batch-level-acitivites (2)

-shipped orders -customer orders

Profit Margin ratio

Operating income/revenues

When asked what is the margin of safety, is your answer a ratio?

Yes

activity definition in ABC?

any event that causes the consumption of overhead resources

Unit-level activities are performed when?

are performed for each individual unit. Since each unit of a particular product requires the same level of activity, each unit consumes the same amount of resources that provide for that activity. The total level of activity performed varies proportionately with the number of units produced.

customer-level activities in ABC?

are performed for specific customers. These activities, and the resources consumed to perform them, do not affect product costs. Rather, the resources are consumed in the delivery of customer support services, and the associated costs are then used to determine the cost to serve a particular customer.

beg finished goods + cog manufactured

cogs

What contribution format should be used for segmented income statements?

contribution format

Activity-based costing?

is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed" as well as variable costs

common fixed cost

is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Even if a segment were entirely eliminated, there would be no change in a true common fixed cost

first-stage allocation in an ABC system?

the process of assigning functionally organized overhead costs derived from a company's general ledger to the activity cost pools

example of duration driver

time spent preparing invoices

weighted average cost of units transferred out

units transferred out times equivalent cost/unit

cost of work in process @ beg inventory + cost added during the period / equivalent units of production

cost per equivalent units

When units produced exceed units sold, net income will generally be higher or lower under absorption costing compared to variable costing?

higher

if we are asked for total manufacturing cost during the year, it is the sum of what?

direct labor + direct materials + applied overhead

dollar sales required for a segment to break even is computed by dividing what?

divide the segment's traceable fixed expenses by its contribution margin ratio

weighted average cost of ending inventory

equivalent amounts left times price per unit

absorption costing income statements are used for internal or external reporting?

external

Organization-sustaining costs ex's

factory security guard's wages, the plant controller's salary, and the cost of supplies used by the plant manager's secretary

Steps for Implementing Activity-Based Costing (5)

1. Define activities, activity cost pools, and activity measures. 2. Assign overhead costs to activity cost pools. 3. Calculate activity rates. 4. Assign overhead costs to cost objects. 5. Prepare management reports.

As a consequence, activity-based costing differs from traditional absorption costing in 3 ways. In activity-based costing...

1. Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. 2. Some manufacturing costs may be excluded from product costs. 3. Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.

examples of common fixed cost

1. The salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors. 2. 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. 3. 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.

Examples of traceable fixed costs include the following:

1. The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. 2. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing. 3. The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of The Walt Disney Corporation.

Common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" for two reasons:

1. This practice may make a profitable business segment appear to be unprofitable. 2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control.

what are the two types of nonmanufacturing costs that ABC systems assign to products?

1. all direct nonmanufacturing costs to products. ex's are Commissions paid to salespersons, shipping costs 2. indirect nonmanufacturing costs to products whenever the products have presumably caused the costs to be incurred

what are three essential characteristics of a successful activity-based costing implementation?

1.top managers must strongly support the ABC implementation because their leadership is instrumental in properly motivating all employees to embrace the need to change 2. top managers should ensure that ABC data is linked to how people are evaluated and rewarded 3. a cross-functional team should be created to design and implement the ABC system

Variable Costing

A costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.

T or F? In an activity-based costing system, a critical question to ask during activity identification is, "How important is this activity to the overall strategy of the organization?

False - A critical question to ask during activity identification is, "What level of detail does the company want to collect?", we want the truth not to rig there system

Explain how information about activities can be used to make decisions.

Activity-based management uses activity-based costing information to manage business activities. Decisions regarding pricing, customer profitability, distribution channel profitability, and process improvement can all benefit from the use of activity-based costing information

T or F? Even when direct materials and direct labor comprise the majority of product costs, manufacturing overhead allocation is still a major issue.

F

T or F? Organizational-level activities provide identifiable benefits to specific products or services.

F

Would there be a business without org level activities?

No

Profit Margin ratio x Asset Turnover

Return on Assets

Profit Margin

Selling Price - Full unit Cost

Gross Margin

Selling price - Full-unit manufacturing cost

Segment margin calculation

Sherman contribution margin - TRACEABLE(AVOIDABLE) FIXED EXPENSES?

T or F? Activity-based costing is a costing technique that assigns costs to cost objects such as products or customers, based on the activities those cost objects require.

T

* T or F? Under activity-based costing, selling and administrative costs should be allocated to products if they are incurred to provide resources that are consumed by unit-level, batch-level, or product-level activities.

TRUE

T or F? ABC includes manufacturing and nonmanufacturing costs when calculating the entire cost of a product rather than just its manufacturing cost.

TRUE, but they must be on a cause and effect basis?

T or F?

The first step in developing activity-based product costs is to identify the activities performed in the organization.

Batch-level activities are performed when, with ex's?

are performed on groups, or batches, of products at one time. Since the activity is based on the existence of the batch rather than on the number of units in the batch, a batch consumes the same quantity of resources whether it includes 20 units or 2,000 units.

organization level activities

are required to provide productive capacity and to keep the business in operation. Although these activities do not provide identifiable benefits to specific products or services, WITHOUT THEM THERE WOULD BE NO BUSINESS

organization-sustaining activities in ABC with ex's?

are required to provide productive capacity and to keep the business in operation. Although these activities do not provide identifiable benefits to specific products or services, without them there would be no business.

T or F? Customer-level activities and the resources consumed to perform them do not affect product costs.

True

T or F? For unit-level activities, the total level of activity performed varies proportionately with the number of units produced.

True

T or F? Identifying the activities performed in the organization is the most time consuming part of implementing an activity-based costing system.

True

T or F? Product-level activities are also referred to as product-sustaining activities.

True

activity cost pool definition in ABC?

a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system

traceable fixed cost of a segment?

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

Product-level activities are performed when, and some ex's?

also referred to as product-sustaining activities, support the products or services provided by the company. These activities are performed for the entire product line, regardless of how many units or batches are produced.

Distinguish between value-added and non-value-added activities.

alue-added activities are those activities that create the product or service the customer wants to buy. Non-value-added activities are those activities that consume resources but do not contribute to the product's value

activity measure in ABC?

an allocation base in an activity-based costing system. The term cost driver is also used to refer to an activity measure because the activity measure should "drive" the cost being allocated

Product Costs

cost incurred to create a product

what costs are in product costs under absorption costing?

just manufacturing

When units sold exceed units produced, net income will generally be higher or lower under absorption costing compared to variable costing?

lower

Duration drivers in ABC?

measure the amount of time required to perform an activity, such as the time spent preparing individual bills for customers

are Selling and administrative expenses ever treated as product costs in any costing method?

no

are common fixed costs allocated to segments?

no

do activity-based costing systems assign organization-sustaining costs and unused capacity costs (both are manufacturing costs)?

no

using absorption method for segmented income statements leads to what?

omission of upstream and downstream costs

good way to think about and identify traceable costs?

only those costs that would disappear over time if the segment itself disappeared.

Operating income/identifiable assets= (it is the product of two ratios, segment revenues is a hint)

operating income/segment revenues x segment revenues/identifiable assets

activity-based costing systems treat organization-sustaining costs as what kind of expenses?

period expenses rather than arbitrarily assigning them to products

designing and advertising a product are what kind of activity

product-level-activities

Activity-based costing estimates the costs of the resources consumed by what cost objects?

products and customers

segment margin tells us what?

profitability of that segment