Managerial Final

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.

Practical Standards

tight but attainable. They allow for normal machine downtime and employee rest periods, and they can be attained through reasonable, through highly efficient, efforts by the average worker.

Period Cost

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 a 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.

Profit Margin

Net profit margin is the net profits earned by a business, divided by its net sales. The net sales part of the equation is gross sales minus all sales deductions, such as sales allowances. The formula is: (Net profits / Net sales) x 100 = Net profit margin

Direct Materials

Raw materials refer to any materials that are used in the final product. 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. For example the seats that an airbus purchases from sub contractors to install in its commercial aircraft and the tiny electric motor panasonic uses in its dvd players.

Absorption Costing

Treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead.

Discretionary Fixed Costs

Usually arise from annual decisions by management to spend on certain fixed cost items. Examples: Advertising, research, public relations, management development programs, and internships for students. Discretionary fixed costs can be cut for short periods of time with minimal damage to the long-run goals of the organization.

Variable Costs

Varies, in total, in direct proportion to changes in the level of activity. Examples: COGS for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power. Commissions and shipping costs.

Manufacturing Cost

1. Direct Materials 2. Direct Labor 3. Manufacturing Overhead

Fixed Costs

A cost that remains constant, in total, regardless of changes in the level of activity. Examples: Straight line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising.

Break Even Point Issues

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Capacity Issues

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Product Costs

Include all costs involved in acquiring or making a product. These costs consist of direct materials, direct labor, and manufacturing overhead. 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. Because product costs are initially assigned to inventories, they are also known as inventorial costs.

Sunk Cost

Is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Because sunk costs cannot be changed by any decision, they are not differential costs. And because only differential costs are relevant in a decision, sunk costs should be ignored.

Activity Base

Is a measure of whatever causes the incurrence of a variable cost. Sometimes referred to as a cost driver.

Prime Cost

Is the sum of direct materials cost and direct labor cost.

Non Manufacturing Costs

Selling costs: Include all costs that are incurred to secure customer orders and get the finished product to the customer. Examples:Advertising, shipping, sales travel, sales commissions, sales salaries, and COGS Administrative costs: Include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples: 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.

Types of budgets

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Standard Costing

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variance analysis issues

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Ideal Standards

Can be attained only under the best circumstances. They allow for no machine breakdowns or other work interruptions, and they call for a level of effort that can be attained only by the most skilled and efficient employees working at peak effort 100% of the time. Managers view this as negative and tends to discourage even the most diligent workers. Unrealistic.

Contribution Margin

Deducting variable expenses from sales. Is the amount remaining from sales revenues after variable expenses have been deducted. This amount contributes toward covering fixed expenses and then toward profits for the period.

Direct Labor

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 wooers at toyota and carpenters at home builder KB Home.

Relevant Range

Is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid. Outside of relevant range, fixed cost may no longer be strictly fixed or a variable cost may not be strictly variable.

Differential Cost

A difference in costs between any two alternatives is known as a differential cost. Differential cost is a broader term, encompassing both cost increases and cost decreases between alternatives. Can be either fixed or variable.

Opportunity Costs

Is a potential benefit that is given up when one alternative is selected over another. Example: Vicki has a part time job that pays $200 a week while attending college. She would like to spend a week at the beach during spring break, and her employer has agreed to give her time off, but without pay. The $200 in lost wages would be an opportunity cost of taking the week off to be at the beach.

Planning budgeting issues

Is prepared before the period begins and is valid for only the planned level of activity. A static planning budget is suitable for planning but is inappropriate for evaluating how well costs are controlled. If the actual level of activity differs from what was planned, it would be misleading to compare actual costs to the static, unchanged planning budget.

Margin of Safety

Is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

Operating Leverage

Is the measure of how sensitive net operating income is to a given percentage change in dollar sales. Operating leverage acts a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income.

Manufacturing Overhead

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. Costs for heat and light, property taxes, insurance depreciation and so forth are not included. Only costs associated with operating the factory are included in manufacturing overhead.

Variable Costing

Only those manufacturing costs that vary with output are treated as product costs. This would include direct materials, direct labor, and the variable portion of manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this method.

Committed Fixed Costs

Represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Examples: Investments in facilities and equipment, as well as real estate taxes, insurance expenses, and salaries of top management.

Gross Margin

Sales minus cost of goods sold equals the gross margin. The gross margin minus selling and administrative expenses equals net operating income.