Accounting chapter 4

Nonproduct cost

A cost that is related to selling the products and services or administering the company

Batch-related cost

A cost that varies with the number of batches regardless of how many units are in each batch

Depreciation

A decrease or loss in value

model

A pattern, plan, representation, or description designed to show the structure or workings of an object, system, or concept

Explain the concept of sunk cost. Are sunk costs ever relevant in short-term operating? Why or why not?

A sunk cost is a past cost. Since the past cannot be changed, sunk costs are irrelevant.

Contribution margin per unit

Excess of revenue per unit over variable cost per unit.

How is activity defined in cost-volume-profit analysis?

In CVP analysis activity is measured as units produced and sold.

Direct Materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

How are opportunity costs incorporated into make-or-buy decisions?

Opportunity costs arise if the company can use the space released for another activity if the primary activity is outsourced.

incremental revenue

The additional revenue associated with an alternative

Cost-volume-profit (CVP) analysis

The study of the effects of changes in costs and volume on a company's profits.

Explain the three types of product costs and give an example of each?

The three product costs are direct materials, direct labor, and manufacturing overhead. Direct materials are traced to the product, direct labor is involved in making the product, and manufacturing overhead is all the remaining product costs other than direct materials and direct labor.

How can cost-volume-profit analysis determine the number of units that must be sold to achieve a certain profit after taxes?

We can use CVP to determine the number of units that must be sold to achieve a certain profit after taxes by using the following formula: (SP * Q- VC * 0) - FC =P/(1-tax rate).

manufacturing overhead

all manufacturing costs except direct materials and direct labor

Product-sustaining costs

the costs of activities undertaken to support individual products regardless of the number of units or batches in which the units are produced

incremental cost

the increase in cost from one alternative to another

Unit-related cost

A cost that varies with the number of products produced

What is a make-or-buy decision? What are the relevant variables in a make-or-buy decision?

A make-or-buy decision is an outsourcing decision where the company must decide whether to do something internally or pay someone externally to do it. Typically revenues are irrelevant in these decisions. The unit-related costs, batch related costs, and the number of units is relevant. Product-sustaining costs may also be relevant.

Explain the difference between product and nonproduct costs?

A product cost is incurred to manufacture a product while a nonproduct cost is incurred to sell the product or administer the company.

What are the two attributes of a relevant variable?

A relevant variable must occur in the future and differ among alternatives.

What is a special order decision? What variables are relevant in a special order decision?

A special order decision occurs when a customer wants a reduced price, usually for buying in large volume. The selling price, the number of units desired, the unit-related costs, and the batch-related costs are relevant and the productsustaining costs may be relevant.

Explain the concept of opportunity cost. Are opportunity costs ever relevant in the short-term operating decisions? Why or why not?

An opportunity cost is a benefit forgone. Since we give up something to have something else, an opportunity cost is relevant.

Explain how to calculate before-tax profit by using after-tax profit?

Before-tax profit is calculated as the after-tax profit divided by 1 minus the tax rate.

What is a keep-or-drop decision? What are the relevant variables in a keep-or-drop decision?

In a keep-or-drop decision the company must decide whether a product line should be discontinued. In these decisions all variables are relevant except facility-sustaining costs.

Explain the term incremental. How are incremental revenues, costs, and profits used in short-term operating decisions?

Incremental means additional. Incremental revenues, costs, and profits are relevant, if and only if, they differ among alternatives.

What factors other than relevant costs and revenues must be considered when making a special order decision?

Qualitative factors such as other customers must be considered.

What factors other than costs must be considered before making a make-or-buy decision?

Qualitative factors such as quality and timeliness of delivery must be considered

What factors other than costs and revenues must be considered when making a keep-or-drop?

Qualitative factors such as related sales must be considered.

Explain how short-term operating decisions differ from other decisions made by managers?

Short-term decisions differ in three primary ways. First, we assume that capacity is fixed. Second, these decisions are ad hoc and cannot be planned in advance. Last, these decisions are unique to the circumstances at the time.

Indirect Materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Contribution Margin

The amount remaining from sales revenues after all variable expenses have been deducted.

Explain the breakeven point in units. How is it related to the breakeven point in dollars?

The breakeven point in units is the number of units that must be sold in order to cover both the fixed and variable costs. At breakeven, the company's profits are zero. The breakeven point in dollars is the dollar amount of sales that must be generated to cover both the fixed and variable costs. If we take the breakeven point in units and multiple it by the selling price we can determine the breakeven point in dollars.

Explain each of the following: contribution margin per unit and contribution margin ratio?

The contribution margin per unit is the selling price per unit minus the variable costs per unit while the contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

Facility-sustaining costs

The costs of activities that cannot be traced to individual products or services but support the organization as a whole.

Incremental Profit

The difference between the incremental revenues and incremental costs of a particular alternative

Describe the five basic assumptions of cost-volume-profit analysis?

The five assumptions of CVP are: (1) selling price is constant per unit sold, (2) variable cost is constant per unit, (3) fixed cost is constant in total, (4) the number of units produced (purchased) equals the number of units sold, and (5) the sales mix is constant.

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

opportunity cost

The most desirable alternative given up as the result of a decision

Breakeven point

The point at which the costs of producing a product equal the revenue made from selling the product

sensitivity analysis

The process of changing key variables in CVP analysis to determine how sensitive the CVP relationships are to changes

sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

What are the steps in a relevant variable analysis?

The steps in a relevant variable analysis are: (1) identify the alternatives, (4) determine the relevant revenues, costs, and/or profits, and (3) choose the DOS alternative.

Relevant variables

The types of information studied in a marketing-research project (e.g., brand awareness, customer satisfaction, etc.); also known as constructs

Explain the difference among unit-related, batch-related, product-sustaining, and facility-sustaining costs and give an example of each.

Unit-related costs vary with units produced or sold, for example, packaging. Batch-related costs vary with the number of batches, regardless of how many units are in each batch, for example, ordering costs. Product-sustaining costs vary with the number of product lines, for example, advertising. Facility-sustaining costs do not vary with activity in the short run, for example, rent on the facilities.

sunk cost

a cost that has already been committed and cannot be recovered

Contribution Margin Ratio

a ratio computed by dividing contribution margin by dollar sales

Product Costs

costs that are a necessary and integral part of producing the finished product

Direct Labor

the work of factory employees that can be physically and directly associated with converting raw materials into finished goods