Bmgt221

Discretionary fixed costs

(Or managed fixed costs) usually arise from annual decisions by management to spend of certain fixed cost items. Ex. PR or advertising.

Cost object

A cost object is anything for which cost data are desired—including products, customers, jobs, and organizational subunits. For purposes of assigning costs to cost objects, costs are classified as either direct or indirect.

Direct cost

A direct cost is a cost that can be easily and conveniently traced to a specified cost object. For example, if Reebok 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. If a printing company made 10,000 brochures for a specific customer, then the cost of the paper used to make the brochures would be a direct cost of that customer.

Administrative costs

Administrative costs include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. Administrative costs can be either direct or indirect costs. For example, the salary of an accounting manager in charge of accounts receivable collections in the East region is a direct cost of that region, whereas the salary of a chief financial officer who oversees all of a company's regions is an indirect cost with respect to individual regions.

What are some advantages and disadvantages of having a fixed cost structure?

An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with lower proportion of fixed costs. A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs. A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs. * Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

Allocation Base

An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. We use an allocation base because: a. It is impossible or difficult to trace overhead costs to particular jobs. b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary. c. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

Indirect cost

An indirect cost is a cost that cannot be easily and conveniently traced to a specified cost object. For example, a 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.

CM Ratio

CM Ratio = CM/Sales

Sales Commissions ----->

Companies generally compensate salespeople by paying them either a commission based on sales or a salary plus a sales commission. Commissions based on sales dollars can lead to lower profits in a company.

Mixed cost

Contains both variable and fixed cost elements. Also known as semi variable costs.

Conversion cost

Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.

Conversion Cost

Conversion costs are the combination of direct labor costs plus manufacturing overhead costs. You can think of conversion costs as the manufacturing or production costs necessary to convert raw materials into products.

cost structure

Cost structure refers to the relative proportion of fixed and variable costs in an organization

Variable cost

Cost that varies, in total, in direct proportion to the level of activity.

Direct labor

Direct labor consists of labor costs that can be easily (i.e., physically and conveniently) traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made. Examples of direct labor include assembly-line workers at Toyota, carpenters at the home builder KB Home, and electricians who install equipment on aircraft at Bombardier Learjet.

Direct materials

Direct materials are those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. This would include, for example, the seats that Airbus purchases from subcontractors to install in its commercial aircraft and the electronic components that Apple uses in its iPhones.

Break Even point in sales dollars using the Formula Method and the CM Ratio

Dollar Sales to Break Even = FE / CM Ratio

TRUE OR FALSE: Property taxes and insurance premiums paid on a factory building are examples of period costs.

FALSE

TRUE OR FALSE: The sum of all amounts transferred from the Work in Process account to the Finished Goods account represents the Cost of Goods Sold for the period.

FALSE

Target Profit Analysis for Dollar Sales

Formula Method -> $ Dollar Sales to attain the target profit = target profit + FE /CM Ratio

Target Profit Analysis for Unit Sales

Formula Method -> Unit sales to attain target profit = target profit +FE / CM per unit

Indirect labor

Labor costs that cannot be physically traced to particular products, or that can be traced only at great cost and inconvenience, are termed indirect labor. Just like indirect materials, indirect labor is treated as part of manufacturing overhead. Indirect labor includes the labor costs of janitors, supervisors, materials handlers, and night security guards. Although the efforts of these workers are essential, it would be either impractical or impossible to accurately trace their costs to specific units of product. Hence, such labor costs are treated as indirect labor.

Manufacturing Overhead

Manufacturing costs that cannot be easily traced directly to specific units produced. Ex. Indirect materials and indirect labor

Manufacturing Overhead

Manufacturing overhead, the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor. Manufacturing overhead includes items such as indirect materials; indirect labor; maintenance and repairs on production equipment; and heat and light, property taxes, depreciation, and insurance on manufacturing facilities. A company also incurs costs for heat and light, property taxes, insurance, depreciation, and so forth, associated with its selling and administrative functions, but these costs are not included as part of manufacturing overhead. Only those costs associated with operating the factory are included in manufacturing overhead.

Margin of safety in dollars

Margin of safety in dollars = total sales - break even sales

Activity base

Measure of whatever causes the incurrence of the variable cost.

Operating Leverage

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits. Degree of Operating Leverage = CM/ net operating income

Overapplied Overhead

Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

Period costs

Period costs are 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 the rental costs of administrative offices are all period costs. Period costs are not included as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting. Keep in mind that the period in which a cost is incurred is not necessarily the period in which cash changes hands. For example, as discussed earlier, the costs of liability insurance are spread across the periods that benefit from the insurance—regardless of the period in which the insurance premium is paid.

Period cost

Period costs are not a necessary part of the manufacturing process. As a result, period costs cannot be assigned to the products or to the cost of inventory. The period costs are usually associated with the selling function of the business or its general administration.

Why do we need POHR?

Predetermined overhead rates that rely upon estimated data are often used because: 1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

Prime cost

Prime cost is the sum of direct materials cost and direct labor cost.

product cost

Product cost refers to the costs used to create a product. These costs include direct labor, direct materials, consumable production supplies, and factory overhead. Product cost can also be considered the cost of the labor required to deliver a service to a customer.

Break Even point in sales dollars using the Equation Method and the CM Ratio

Profit = Sales x CM Ratio - FE

Break Even Point in Unit Sales using the Equation Method

Profits = CM x Q - FE

Fixed cost

Remains constant regardless of the level of activity.

Committed fixed cost

Represent organizational investments with multi year planning horizon that can not be significantly reduced even for short periods of time without making fundamental changes. Ex. Equipment

Sales Mix

Sales mix is the relative proportion in which a company's products are sold. • Different products have different selling prices, cost structures, and contribution margins. • When a company sells more than one product, break-even analysis becomes more complex as the following example illustrates.

selling costs

Selling costs include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs. Examples of selling costs 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 manager who oversees numerous products is an indirect cost with respect to individual products.

Indirect materials

Sometimes it isn't worth the effort to trace the costs of relatively insignificant materials to end products. Such minor items would include the solder used to make electrical connections in a Sony HDTV or the glue used to assemble an Ethan Allen chair. Materials such as solder and glue are called indirect materials and are included as part of manufacturing overhead, which is discussed shortly.

Common cost

The factory manager's salary is called a common cost of producing the various products of the factory. A common cost is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost.

The margin of safety in dollars

The margin of safety in dollars is the excess of budgeted (or actual) sales over the break-even volume of sales. Margin of safety in dollars = Total sales - Break-even sales

Matching principal

The matching principle is based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized. This means that if a cost is incurred to acquire or make something that will eventually be sold, then the cost should be recognized as an expense only when the sale takes place—that is, when the benefit occurs. Such costs are called product costs.

Raw materials

The materials that go into the final product are called raw materials. This term is somewhat misleading because it seems to imply unprocessed natural resources like wood pulp or iron ore. Actually, raw materials refer to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company. For example, the plastics produced by Du Pont are a raw material used by Hewlett-Packard in its personal computers.

POHR

The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins. POHR=Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period

Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins using a four-step process. 1.Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2.Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3.Use the following equation to estimate the total amount of manufacturing overhead: 4.Compute the predetermined overhead rate.

Cost structure

The relative proportion of fixed, variable, and mixed costs in an organization.

Relevant range

The relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable. Managers should always keep in mind that assumptions made about cost behavior may be invalid if activity falls outside of the relevant range.

Cost behavior

The way in which cost reacts to the change in level of activity.

TRUE OR FALSE: The information in a quality cost report can be used to help managers determine if their quality costs are poorly distributed.

True

Underapplied Overhead

Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period.

Unit CM equation

Unit CM = Selling price per unit - Variable expenses per unit

Break Even Point in Unit Sales using the Formula Method

Unit Sales to Break Even = Fixed Expenses / Unit CM

absorption costing

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

raw materials

any materials that go into the final project

Overhead Applied During the Period

applied overhead=POHR x Actual Direct Labor Hours

finished goods

consists of finished goods that have not yet been sold to customers

cost of goods manufactured

include the manufacturing costs that were associated with the finished goods of that period

Job order costing

is used in situations where many different products, each with individual features, are produced each period.

Product costs

product costs include all costs involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.1 Product costs "attach" to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory awaiting sale. Product costs are initially assigned to an inventory account on the balance sheet. When the goods are sold, the costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales revenue on the income statement. Because product costs are initially assigned to inventories, they are also known as inventoriable costs.

work in process

units of production that are only partially complete and will require further work before they are ready for sale

break even

when the level of sales at which profit is zero