Cost Management Final (god bless)

What are disadvantages of cost based transfer price?

Can lead to sub-optimal decisions and can pass responsibility for allocated fixed costs to another department.

What is a measure of constraints within an entity?

Capacity

When does the right to make or authorize decisions lies within top levels of management?

Centralized Decision Making Decisions are based on general knowledge.

When is information produced by the accounting system for decision making and is used primarily by top managers (who have responsibility for their effort and quality of the decision)?

Centralized Entity

What is the general rule for make or buy decisions?

Choose the option with the lowest relevant cost.

What is an illegal practice in which two or more organizations conspire to set prices above a competitive price?

Collusive Pricing

What is based on the cost of the good or service transferred if a product has no external market since its a sub component of another product?

Cost Based Transfer Price

What are some of the methods used for setting transfer price polices in manufacturing and service organizations?

Cost Based, Dual Rate, Market Based, Activity Based, and Negotiated

Which responsibility center makes managers responsible for costs under their control and are used for subunits that produce goods or services eventually sold by others?

Cost Centers Minimize cost for a certain level of output OR maximize output for a certain level of cost.

What provides a measure of activity that explains the cost object's use of the indirect cost?

Cost Driver

What is a thing or activity for which costs are measured?

Cost Object i.e. products, services, customers, departments, business units, or geographic regions

What is simply a grouping of individual costs for a particular purpose and can be grouped on a departmental or activity basis?

Cost Pool

What is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices?

Cost Volume Profit (CVP) Analysis Performed periodically to help plan future levels of operating activity and provide information.

What is the difference between engineered and discretionary cost centers?

Engineered: Can measure inputs and outputs so the standard is against the actual performance measurement and variances identified. Discretionary: More suited to business units where it's difficult to identify the relationship between input and output

What are the uses and limitations of joint cost information?

Estimation of physical quantities, sales value at split off point, sales price if processed further, and separable costs can lead to bias or other distortions.

What do service entities use cost information for?

Facilitate cost management, productivity measurement, and billing.

What is the difference between allocated variable overhead cost and actual variable overhead cost?

Fixed Overhead Budget Variance

What provides an indication of the proportion of the revenue volume variance that can be attributed to unexpected changes in market size?

Market Size Variance (change in market size*budgeted market share*planned average CM)

What do the advocates say in regards to absorption costing?

Matching revenue and costs provide better information about opportunity costs for the entity and that the absorption costs reflect different product use of capacity.

When are managers responsible for the revenues, cost, and investments under their control?

Investment Center - common in DEcentralized Assets such as fixed assets, inventory, intangible assets, and AR; profitability is related to the assets used to generate the profit.

What happens to the level of operating activity as margin of safety increases and degree of operating leverage decreases?

It increases above the breakeven point.

Why should the quality of cost information be improved?

It is already low quality so personnel can work together to: use dual rate allocations, redesign the accounting system for cost pools and allocation bases, make choices regarding estimated vs. actual support costs and rates, and consider perceived fairness.

What is a disadvantage of the dual rate transfer price?

It overstates profitability at the sub unit level and managers believe that the entity as a whole is more profitable than it actually is.

What is the process of making one product and one or more products or services are created?

Joint Products

What is the continuous improvement in product cost, quality, and functionality and has cost targets based on price predictions?

Kaizen Costing Also focuses on continuous cost reduction.

What is a major difference between Target Costing and Kaizen Costing?

Kaizen Costing occurs after the product has been designed and the first production cycle is complete; market prices decrease over many products life cycles.

What is the excess of an organization's expected future sales above the breakeven point and indicates the amount by which sales could drop before profits reach the breakeven point.?

Margin of Safety Used to evaluate future risk when planning and monitoring operations.

What is the margin of safety divided by actual or estimated sales and indicates the extent to which sales can decline before profits become zero?

Margin of Safety Percentage Units = margin of safety in units / actual or estimated units Revenues = margin of safety in revenues / actual or estimated revenues

What is determined by using some measure of customer demand and strives to identify what customers are willing to pay for a good or service?

Market Based Prices

What are transfer prices based on competitors' prices or on the supply and demand relationship and are appropriate under a restrictive set of conditions?

Market Based Transfer Prices Provides an objective value for intermediate products, but the underlying costs aren't revealed.

What provides an indication of the proportion of the revenue volume variance that can be attributed to changes in the market share?

Market Share Variance (actual market size*change in market share*planned average CM)

What is an average use of capacity over time and is the typical volume of goods or services an entity products to meet customer demand?

Normal Capacity (Demand)

Why might actual production volume differ from estimated volume?

Normal fluctuations, production problems, improved productions process, unreasonable estimates, or accounting errors.

What are the departments or divisions within an organization that commonly manufacture goods or produce services for external customers or clients?

Operating Departments

What is the risk of loss resulting from inadequate or failed internal process, people and systems, or from external events?

Operational Risk

What is the practice of finding outside vendors to supply products and services?

Outsourcing Existing fixed costs are only relevant if they can be avoided through outsourcing.

What is the practice of charging different prices at different times to reduce capacity constraints?

Peak Load Pricing

What is the practice of setting low prices when new products are introduced to increase market share?

Penetration Pricing

What are all costs other than manufacturing costs incurred in the current period and are required by GAAP to be expensed when incurred because they have no future benefit?

Period Costs

What allocates joint costs using the relative proportion of physical output for each main product and is used when output for all main products can be expressed using the same physical measure?

Physical Output Method Allocated a proportion of joint costs based on the product's physical output divided by the total physical output of all main products; distortions will likely occur when the incremental contribution of some products is relatively high compared to other products.

What method is commonly used in industries when all units are similar in size and have comparable NRV?

Physical Volume Method

What takes into account the organization's regularly scheduled times for production and excludes potential production that could take place during anticipated and scheduled maintenance downtime?

Practical Capacity (Supply Based) Estimated using engineering studies and labor use patterns; fixed overhead allocation rate reflects the costs of supplying capacity and focus the managers attention on unused capacity. - motivates managers to find new ways to use available capacity.

What is an illegal practice deliberately setting low prices to drive competitors out of the markets and then raising prices?

Predatory Pricing Can be justified by cost difference

What is the major benefit of cost based pricing?

Simplicity since prices are calculated from readily available cost data.

What is the practice of using only one base to allocate both fixed and variable costs?

Single Rate Allocation

What is the fee based on a client's income?

Sliding Scale Fee -- used by not for profit organizations.

What occurs when an existing or new customer places a one off request for a product or services which may or may not be part of the normal operations?

Special Order

What is detailed information about particular process, customers, or products and is costly to transfer within the entity?

Specific Knowledge

What is the point at which individual products are identified and separable costs are incurred?

Split Off Point

What is the cost managers expect to incur to product goods or services under operating plan assumptions and is best suited to an entity that has repetitive activities and/or output as it's possible in such an operating environment to establish the expected inputs?

Standard Cost - reviewed periodically Total standard cost is the sum of standard costs for the resources used in production.

What is a difference between a standard cost and an actual cost?

Standard Cost Variance

What is an allocation rate used to allocated OH and is created at the beginning of each period to monitor overhead costs?

Standard Fixed OH Allocation Rate

What is created at the beginning of each period?

Standard OH Allocation Rate

What is determined by estimating the variable amount of overhead cost per unit of an allocation base?

Standard Variable OH Allocation Rate (estimated vOH cost / estimated volume of an allocation base)

What happens when entities have a standard cost system in place?

Standard costs are used in budgeting to develop flexible budgets.

What is used to allocate support department costs, one department at a time, to remaining support and operating departments in a cascading manner until all support department costs have been allocated?

Step Down Method Cost objects of interest are both support and operating departments; ranking is in accordance to the amount of service provided to other support departments and can be done so with any reasonable criteria.

What needs to be identified when conduct customer profitability?

The resources consumed and the associated costs of servicing the customers/clients. Customer or customer groupings become the cost object for the purposes of cost assignment.

What is needed to make a non operating decision?

The use of relevant costs/revenues and qualitative information that must arise in the future and vary with the action taken.

What happens if fewer resources were used than estimated?

The variance is favorable and costs in inventory and CGS needed to be decreased.

What happens if more resources were used than estimated?

The variance is unfavorable and costs in inventory and CGS need to be increased.

What assumes continuous uninterrupted production 365 days per year and represents the maximum volume of goods or services that an entity could hypothetically produce?

Theoretical Capacity (Supply Based) Rarely used because it's unrealistically small

How do you account for by products?

1. If there is 0 value, no accounting is needed. 2. If the by product contributes to profits, a decision must be made about accounting; reduces the cost of producing the main products when recognized at the time of production.

What are the scenarios in which timing of fixed overhead is recognized?

-If units are produced and sold in this period, OH costs incurred to produce the product are expensed in the period. -If units from last period are sold, some OH costs from last period are expensed. -If units produced in this period are not yet sold, the overhead allocation to those units will not be expensed until a future date when the units are sold.

What are additional transfer price considerations?

-International Income Taxes: Income tax regulations typically stipulate the use of market based transfer prices -Transfer Prices for Support Services: Shared services and can encourage more efficient use of support services; based on fully allocated costs and include allocations of fixed support department costs and allocations from other support departments. -Setting Transfer Prices for Internal Services: Opportunity cost approach is the best transfer price policy that motivates efficiency. -Transfer of Corporate OH Costs: Allocated to OH centers; moves performance from managers for costs in performance evaluations.

What criteria should be used to select an appropriate cost driver?

-Cause and Effect: Variables that cause resources to be consumed (objective being (accuracy of full cost) -Benefits Received: Identifying the beneficiaries of the outputs of the cost object -Fairness or Equity: Reasonable or fair costs -Ability to Bear: Allocating costs in proportion to the cost object's ability to bear them -Behavioral: Selecting a cost driver to modify behavior

What are pros and cons of reciprocal method?

-Computationally the most complex, but computers simplify the process -May be difficult to explain the managers and others -Most accurate allocation method since it takes into account all of the interactions among support departments.

What are the major factors that affect quality of decision process?

-Decision Maker Bias: Can cause a reduction in ability to objectively and thoroughly analyze relevant information or preference of qualitative or quantitative information. -Sensitivity Analysis: Helps managers evaluate how quantitative results would change with changes in various pieces of information. -Prioritization: Each option should be consistent with the organization's strategies, vision, and core competency.

What are higher resource consuming customers tend to do?

-Demand additional support services. -Exceed credit terms available -Placed non routine orders and requests -Frequently return goods for credit -Require more frequent deliveries due to order size.

Why would entities be motivated to allocate indirect costs?

-Determine the full cost of a specific cost object in order to undertake profitability analysis, provide a basis for pricing decisions, and assist in resource allocation decisions. -Allocate cost of shared services -Encourage use of central resources -Control costs by encouraging mutual monitoring -Comply with external requirements

What are the common allocation methods used to allocate support department costs to operating costs?

-Direct Method -Step Down Method -Reciprocal Method

What are the advantages of ROI?

-Easily comparable with internal and external benchmarks -Reduces tendency of manager to over invest -Motivates managers to increase sales, decrease costs, and minimize asset investments.

What are uncertainties associated with allocating costs?

-Identifying appropriate cost pools. -Deciding whether to establish separate pools for fixed and variable costs -Choosing how to assign costs to cost pools -Identifying the most appropriate allocation base for each cost pool -Selecting the most appropriate allocation method -Deciding whether the benefits exceed the costs of establishing a more detailed cost allocation system

When is fixed overhead overapplied or underapplied?

-If actual volumes of the allocation base exceed normal volumes, fixed OH will be OVERapplied and the variance is favorable. -If actual volumes of the allocation base are less than normal volumes, fixed OH is UNDERapplied and the variance is unfavorable.

What are scenarios associated with volume variance with normal costing?

-If allocated volume > estimated volume, then too much fixed OH cost is allocated to inventory and needs to reduced by that amount. -If allocated volume < estimated volume, too little fixed OH cost is allocated to inventory and needs to be increased by that variance amount.

What are perfect scenarios relating to transfer price?

-If external demand is 0, selling division has excess capacity and the transfer price is the variable cost. -If capacity is limited and goods or service can be sold externally, opportunity cost is market price. (rarely used since the price would vary with capacity)

What is the process for addressing non routine operating decisions?

1. Identify the type of decision that must be made 2. Quantitative Analysis 3. Apply each relevant analysis technique 4. Identify and analyze qualitative factors 5. Consider quantitative and qualitative information to make a decision.

What are factors that affect the success of target costing?

-Long and complex product development, design phases, and processes -Market is willing to pay for differences in quality or function. -Manufacturer can push some cost reductions onto suppliers and subcontractors and influence the design of subparts.

What are factors that foster a more organizational level cutlure?

-Long range strategic planning -Effective use of multiple measures in combination -Familiarity of central management with divisional operations -Management service histories

What are lower resource consuming customers tend to do?

-Make better used of technology in ordering and service delivery process -Be consistent with ordering routines. -Not require customized features with given price range and additional support beyond original agreement. -Make payments within credit terms.

What should be considered to create a more comprehensive model for evaluating and managing customers?

-Nature of contractual arrangements with individual customers and potential for related sales. -Life cycle stage of each customer -Threats to the market -Status of customer relationships -Bargaining power

What is the general rule for relaxing constraints for one or two products valid?

-Organization will for sales if the resource constraint isn't relaxed. -Fixed costs are unaffected by short term decisions made to relax constraints. -Managers want to maximize profits in their short term. -Sales of one product don't affect sales of other products.

What are facts that the determination of where decision making responsibility within an organization depends on?

-Organizational structure -Centralized or Decentralized Decision Making -Type of Knowledge Required -Technology to support globalization: decisions made at a unit level are likely to be more timely and of higher quality.

What are factors to evaluating denominator choices?

-Realistic estimates of the use of resources -How the choice affects the management of an organization's capacity

What might managers be motivated by?

-Reputation increase -Bonus payments based on their ability to meet or exceed targeted operating income levels -Bias in their sales forecasts preventing them from promptly recognized a decline in sales.

What are pros and cons with step down method?

-Requires ranking of support departments in terms of services provided to other support departments. -Moderately easy computation and t explain to managers and others. -Takes into account some of the interactions among support departments.

What are the factors that managers must take into consideration regarding the quality of information?

-Uncertainties about future revenues and costs due to the economic environment, customer demand, competition, technology, etc. -Timeliness: decisions should be made quickly with up to date information. -Analysis Technique Assumptions

What are disincentives to build up inventories?

-Unwillingly to build up inventory since it would affect future earnings when those units are sold or written off. -No payment rewards

What are key assumptions associated with standard cost?

-Volume of Production Activity -Production Process and Efficiency -Prices and Quality of Inputs

What does the CVP provide information about?

-Which products or services might be best to emphasize -Volume of sales needed to achieve a targeted level of profit -Amount of revenue required to avoid losses -Whether to increase fixed costs -How much to budget for discretionary expenditures -Whether fixed costs expose the organization to an unacceptable level of risk

What are the steps to computing the profit maximizing price?

1. Calculate the price elasticity of demand 2. Calculate the profit maximizing price (based on the strong assumption that changes in volume result only from changes in price)

What are alternative ways of allocating the support department costs?

1. Clarify the purpose 2. Identify support and operating department cost pools 3. Assign costs to cost pools 4. Choose an allocation base for each support department. 5. Choose and apply a method for allocating support department costs to other support departments and operating departments. 6. Allocate support costs for the operating departments to units of goods or services.

What are the computations associated with the constant gross margin NRV method?

1. Combine the gross margin percentage for main products is calculated. (GM = joint and separable costs from the sales) 2. Joint costs are allocated to each main product to achieve a constant gross margin.

What are the steps in a target costing design style?

1. Determine product target price, quality, and functionality. 2. Determine target cost (Price - Required profit margin) 3. Design product and production process to achieve target cost - team must focus on reducing the complexity of the product and manufacturing process to meet the target cost .4 Use pilot project to evaluate feasibility - if successful, full production beings otherwise the team returns to the design phase.

What is the process to allocate indirect costs?

1. Develop the cost allocation formula - identify the indirect costs to be allocated and selecting the cost river that will link the indirect cost to the cost object. 2. Calculate the indirect cost - dividing indirect costs by the total cost driver usage in order to calculate the indirect cost per unit of cost driver. 3. Allocate cost to the cost object - multiplying the indirect cost rate by the cost object's use of the cost driver.

What are the options when faced with one or more constrained resources?

1. Maximize the contribution margin within the constraint / emphasize the product that contribute the most in light of the constraint. 2. Incur additional costs to relax the constraint by purchasing goods or services from an outside supplier OR adding internal capacity / redesign products and processes to use existing capacity more efficiently.

What are the advantages of recording raw materials in raw material inventory at the standard cost rather than actual cost?

1. Reduces bookkeeping complexity since all units are recorded at the same standard cost in the raw materials inventory account in the GL. 2. Managers can identify the price variance using the period in which the variance occurred at the time direct materials are purchased.

What makes customers more profitable than others?

1. We need them to be buying profitable products and/or services. 2. Customers demand significantly more resources in the sales and service delivery process.

What do suppliers use to access their customers' inventory level information, time deliveries, and improve their own production planning?

Advanced technology and internet capabilities, but organizations need adequate security measures to protect sensitive information that might have competitive value.

What are advantages and disadvantages of EVA?

Advantages: Specific incentives that align goals of managers with owners Disadvantages: Appropriateness of the specific cost of capital since there is no perfect way to measure economic revenues, costs or assets,

What is the costing system that is required by GAAP?

Absorption Costing

What is a system that records all manufacturing costs on the balance as past of the inventory and are expensed as part of the CGS when units are sold?

Absorption Costing Direct costs are traced to products and manufacturing overhead is allocated to products

What does not provide managers with the relevant information needed for short term operating decisions because they factor in costs that aren't relevant to those decisions?

Absorption Costing Income Statements

What happens when manufacturing levels EQUAL sales level?

Absorption costing equals variable costing income with no change in inventory and no reconciliation needed.

What happens when manufacturing levels is GREATER than sale levels?

Absorption costing is greater than variable costing with inventory quantities increased on the balance sheet and a difference in income.

What happens when manufacturing levels is LESS than sales level?

Absorption costing is less than variable costing with decreased inventory quantities and a difference in income.

What is a transfer price method in which the purchasing unit is charged for the unit level, batch level, and possibly some product level costs for products transferred plus an annual fixed fee that is a portion of the facility level costs?

Activity Based Transfer Prices

What are the factors that relate to attributes of the individual activities and recognize that things other than volume cause indirect costs to be used by cost object?

Activity Drivers - can eliminate cross subsidization

What are the factors that serve as the motivation for normal costing?

Actual production volumes and fixed production overhead costs fluctuate and actual volume (avoid distortion) and fixed OH costs aren't known until after accounting for the period is completed (used for faster paced valuations).

What is the general rule of special order decisions?

An entity wants to be as well of after accepting the order as we were before we accepted it. 1. The price should be at or above the usual price because the opportunity cost of accepting this order is the loss of the usual contribution margin. 2. If capacity is available, the special order is acceptable if the organization at least breaks even. so the minimum acceptable price is equal to the incremental cost of the order. Irrelevant Cost: Variable selling costs such as commission and unavoidable fixed costs.

What is the important principle behind responsibility accounting?

An individual should be held accountable for costs over which they have control.

How do you identify and estimate avoidable fixed costs?

Analyze the nature of the fixed cost and its relation to the two alternatives of keep or drop.

How is weighted average cost of capital calculated?

Analyzing all sources of invested funds including both debt and equity financing; it's the after tax cost of all long term financing for the entity or division.

When do managers become indifferent to purchasing more of the constrained resources for continued production?

As the variable cost per unit approaches the selling price of the product or service.

What is responsibility accounting?

Assess the performance of individual managers and business units against the performance targets that have been set and identifies any variance between actual and planned performance that can be investigated.

What are costs that are eliminated if the product is dropped?

Avoidable Fixed Costs

What does the Variable Costing Balance Sheet look like?

Beginning Inventory (Product Cost Incurred: DM, DL, VOH) ------------------------------------------ Goods Available for Sale (Less Ending Inventory) ------------------------- Cost of Goods Sale

What does an Absorption Costing Balance Sheet look like?

Beginning Inventory (Product Costs Incurred: DM, DL, VOH, FOH) -------------------------------------------------- Goods Available for Sale (Ending Inventory) --------------------------- CGS

What does the Throughput Costing balance sheet look like?

Beginning Inventory (Product Costs Incurred: DM) -------------------------------- Goods Available for Sale (Less Ending Inventory) ---------------------------- CGS

What is the area above and below the breakeven point known as?

Below --> Operating Loss Area Above --> Operating Income Area

What is any process, part, or machine that limits overall capacity?

Bottleneck Emphasize products that have the highest contribution margin per bottleneck hour.

What is the level of operating activity at which revenues cover all fixed and variable costs resulting in zero profit?

Breakeven Point

What is the anticipated use of capacity over the next period and is based on management's planned operations in which customer demand is forecasted?

Budgeted/Expected Capacity (Demand)

What has low sales value compared to other joint products?

By Product

What is the extent to which the cost function is made of up fixed costs?

Degree of Operating Leverage Contribution Margin / Profit

What are examples of generic revenue drivers?

Competition, economies of scale, market share, customer satisfaction, employee satisfaction, brand strength, customer loyalty, etc.

What is the reverse engineering that occurs in target costing?

Competitors' products are taken apart and put back together to better understand the manufacturing process and product design.

What allocates joint costs so that the gross margin percentage for each main product is identical?

Constant Gross Margin NRV Method Best reflects the inseparability of joint production process.

What is it called when there are limits in capacity, materials, or labor restrict an entity's ability to provide enough products to satisfy demand?

Constraint

What is the total revenue minus total variable costs?

Contribution Margin

What is the selling price per unit minus the variable cost per unit and tells how much revenue from each unit sold can be applied toward fixed costs?

Contribution Margin Per Unit (selling price per unit - variable cost per unit)

What is the formula for profit?

Contribution Margin Per Unit*Quantity of product sold - total fixed costs

What is the percentage by which the selling price or revenue per unit exceeds the variable cost per unit?

Contribution Margin Ratio = Contribution Margin Per Unit / Sales Price Per Unit

What is the process by which indirect costs are assigned to specific cost objects?

Cost Allocation

What is determined by adding a mark up to some calculation of the product's cost?

Cost Based Pricing Mark ups originate from industry practice and are chosen so that the organization earns a target rate of return on investment, but not maximize profits.

What shows the relationship between total revenues and total costs and illustrates how an organization's profits are expected to change under different volumes of activity?

Cost Volume Profit Graph

What are the common types of responsibility centers?

Cost, Revenue, Profit, and Investment

What is a comparison of the cost of tracing costs to cost objects against the benefits of a more detailed cost information tracing system?

Cost/Benefit Test

What type of standard assumes normal operating conditions that allow employees to meet the target set without a superhuman effort?

Currently Attainable Standards Employees might not be challenged to do better, but can be overcome by taking a continuous improvement approach by updating standards and introducing stretch targets.

What can reveal useful insights for improving customer organization performance?

Customer Profitability It's important for organizations to differentiate between the more profitable and less profitable customer/clients.

What is a downward demand spiral that occurs in cost based pricing when sales volumes inappropriately influence the price?

Death Spiral i.e. If production decreases because demand has, the average product cost and the price based on the average cost increases.

When do the rights and responsibilities for decision making permeate all levels of the organization?

Decentralized Decision Making

When does decision making occur throughout management levels and in the field?

Decentralized Entity

What are the costs that can be directly linked to the cost object?

Direct Costs

What compares the labor hours worked to produce the actual output to the standard amount of labor hours allowed for the actual output?

Direct Labor Efficiency Variance Values the difference at the standard labor price per hour and is recorded in WIP. (actual hours for actual output - std. hours)*standard price

What compares the actual price labor with the standard price?

Direct Labor Price Variance (actual labor price per hour - std. labor price)*actual hours used

What compares the actual amount of materials used to the standard amount of materials allowed for the actual level of output?

Direct Materials Efficiency Variance - recorded in WIP at standard cost (actual quantity used for actual output - std. quantity)*standard price

What compares the actual price for the amount of direct materials purchased with the standard price for the direct materials?

Direct Materials Price Variance - usually calculated at the time direct materials are purchased (actual price - standard price)*quantity purchased

What is used to allocate the costs of each support department only to the operating departments?

Direct Method Cost objects of interest are the operating departments since none of the interactions among support departments are reflected.

What is the general rule for keep or drop decisions?

Discontinue a product, service, or business segment when its total contribution margin doesn't cover the avoidable fixed costs.

What are disadvantages of ROI?

Discourages managers from investing in projects that reduce the division ROI even though they might improve the overall entity or have only a short term effect -Doesn't incorporate measures of risk -Inappropriately cut costs that provide long term benefit for entry -Distortion due to understatement and overstatement of costs

What is a method used when support costs are separated into fixed and variable cost pools and cost drivers are identified for the variable cost pools to more accurately reflect the flow of resources?

Dual Rate Allocation Reflects a more accurate estimation of the incremental costs of providing support services compared to single rate allocation, but it costs more to develop and maintain.

What transfer prices allow the selling department to be credited for the market price and the purchasing to be charged the variable cost?

Dual Rate Transfer Prices Provides appropriate information and incentives when the selling department has excess capacity and is similar to a policy that uses an opportunity cost for the transfer prices.

What is an illegal practice that occurs when a foreign based entity sells products in Australia at prices below the market value in the country where the production is produced and the price could harm an Australian industry?

Dumping

What is the decomposition of ROI into investment turnover and return on sales that focuses attention on the role that assets play in generating revenues known as?

Dupont Analysis Investment turnover is a measure of the sales generated by each dollar invested in operating assets while return on sales measures managers' abilities to control the operating expense related to sales during a period.

How are the target cost reduction goals set and met?

Each department is assigned responsibility for spcific cost reductions amounts and are achieved via: value chain analysis to redesign the production and service process to increase overall productivity and efficiency OR use supply chain analysis to issue target cost reductions for intermediate parts or service supplies.

What is a type of residual income that incorporates a number of adjustments to reduce the disadvantages produced by using adjusted residual income?

Economic Value Added - each division can use its actual cost of capital. adjusted after tax OI - (weighted average cost of caption*(adjusted total assets - current liabilities))

What provides information about how economically direct resources such as materials and labor were used?

Efficiency Variance Does not consider any factors that might have effected efficiency

What is the general rule for choosing the product mix when resources are constrained?

Emphasize products and services that maximize the contribution margin per unit of constrained resource.

What is not affected by the choice of the denominator?

Inventory and CGS

True or False. Organizations with high operating leverage incur less risk of loss when sales decline.

False it incurs MORE risk and accelerated profits above the breakeven point.

True or False. As the number of cost pools increase, the accuracy of the cost information decreases because each new pool will have a different cost driver for allocation purposes.

False, the accuracy of cost information increases as well as the resources needed to undertake the cost assignment.

True or False. When launching a new product, managers set the price based on the cost of the product.

False. Managers determine the cost of the product and then set the price to achieve a desired profit margin.

True or False. There are rules prescribed for developing standards costs.

False. Managers use the most recent year's data or historical data for expected changes in costs or processes.

True or False. Compared to ROI, residual income is more influenced by changes in investment.

False. It is less influenced

True or False. Few uncertainties come with a special order for a short time customer.

False. Long term customer > new customer

True or False. Financial statements reporting requires incremental costs whereas short term internal decisions requires average costs.

False. Switch them.

True or False. By products are material to financial statements or other reports.

False. They are material and aren't always recorded int the most theoretical way, but the choice of accounting treatment is unimportant.

What happens if the actual volume of the allocation base is less than the expected given actual production levels?

Favorable (but is more than expected it's Unfavorable)

What helps managers identify variances that are sufficiently large to justify further investigations and can reveal production problems that need to be investigated?

Favorable and Unfavorable Variances between Companies

What is the difference between actual fixed OH costs and estimated fixed overhead costs?

Fixed Overhead Spending Variance (actual fixed OH costs - estimated fixed OH costs) Fixed OH costs are not expected to fluctuate with levels of activity and reflects the amount by which the actual spending on fixed OH differs from the estimated fixed OH.

What is the key value of target costing?

Focuses managers' attention on the design phase where most cost savings potentially occur since 70-80% of product costs are committed at this point, specifically those in the manufacturing process.

What are the total costs incurred for a cost object?

Full Cost

What are the set of accounting methods and disclosures typically used to prepare financial statements for external parties?

GAAP Not followed for internal purposes

What is information about volume of sales or product prices when organizations sell few product and is usually easy to transfer from one person to the next?

General Information

What is the importance of breaking variances into spending volume and efficiency components?

Helps to identify why actual overhead costs differ from standard cost.

When is a life cycle budget developed?

IF forecasts predict that sales over time will cover all product costs and eventually add to profit.

What type of standard assumes perfect operating conditions that achieve maximum efficiency with no allowances for process errors?

Ideal Standards Can either motivate employees as it encourages higher levels of performance or demotivate due to the frustration of not being able to admit.

What is the major drawback of cost based pricing?

Ignores customer demand so prices are likely to be higher or lower than what customers are willingly to pay for goods or services.

What is the level of activity as which equal cost or profit occurs across multiple alternatives?

Indifference Point

What is the basic structure of the simple costing system?

Indirect Cost (allocated via cost driver)--> Cost Object (traced via source documentation)--> Direct Cost

What is the rate used to assign the cost to the cost object, but won't be possible until the end of the financial period when actual results are known?

Indirect Cost Rate Can vary on month to month fluctuations in the cash flow pattern.

What are the costs that are used for the benefit of multiple cost objects?

Indirect Costs / Overheads

What is the practice of providing the good or service from internal resources?

Insourcing Includes opportunity cost of extra space or capacity from outsourcing that can be converted to other users.

What is a decision making method that considers changes in price and costs over the entire life cycle of a good or service from the time the product is introduced through a number of years?

Life Cycle Costing Managers consider the profitability of the product over a number of years.

What has high sales value compared to other joint products?

Main Product

What is a decision to make a product or service in home or to outsource it to outside vendors?

Make or Buy Decision

What are advantages of throughput costing system?

Managers are encouraged to reduce operating costs when needed and are more likely to consider reducing costs such as DL and the incentives for managers to build up inventory.

What is the general rule for relaxing constraints for one or two products?

Managers must be willing to pay not only what they are already paying, but also some or the entire contribution margin per unit of constrained resource. The goal is to acquire added capacity and eliminate the constraint.

What is management by exception?

Managers perform detailed investigation only for variance they consider important via -variances calculated and monitored need to chosen based on dollar amount or given percentage -when variance trends are increasing, managers can know what causes the trend so they may be eliminated.

What affects the timing of when fixed overhead is recognized as an expense?

Manufacturing and Sales Volume

Why are variances calculated?

Monitoring and bookkeeping.

Why must joint costs be allocated?

Must be allocated to each product for reporting inventory and CGS on financial statements, income tax returns, government regulatory reports, legal processes, and tax audits.

What is generally preferred because they are based on the ability of each product to pay for its allocated cost?

NRV Methods Products appear profitable as long as their revenues are greater than their separable costs.

What are transfer prices based on an agreement reached between the managers of the selling and purchasing department?

Negotiated Transfer Price Ensures that both managers have full information about costs and market prices and that the transfer price provides appropriate incentives.

What allocates joint costs using the relative value of main products and takes into account both the additional sales value that is created and cost that are incurred after joint production ends?

Net Realizable Value (NRV Method) Calculated as the final selling price minus separable costs.

What is a method of allocating indirect costs using budgeted rather than actual indirect costs?

Predetermined Indirect Cost Rate Overcomes the delay in obtaining information and smoothing out fluctuations in cash flows; provides a benchmark against which actual costs can be measured to assess performance and assist in pricing and budget preparation.

What is the illegal practice of setting different prices for different customers?

Price Discrimination

What is the sensitivity of sales to price increases?

Price Elasticity of Demand

What is the practice of charging a price viewed by consumers as too high?

Price Gouging Managers must convince consumers that prices are based on cost

What is the practice of charging a higher price for a product or service when it's first introduced?

Price Skimming

What is the difference between standard and actual prices paid for resources purchased and used in the production of goods or services?

Price Variance Doesn't take into account whether sufficient cash flows, storage space, or usage requirements justify and accommodate purchasing resources in larger quantities.

What can the total variance for direct cost be broken down into?

Price and Efficiency Variance

What are direct and indirect production costs are assigned to the cost of inventory?

Product Costs

What provides an indication of changes in contribution margin caused by selling in a different mix form the planned mix of products?

Product Mix Variance - only relevant when the products involved are substitute. (Change in avg. std. CM*actual unit volume)

What is the difference between the standard amount of fixed overhead cost allocated to products and the estimated fixed overhead costs?

Production Volume Variance

What happens when there are no capacity constraints apply or alternative uses of fixed resources are available?

Products with the highest contribution margin per unit are emphasized.

When are managers held responsible for both revenues and costs under their control and must make decision about inputs, product mix, pricing, and volume of goods or services produced?

Profit Centers Performance is measured via revenue and cost measures with not for profits using revenues and cost budgets.

What is an advantage of activity based transfer pricing?

Purchasing department has incentive to accurately project the number of units it will purchase internally which enhances the entity's planning abilities.

What is used to evaluate investment center performance because it's compared across subunits within a single organization, within an industry, and within an organization?

ROI (operating income / average operating assets) OR (Investment turnover * return on sales)

What is used to allocate costs among support departments and then from support departments to operating departments and allows for all interactions among departments?

Reciprocal Method (widely used) More accurate than direct and step down method.

What are some characteristics of a special order?

Reduced price, personalization, non standard order size, and special delivery characteristics.

What measures the dollar amount of profits in excess of required rate of return and represents the difference between actual operating income and the required income?

Residual Income operating income - (required rate of return*average operating assets)

What is the process of assigning authority and responsibility to managers of sub units and then measuring and evaluating their performance?

Responsibility Accounting

What are sub units in which managers are accountable for specific types of operating factors and should reduce agency costs?

Responsibility Centers However, it can lead to sub-optimal decision making since the interests are in their own responsibility centers.

What is the ratio of operating income to average operating assets?

Return on Investment Intended to capture operations over a period of time and can be manipulated by temporarily decreasing investment at time of measurement.

What are the financial measures commonly used to evaluate investment center performance?

Return on Investment, Residual Income, and Economic Value Added

What does the Absoprtion Costing Income Statement look like?

Revenue (CGS: units sold*variable cost per unit + allcoated fixed production cost per unit) ------------------------------------ Gross Margin (Non Production Costs: Selling, admin, exec) ------------------------------------ Operating Income

What does the Variable Costing Income Statement look like?

Revenue (Variable Cost: Production, non production) -------------------------------------------------- Contribution Margin (Fixed Cost: Production, non production) -------------------------------------------------- Operating Income

When are managers held responsible for revenues under their control and are expected to maximize sales?

Revenue Centers Gross Revenues, sales volume in units and sales mix serve as evaluations for performance measures.

What does throughput costing focus a managers' attention?

Revenue generated, investment into what should be sold, and costs incurred to convert inventory to throughput.

What does the Throughput Costing Income Statement look like?

Revenues (Direct Material Costs: Production) ----------------------------------- Throughput Contribution (Other Cost: Production and non production costs) ------------------------------------ Operating Income

What are the assumptions and limitations of CVP analysis?

Rules out fluctuations in revenues or costs that might be caused by common business factors such as supplier volume discounts, learning curves, changes in production efficiency, or special customer discounts. Whether CVP assumptions will be violated

What is the proportion of different products or services that an organization sells?

Sales Mix

What allocates joint costs based on the relative sales volume of main products at the point where joint production ends?

Sales Value at Split Off Point Method

What is treated as a revenue center?

Sales department with rewards for employees or for non profits -- fundraising activities.

What does Kaizen Costing rely on?

Sales forecasts to provide explicit cost reductions.

What are the two categories that can be used to estimate volume of production under absorption costing?

Supply Based Capacity and Demand Based Capacity

What is the flow of resources from the initial suppliers through the delivery of goods and services to customer and clients?

Supply Chain

What uses market based prices to determine whether products and services can be delivered at costs low enough for an acceptable profit?

Target Costing Inappropriate for industries with simple production processes such as food products and beverages.

What is the process of researching consumer markets to estimate an appropriate market price, then subtracting the desire return to determine a maximum allowable cost to generate the desired profit margin?

Target Costing If expected costs > target, managers will NOT provide the good or service.

What are the major techniques used to plan for long term profitability and help accountants become more deliberate about profit planning?

Target Costing, Kaizen Costing, and Life Cycle Costing.

What is used when entities are facing declining prices over time?

Target and Kaizen Costing Both use goal setting to encourage better performance, but the stress of cost reduction can impair employees well being and cause organizations to forgo some products having long term profit potential.

Why do accountants analyze the supply chain?

They look for opportunities to reduce cost and improve quality that are identified through tracking and analyzing use patterns of materials, supplies, finished goods, and shipped goods.

What is the revenue less direct materials costs for the units sold?

Throughput Contribution Allows managers to increase throughout put and decrease the cost of inventory and operating expenses.

What is a modified form of variable costing that treats direct labor and variable overhead as period expenses and inventory is valued using only direct material costs?

Throughput Costing

When would an entity accept a special order?

To use idle capacity in order to increase short term profits or the entity may have a strategic intent to secure business.

What is the equation used to calculate breakeven point in total revenue by dividing the fixed costs by the contribution margin ration?

Total Revenue to Break Even = Fixed Costs / contribution margin ration

What is the price used to record revenue and cost when goods or services are transferred between responsibility centers in an entity?

Transfer Price perfect one is the opportunity cost of transferring goods and service internally.

What is the price used to record revenue and cost when goods or services are transferred between responsibility central in an entity?

Transfer Price - have incentives and tax effects. Prices are set for the use of support departments.

True or False. Accountants choose allocation basis for variable overhead that reflect the use of variable resources.

True.

True or False. As inventory quantity increases, the amount of fixed costs included in inventory increases as well as operating income.

True.

True or False. If indirect costs are caused by factor other than volume, then incorrect allocation may lead to cross subsidization between the cost objects.

True.

True or False. If the margin of safety is small, managers may put more emphasis on reducing costs and increasing sales to avoid potential losses while a larger margin of safety gives managers more confidence in making plans such as incurring additional fixed costs..

True.

True or False. In a variable costing income statement, all costs are separated into variable and fixed categories.

True.

True or False. No allocation method is necessary for processing a joint product beyond the split off point because allocated joint costs represent sunk costs and aren't included in the analysis.

True.

True or False. Organizations may sometimes need to reallocate capacity to attain the highest contribution under activity base transfer pricing.

True.

True or False. Analysis of the value chain can lead to improved relationships between the entity and others in the value chain, creating an extending organization that can respond flexibly to dynamic and competitive environments.

True. It can also encourage managers to consider whether they should outsource some of their value added activities.

True or False. Cost based pricing is commonly used method.

True. Manufacturers prefer to mark up an average cost that includes a portion of fixed cost -- reflects that fact that it was difficult in the past for entity;s information systems to gather the date needed to calculate profit maximize sales prices.

True or False. The performance measure selected to evaluate performance must reflect the organizational goals and strategic directions of the entity and the responsibility center.

True. Performance measures influence behavior and decision making.

What are uncertainties associated with estimating future revenues and costs?

Unforeseen economic trends, shifts in competition, demand, or supply, and changes in technology. Uncertainty is often greatest for option involving extra processing.

What is the formal used to calculate margin of safety in units and revenues?

Units = actual/estimated units of activity - units at breakeven point Revenues = actual/estimated revenue - revenue at breakeven point

When is target costing primarily used?

Used for products that have been manufactured by other organizations, but is increasingly being used for new goods and services.

How is a cost base calculated?

Using variable cost or average cost that includes both variable and fixed costs.

What is a disadvantage of negotiated transfer price?

Usually requires more time because both managers prefer contribution margin.

What happens when by products are recognized at the time of sale?

Value may be recorded as sales revenue, other income, or as a reduction of CGS.

What is preferred for internal reporting?

Variable Costing

What is a costing method where all variable costs are matched against revenues and fixed costs are treated as period costs?

Variable Costing Inventory includes only variable manufacturing costs under variable costing and includes DM, DL, and VOH

What is the difference between allocated fixed overhead cost and actual fixed overhead cost?

Variable Overhead Budget Variance

What is the difference between the standard amount of variable overhead for the actual volume of the allocation base and the flexible budget for variable overhead cost?

Variable Overhead Efficiency Variance (std. volume of allocation base for actual output - actual volume)*standard variable OH allocation rate

What is the difference between the actual variable OH costs for the actual output compared with the total expected variable OH costs for the actual output?

Variable Overhead Spending Variance Helps managers monitor whether the organization spent the planned amount on overhead.

What is used if additional fixed costs caused the degree of operating leverage to reach an unacceptably high level?

Variable costs to meet the operating needs.

What is the process of calculating variances and then investigating the reasons they occurred?

Variance Analysis Can be used whether or not an organization uses a standard costing system.

What happens if the actual price paid is higher than the standard price?

Variance is Unfavorable

What happens when actual variable overhead costs are less than expected given the actual volume of output?

Variance is favorable.

What happens when the actual hours are less than standard hours?

Variance is favorable.

What happens when there are fewer direct materials used than called for at standard?

Variance is favorable.

What happens when the entity pays more for labor hour than the standard called for price?

Variance is unfavorable

What is a measure of output to assign the direct costs and are consumed by the cost object in relation to its use of volume driver?

Volume Drivers

What is the difference between the amount estimated fixed OH costs used to calculate the allocation rate and the amount of fixed OH costs actually allocated to inventory during the period?

Volume Variance If immaterial, the variance is closed to CGS, but if material, its allocated on a pro rata basis among CGS, finished goods, and WIP.

What are cost drivers classified as?

Volume or activity drivers.

What is the average contribution margin per unit for multiple products weighted by the sales mix and to determine the breakeven point or targeted profit in revenues?

Weighted Average Contribution Margin Per Unit

What is the combined contribution margin divided by combined revenue and can be calculated by dividing the contribution margin per unit by the weighted average selling price?

Weighted Average Contribution Margin Ratio

When do non operating decisions arise?

When re-evaluating operations to improve process, shortages occur, or a customer wants special treatment.

When is life cycle costing used?

When the initial product is produced and sold at a loss. It is also used to identify products that may not be profitable when the costs of decommissioning the operation are included.

When is a commodity price used?

When there are many competitors with no product differentiation.

When is a monopoly price used?

When there are no competitors for the unique good or service; an entity can't establish a free market price, but must charge the regulated price.

What does the type of adjustment depend on?

Whether variances are material or immaterial.

Don't stop.....

believing...HOLD ONTO THAT FEEEEEELLLIIINGGGG okay now get back to studying.