Costing Systems and Decision Making

peanut-butter costing

inaccurate averaging or spreading of indirect costs over products or service units that use different amounts of resources

Special Orders in the Absence of Excess Capacity

marginal costs of accepting the order must be considered. firm must consider the opportunity cost of redirecting productive capacity away from (possibly more profitable) products.

Resource drivers

measures of the causes of resources consumed by an activity.

Activity cost drivers

measures of the demands on an activity by next-stage cost objects (e.g., the number of parts in a product used to measure an assembly activity).

Special Orders When Excess Capacity Exists

no opportunity cost accepted if the minimum price for the product is = to or > than the variable costs. When capacity is available, fixed costs are irrelevant.

first-in, first-out (FIFO) method

EUP in beginning work-in-process (work done in the prior period) must be excluded from the calculation. Only the costs incurred in the current period are considered. The EUP produced during the current period are based only on the work done during the current period.

Breakeven Point in Dollars

CR ratio = ratio of contribution margin to sales price on either a total or per-unit basis

overhead was overapplied

Overhead control account (actual) < Overhead applied account (applied)

overhead was underapplied

Overhead control account (actual) > Overhead applied account (applied)

Breakeven point in units

UCM = unit selling price - unit variable cost

Volume-Based vs. Activity-Based

Volume-based systems are appropriate when most manufacturing costs are homogeneously consumed. In these cases, one volume-based cost driver can be used to allocate the overhead costs. ABC addresses the increasing complexity and variety of overhead costs.

Nonvalue-adding

activities should be reduced or eliminated.

Target Operating Income

amount of operating income, either in dollars or as a percentage of sales, can be calculated by treating target income as an additional fixed cost (e.g., financing costs or required profits to keep the stock price from falling).

Uses of Process Costing

assigns costs to inventoriable goods or services. It applies to relatively homogeneous products that are mass produced on a continuous basis uses a work-in-process account for each department through which the production of output passes.

breakeven point

output at which all fixed costs and cumulative variable costs have been covered. It is the output at which operating income is zero.

value-adding

contribute to customer satisfaction

Cost drivers

cost assignment bases that are used in the allocation of manufacturing overhead costs to cost objects.

Transferred-in

costs are by definition 100% complete.

Uses of Job-Order Costing

each end product is unique. Because the end products are few, tracking their costs is relatively simple.

Relevant Factors

expected to be earned or incurred, respectively, in the future. Differ among the possible decisions Be avoidable

Activity-Based costing

response to the significant increase in the incurrence of indirect costs resulting from the rapid advance of technology. ABC is a refinement of an existing costing system (job-order or process). indirect costs are assigned to activities and then rationally allocated to end products.

Margin of Safety

the excess of sales over breakeven sales. It is the amount by which sales can decline before losses occur.

weighted-average method, units in beginning work-in-process (WIP)

treated as if they had been started and completed during the current period averages the costs of beginning WIP with the costs of current-period production

Equivalent Units of Production (EUP)

unfinished units restated in terms of EUP = # of finished goods that could have been produced

Allocation of Indirect Costs

using an overhead allocation rate.