Managerial Accounting Chapters 5-7

How does ABC differ from traditional cost accounting?

• ABC assigns manufacturing and non manufacturing costs to products • ABC does not assign ALL manufacturing costs to products • ABC uses more cost pools

What is the margin of safety?

• Amount by which sales can drop before losses are incurred

Product costs include:

• Direct materials, • direct labor, • variable manufacturing overhead

Period costs include:

• Fixed manufacturing overhead, • variable selling and administrative expenses, • fixed selling and administrative expenses

ABC limitations:

• Substantial resources required to implement and maintain • Desire to fully allocate all costs to products • Resistance to unfamiliar numbers and reports • Potential misinterpretation of unfamiliar numbers • Does not conform to GAAP. Two costing systems may be needed.

What is the contribution margin?

• The amount remaining from sales revenue after variable expenses have been deducted. • The amount available to cover fixed expenses and then to provide profits for the next period.

How does the contribution format income statement vary from a normal income statement?

• The gross margin is replaced in the statement by the contribution margin • Fixed production costs are aggregated lower in the income statement, after the contribution margin.

Break-even Analysis:

• The level of sales at which the company's profit is zero

5 level of activity in ABC:

• customer orders, • design changes • order size • customer relations • other

Activity based costing :

• designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed" as well as all variable costs

Transaction drivers:

count the number of times an activity occurs.

Traceable fixed costs should be separated from common fixed costs to:

enable the calculation of a segment margin.

Duration drivers:

measure the time required to perform an activity.

A contribution format income statement is used in segments to:

separates fixed from variable costs and it enables the calculation of a contribution margin.

Gross margin reveals:

the amount that an entity earns from the sale of its products and services, before the deduction of any selling and administrative expenses.

The amount of gross margin a company has dictates:

the level of funding left with which to pay for selling and administrative activities and financing costs, as well as to generate a profit.

True/ False: The traditional absorption costing method assigns selling and administrative expenses to products.

False

True/False: Activity rates are computed in the second-stage allocation in activity-based costing.

False

True/False: In an ABC system, batch-level activities should be combined with unit-level activities.

False

True/False: It is necessary to compute an activity rate for the "Other" category of costs.

False

True/False: Organization-sustaining overhead costs should be allocated to products just like unit-level and product-level activities.

False

True/False: Product-level activities relate to how many batches are run or units of product are made.

False

True/False: The costs of direct materials and direct labor costs are allocated to cost objects using the first-stage allocation.

False

__________________ cost pool consists of organization-sustaining costs and costs of idle capacity that are not allocated to products and customers.

"Other"

What is a segment?

Any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

True/False: The costs of idle capacity should be assigned to products in activity-based costing

False

How are costs divided among departments in ABC?

Activity and Activity cost pool

___________________ is designed to be used for internal decision making. WHEREAS, ________________ is designed to provide data for external financial reporting.

Activity-Based Costing (ABC), Traditional Absorption Costing

An example of a product-level activity is _____________ .

Advertising

What is an activity?

An event that causes the consumption of overhead resources.

Activity-based costing estimates the costs of the resources consumed by ________________.

Cost objects

__________________________ are excluded from the overhead costs because the existing cost system can accurately trace direct materials and direct labor to products.

Direct materials and direct labor

Which of the following is an allocation base commonly used under the traditional methods for allocation of overhead costs?

Direct-labor hours

_______________________ measure the amount of time required to inspect items, to process bills, or to process orders. They're a more accurate measurement of the consumption of resources.

Duration drivers

What is an activity cost pool?

A "cost bucket" in which costs related to a single activity measure are accumulated.

What is operating leverage?

A measure of how sensitive net operating income is to a given percentage change in dollar sales (how fast net income changes in accordance to sales)

In __________________ costing, fixed manufacturing overhead costs are included as a part of the costs of ____________ inventories.

Absorption, work in process

Activity-based costing accumulates costs for each ___________ .

Activity

Activity-based costing uses the ___________ process to divide overhead costs among activity cost pools.

First-stage allocation

First-stage allocations are usually based on the results of __________ .

Interviews with employees

_____________________ is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits.

Operating leverage

Fixed costs are expressed as _____________ costs and are not found under variable costing

Period

____________________ best gauge of the long run profitability of a segment because it includes only costs caused by the segment

Segment margin

Examples of _________________________ include the number of orders processed, number of orders shipped, and number of items inspected. _______________ can accurately measure the activity rate when the activity requires the same amount of time.

Transaction drivers

True/False: Activity-based costing involves a two-stage allocation in which overhead costs are first assigned to departments and then to jobs.

True

True/False: In activity-based costing, products are charged only for the costs of the capacity they use.

True

True/False: The activity rates are computed by dividing the total cost for each activity by its total activity.

True

Target-profit analysis:

What sales volume is needed to achieve a specific target profit

A common cost is:

a cost that is not attributable to a specific cost object, such as a product or process. For example, the cost of rent for a production facility is not directly associated with any single unit of production that is manufactured within that facility.

Customer realtions:

assigned all costs associated with maintaining relations with customers.

Order size

assigned all costs of resources consumed as a consequence of the number of units produced.

Design changes:

assigned all costs of resources consumed by customer requested design changes.

Customer orders:

assigned all costs of resources that are consumed by taking and processing customer orders.

Other:

assigned all organization-sustaining costs and unused capacity costs

______________________ is the

best gauge of the long run profitability of a segment because it includes only costs caused by the segment