CAPE Accounting: Unit 2
Re-order point=
(lead time * daily usage) + safety stock
The 2 categories of capital investment techniques are
1. Non- discounting methods 2. Discounting methods
Disadvantages of NPV method
1. Present value tables are not always readily available. 2. It is less appealing for the man in the street who does not understand discounting 3. furthermore, it assumes immediate reinvestment of the cash generated by investment projects. This assumption may not always be reasonable due to changing economic conditions.
Disadvantages of Periodic Inventory System
1. can leads to delayed results 2. less control of inventory
Disadvantages of Participative Budgeting Style
1. time consuming 2. encourages bias and excessive claims
Required Units in Production
= (expected units of sales+ desired ending inventory)- beginning inventory units
mutually exclusive investment projects
a set of projects where only one can be accepted but all yield positive NPVs, thus the business must choose the project that gives the highest NPV
margin of safety in units:
actual sales in units - breakeven sales in units
Period Costs (Fixed Costs)
are costs related to other business functions such as selling and administrative expenses, these costs are usually found in your income statement. These are also called fixed costs and are not directly related to production.
BEA- Equation Method: To calculate break even point in sales revenue
break even point in units * selling price
Cost Identification
determining exactly what cost is involved
Activity Based Costing
is a system that is used to determine or allocate costs based on activity level.
Budgeting
is the process formalizing plans and committing them to written financial terms.
Unit Level Activities
performed each time an individual unit is produced.
Facility Sustaining Activities
performed to support the organization and does not deal with the facilitation of production at all for example building depreciation
Direct Labour Budget=
units to be purchases*labour hours per unit* wage rate her hour
Contribution Method: target point in units sold (in sales/units)
units to reach target profit= Fixed Cost + Target Profit/Contribution Margin per unit
Controllable and Non-Controllable costs
- Controllable Costs: are costs that can be managed by management. For example: direct materials - Non-controllable costs: are costs that cannot be changed or managed by management.
Manufacturing and Non-Manufacturing
- Manufacturing Costs: also known as product costs is the cost incurred to produce a product. -Non-manufacturing costs: also known as period costs is the cost related to the non-factory aspects of the business.
Planned and actual costs
- Planned Cost: is the approved estimate cost of work undertaken. -Actual Costs: is the specific cost incurred for the work carried out.
Product Costs
- are costs related to producing and acquiring products that directly generate revenue for the firm. - are costs incurred to produce a product; any costs that would be found in your manufacturing account. - also called inventoriable costs
Weighted Average Method
- calculate equivalents costs FOR ALL WORK DONE TO DATE -no distinction made between prior and current periods - blends units and costs from previous and current periods.
FIFO Method
- treats beginning inventory units of WIP separate and apart from units started and completed during the current period
Features of Absorption Marginal Costing
- used for external financial reporting and limited internal decision making required by GAAP - production costs is based on total production cost (variable and fixed) - inventory valuation based on full production cost per unit - cost classification: all manufacturing costs (product costs) and fixed and variable non-manufacturing costs are period costs.
Features of Marginal Costing
- used for internal decision making - production cost based on variable production cost ONLY - inventory valuation is based on variable production cost per unit - cost classification: variable manufacturing costs (product costs) AND fixed manufacturing and non-manufacturing costs (period costs);
Fixed and Variable costs
-Fixed cost: are costs that remain constant no matter production (for example rent, insurance) - Variable cost: are costs that vary in total in relation to changes in activity (for example electricity and water expenses)
Objective of Cost Volume Profit Analysis
-to establish what will happen financially if volume or a specific activity changes.
Activity Based Costing VS Job Costing
1. ABC is expensive to start up and maintain while job costing is cheap and inexpensive 2. ABC is more complex in allocating costs while job costing is simple but less accurate 3. allocates overhead costs using various cost drivers and activities, but job costing uses the predetermined overhead rate 4. in ABC costs are usually in alignment but with job costing there may be overhead variances 5. in ABC both manufacturing and non manufacturing costs are traced to products but in job job costing ONLY manufacturing costs are traced to products
The techniques under the non-discounting method include:
1. Accounting/Annual Rate of Return Method (ARR) 2. Pay-back period method
Limitations of ABC System
1. Can be expensive to use 2. Some arbitrary allocations continue 3. time consuming
Examples of Process Costing businesses
1. Coca Cola 2. Berger Paints 3. Grace Kennedy 4. Caribbean Cement Company
In costing a product three attributes must be present (IMA)
1. Cost identification 2. Cost measurement 3. Cost assignment
Avoidable/Relevant Costs have to categories:
1. Differential/ Incremental Costs: is the additional cost incurred for a given decision 2. Opportunity Cost: is the benefit lost from one item to obtain something else 'what you give up to achieve something else'.
Production Costs are split into 2 categories
1. Direct Costs 2. Indirect Costs
There are 2 approaches to the break-even analysis
1. Equation/Algebraic Method 2. Contribution Margin Method
There are 3 inventory method:
1. First in First Out (FIFO) 2. Last in First Out (LIFO) 3. Weighted Average (AVCO)
Types of Cost Curves
1. Fixed Cost Curve 2. Variable Cost Curve 3. Mixed Cost Curve (Semi-Variable Cost Curve) 4. Total Cost Curve 5. Step Fixed Cost Curve 6. Step Variable Cost Curve
There are 3 phases of capital investment:
1. Identification of potential investment 2. Evaluation of investment return to business and stakeholders 3. Selection of investment which yields the greatest investment return
Steps in Activity Based Costing
1. Identify and define activities cost pools eg. Cutting,finishing 2. Calculate the activity rate for each task or activity by using the formula:Activity rate= Budgeted activity cost pool/ Estimated Activity Based usage 3. Allocate factory overhead costs to each product by using the following formula: activity rate * usage
There are 3 main types of budget styles:
1. Imposed 2. PartIcipative 3. Negotiated
There are 3 types of cost classifications: (DIP)
1. Inventory Valuation 2. Decision Making 3. Planning and Control Costs
There are 3 categories of capital investment decisions
1. Modernisation: this is concerned with if the business will achieve cost savings from benefits a new machine may offer. 2. Expansion: this is concerned with if a company should produce more products which would cause for an increase in machines needed. 3.Replacement: this is concerned with if a business should replace an old machinery with a new one or change brands of a machine etc. due to declining performance etc
Non-Cash VS Cash items in a cash budget
1. Non-Cash Items such as provision for bad debt and depreciation DO NOT go in the Cash Budget 2. Items such as capital expenditure on fixed assets go in the cash budget
Objectives of Budgeting (CCCAMPP)
1. Planning 2. Coordination 3. Communication 4. Motivation 5. Control 6. Performance Evaluation 7. Authorization
CVP Analysis Assumptions
1. Production and Sales are equal, hence there is no inventory brought forward. 2. When a company produces multiple products the sales and production mix are constant 3. Selling and Variable per unit costs and the fixed total costs are constant. 4. Volume is the only relevant factor affecting sales and costs. 5. Total Costs consists of variable and fixed elements.
Uses of Marginal Costing
1. Provides information to management for internal planning and decision making. It is particularly appropriate for short run decisions. 2. it is used in the routine accounting system for the calculation of cost and the valuation of stock.
There are 3 costs associated with inventory:
1. Purchasing Cost 2. Ordering Cost 3. Carrying Cost
There are 3 types of capital investment projects
1. Revenue enhancing investments (for example, entering a new market) 2. Cost-reduction investments (for example, installing a more efficient equipment) 3. Mandatory investments that are a result of government mandate (for example, installing mandatory safety features in a car)
Features of Process Costing
1. Total Costs are determined at the end of the period (month,year,quarter) 2. Used by manufacturers for mass production of identical units in a continuous flow. 3. Separate WIP accounts are maintained for each production department. 4. has more than one WIP inventory
There are 3 conditions that occur at the break even point
1. Total Costs=Total Revenue 2. Profits = 0 3. Contribution Margin = Total Fixed Costs
There are 2 methods to process costing:
1. Weighted Average Method 2. First In, First Out Method (FIFO)
Examples of period costs
1. administrative expenses 2. general expenses 3. selling and distribution expenses (delivery,advertising etc) 4. financial costs
Advantages of Budgeting
1. allows business performance evaluation 2. motivates workers to achieve target goals 3. it anticipates potential problems and solutions 4. it assists with the planning, coordinating and controlling of business activities.
There are 2 types of schedules that accompany the cash budget:
1. cash collection schedule 2. cash payment/disbursement schedule
A cash budget has three sections:
1. cash receipts (receipts from customers,capital and dividends etc) 2. cash payments (expenses,purchase of fixed asset/investment and drawings etc) 3. short term financing (loan payments,interest paid on loans etc)
Examples of product costs
1. direct materials 2. direct labour 3. factory overheads
Job Costing Accounts for:
1. direct materials 2. direct labour 3. manufacturing overheads
Guidelines for hazardous materials
1. do not mix solid and liquid chemical waste 2. waste must be collected in a chemically compatible container 3. Do not fill liquids to full capacity
Disadvantages of the Perpetual System
1. expensive to implement 2. can be inaccurate at times
Hazardous materials categories
1. explosives 2. flammable liquid, combustible solids 3. solids that are dangerous when wet 4. corrosive materials 5. poisonous infectious materials
Characteristics of Job Costing
1. focuses on a specific customer or contract 2. elements include direct labour, direct costs and manufacturing overheads. 3. information is found in a job cost sheet (source document) 4. finished product is separate and readily identifiable as a unit or batch.
There are many types of remuneration:
1. hourly rate 2. commission 3. fixed salary 4. bonus 5. piece rate 6. shift premium 7. holiday pay 8. overtime
Disadvantages of the Imposed Budgeting Syle
1. ignores the expertise of lower management
Advantages of Participative Budgeting Style
1. increases worker motivation 2. allows communication of issues and more feasible solutions
Advantages of Periodic Inventory System
1. inexpensive to set up 2. simple to use
Disadvantages of Annual Rate of Return
1. it does not consider the time value of money 2. it uses accounting profits rather than cash flows 3. there are too many different formulas to calculate average investment.
Disadvantages of Payback Period
1. it does not consider the time value of money concept 2. it ignores cash flows which occur after the payback period
Uses of CVP Analysis
1. its used to make managerial, investment and marketing decisions 2. used to determine how many units of a good should be sold to break-even or make or profit
There are 3 types of costing systems:
1. job (order) costing 2. activity based costing 3. process costing
Job Order Costing VS Process Costing
1. job costing is used for production of special orders or unique products while process costing is used for mass production of homogeneous products 2. job costing jobs are accumulated by job while in process costing jobs are accumulated by department for time periods. 3. job costing uses the job order cost sheet while process costing uses the production cost report to summarize costs. 4. in job costing, cost per unit and material varies with each item produced but in process they remain the same.
Bases for cost apportionment
1. machine hours 2. direct labour hours 3. units of production 4. direct labour costs 5. prime cost * 6. material cost*
The categories of decision making under relevant costs
1. make or buy 2. accept or reject 3. continue or discontinue
Advantages of ABC System
1. more accurate overhead cost allocation 2. more effective overhead cost control 3. Focus on relevant factors 4. Better management of activities leading to better management decisions
There are 2 types of annuity
1. ordinary annuity 2. annuity due
Disadvantages of Budgeting
1. over budgeting can occur 2. difficult to predict future sales 3. preparation is time consuming 4. inflation can affect budgeting (price of materials, overhead etc)
There are 2 systems to do inventory valuation
1. perpetual inventory system (CSEC way) 2. periodic inventory system
There 2 categories of inventory valuation
1. product costs (manufacturing costs) 2. period costs (non manufacturing costs)
Advantages of a cash budget
1. promotes staff to take advantage of cash discounts 2. predicts any cash deficiencies or surplus 3. minimizes interest and loans and overdraft
Advantages of the Annual Rate of Return
1. simplicity 2. ease of comparison of firms overall profitability to one investment
Advantages of Payback Period
1. simplicity- easy to understand calculate 2. uses cash flow instead of accounting profit 3. evaluates risks since it focuses on how soon capital will be repaid
Advantages of NPV method
1. the basic advantage of net present value method is that it considers the time value of money. 2. It recognizes income over the whole life of the project 3. It is straightforward unlike other methods. 4. it uses cash flows over profits
The techniques under the discounting method include:
1. the discounted pay back period method 2. net present value method 3. internal rate of return 4. profitability index method
Cost Volume Profit Analysis are based on 2 relationships:
1. the relationship between volume and sales revenue 2. the relationship between cost and profit
There are 4 types of activities
1. unit level activities 2. batch level activities 3. product sustaining activities 4. facility sustaining activities
Advantages of the Imposed Budgeting Syle
1. very easy to implement 2. facilitates coordination 3. removes bias towards certain departments
Making Decisions using NPV
1. when NPV is positive that means the investment is profitable and can be accepted 2. when NPV is negative that means the investment is not profitable and needs to be rejected 3. when NPV is zero the decision can be accepted as it a point of break even
Advantages of the Perpetual System
1. works in real time because its continuous 2. good inventory tracking so can easily pick up shortages
Roles/Functions of the Budget Committee
1.setting policies for budget; 2. approves department budgets and final budget,; 3. review budgets progress and 4. resolve budget disputes and difficulties
Activity rate formula
= Budgeted Activity Cost Pool/ Estimated Activity Based Usage
Initial Investment Formula
= Cost of new project + installation costs - proceeds from sale or disposal of existing assets(+ or- taxes on sale of assets)
Contribution Method: break-even point in sales revenue
= Fixed Costs/Contribution Margin Ratio (as a decimal)
Contribution Method: break-even point in units sold
= Fixed Costs/Contribution Margin per Unit = Fixed Costs/ (Selling Unit Price- Variable Unit price)
Pay Back Period Formula (even cash flow)
= Initial Investment/Estimated annual net cash flow
Net Cash Flow Formula
= cash inflow - cash outflow OR =net income + depreciation
AVCO per unit
= total cost of goods in inventory/total units in inventory
Net Present Value Formula
=Present value net cash flows-initial investment
Perpetual Inventory System (day to day/continuous)
A detailed inventory system in which a company maintains the cost of each inventory items and the records continuously show the inventory that should be on hand.
CVP Graph
A graphical representation of the relationships between an organization's revenues, costs, and profits and its sales volume.
annuity due
An annuity that pays at the beginning of each period.
ordinary annuity
An annuity that pays at the end of each period.
Periodic Inventory System (over a period)
An inventory system in which a company does not maintain detailed records of goods on hand (physical inventory count) throughout the period and determines the cost of goods sold only at the end of an accounting period.
Annual Rate of Return Formula
Average Annual Net Income / Average Capital Investment * 100
Contribution Margin Ratio
Contribution / Sales *100 OR Contribution Margin per unit/Unit selling price*100
Production Cost per unit=
Cost of goods manufactured(Production Cost)/number of units produced
Ordering Cost Formula
D/O * OC where D is demand per units, O is order size and OC is order cost
Structure of Schedule of Cost of Goods Manufactured
DIRECT RAW MATERIALS USED: Beginning Inventory Purchases Add: Carriage Inwards and Import Duties Less Return Outward (Purchases Returns) Net Purchases Cost of Materials Available for use Less ending inventory Cost of materials consumed/used DIRECT LABOUR: OTHER DIRECT EXPENSES: PRIME COST FACTORY OVERHEADS (list factory overheads) CURRENT MANUFACTURING COSTS Add: Opening WIP TOTAL MANUFACTURING COSTS Less: Closing WIP Production Cost/ Cost of goods manufactured
To adjust under applied overhead.
DR: Cost of goods sold CR: Manufacturing Overhead
Accounting for completed production
DR: Finished Goods inventory CR: Work in process inventory
To adjust over applied overhead
DR: Manufacturing Overhead CR: Cost of goods sold
Accounting for Labour
Direct Labour - Work in Progress Indirect Labour- Manufacturing Overhead Wages Owed- Wages Payable
Accounting for Raw Materials
Direct Materials- Work in Progress Indirect Material- Manufacturing Overhead Bought on Credit- Accounts Payable
Predetermined Overhead Rate (POHR) Formula
Estimated Manufacturing Overhead Costs/ Estimated Activity Base
Accounting for Overheads
In job costing, costs are allocated or determined using the predetermined overhead rate which is used to apply overhead costs to production.
Reconciliation of net income
Net Income per Absorption Costing Add: Fixed Cost in Opening Stock (Diff) Less: Fixed Cost in Closing Stock (Diff) Net Income per Marginal Costing I/S
Profitability Index Method Formula
Net Present Value / Initial Investment
Carrying (Holding) Cost formula
O/2 * C - where O is order size and C is carrying cost per unit
Break-even Analysis: Equation Method (units sold)
Profits= (Sales-Variable Expenses) - Fixed Expenses OR Sales= Profits+ Variable Expenses+Expenses NB: At break-even profits=0.
Income Statement for Absorption Costing
Sales Revenue Less: Cost of goods sold Opening Stock Direct Materials Direct Labour Direct Expenses Variable Manufacturing Overhead Fixed Manufacturing Overhead Cost of goods available for sale Less: Closing Stock GROSS PROFIT Less: Expenses - Fixed Non Manufacturing -Variable Non-Manufacturing NET PROFIT
Income Statement for Marginal Costing
Sales Revenue Less: Variable Cost of Goods Sold Opening Stock Direct Materials Direct Labour Direct Expenses Variable Manufacturing Overhead Variable cost of goods available for sale Less: Closing Stock VARIABLE COST OF GOODS SOLD Add:Variable Non-Manufacturing(selling and admin expenses) CONTRIBUTION MARGIN LESS: FIXED COSTS - Fixed Manufacturing Overhead -Fixed Non-Manufacturing (Selling and Admin) NET PROFIT
Product Contribution Margin
Sales Revenue- Variable cost of goods sold - It shows how much revenue is able to cover all period costs. - it is also called the Manufacturing Margin.
Hazardous materials
Substances that pose a danger to the health and safety of organisms
Re-Order Point (Level)
The inventory level at which additional goods need to be ordered which is determined by 3 factors: 1. usage 2. lead time 3. safety stock
Cost of production/Cost of goods manufacturing
The total cost of materials, labor, and other inputs required in the manufacturing of a product. = (prime costs+factory overheads+opening WIP)- closing WIP
Margin of safety in dollars=
Total Sales - Break Even Sales
Abnormal Gain
Where the loss in a process is less than the normal loss which can be caused by an increase in technology.
The EOQ Graph
Y axis: Annual Cost X axis: Re Order Quantity
Cash Budget
a budget that estimates expected cash inflows and outflows during a particular period.
A material requisition form
a document used by the production department supervisor to request the release of raw materials for production. This form shows the type and quantities of materials to be placed.
Job Cost Sheet
a form that records the materials, labor, and manufacturing overhead costs charged to a job
Budget Committe
a group of key managers who are responsible for preparing, coordinating and evaluating the overall budget
Inventory Valuation
allows a company to provide a monetary value for items in inventory.
Relevant Total Cost
also called total stock and administration cost. This is the total incremental and avoidable cost of the company implementing a business decision.
Carrying (Holding) Cost
also known as holding cost and this is the cost of holding an item in inventory, usually your stock brought down from the previous period.
Normal Loss
an expected decline in units experienced during the production process; the expectation is set by management
Abnormal Loss
any loss in excess of the set expectation level, usually caused by fire, damage, theft or natural disasters.
Overhead Costs
are all other costs excluding direct material,direct labour and direct expenses, which can be either manufacturing or non manufacturing over heads.
Initial Investment
are costs associated in getting a capital investment project in operation.
Unavoidable Costs (Irrelevant Costs)
are costs that have already been incurred (sunk/past costs) and the decision maker is no longer in control of these costs.
Cost Curves
are economic models and they are used to measure the cost against the output
Non-Value-Added Activities
are product or service related activities that simply add cost to or increase the time spent on a product or service without increasing its market value. Example repairs of machines, storage of inventory, inspections and inventory control. Also called business/entity added activities.
Capital Investment/Budgeting Techniques
are used to calculate how much value an investment will create.
The EOQ formula
calculates the ideal quantity of inventory that should be ordered for a given product. -EOQ is your order size in the question if not given in the question.
Direct Labour Budget
calculates the number of hours required to produce each unit of good and the labour cost of production.
Purchasing Cost
cost of purchasing the actual inventory/materials. (Purchases-Discount Received+Carriage Costs)
Step-fixed Cost Curve
costs that remain fixed over a wide range of activity but jump to a different amount for activity levels outside that range
Direct Materials/Purchases Budget
details raw materials to be purchased in a particular period.
Cost assignment
determining how the costs are allocated
Cost measurement
determining the dollar amount of the cost.
When calculating your product cost per unit in Marginal Costing
direct materials+ direct labour + direct expenses + variable manufacturing costs. NB: Variable non-manufacturing costs are used in your income statement NOT TO calculate product costs.
Discounting Methods
do consider the time value of money, meaning a dollar today is NOT WORTH the same tomorrow.
Non-discounting methods
do not consider the time value of money, meaning a dollar today is worth the same tomorrow.
Contribution Method: target point in units sold (in dollars)
dollars to reach target profit= Fixed Cost+ Target Profit/ Contribution Margin Ratio
Net Present Value Method (NPV)
estimates the amount of wealth that an investment will create. This method is also called the discounted cash flow method.
Total Sales=
expected unit sales * selling price per unit
Direct Costs
includes direct materials, direct labour and direct expenses, which are traceable to the production process.
Value Added Activities
increase the worth of a product or service to customers. Examples include engineering design, machining, assembly, painting and packaging.
Job Cost Flow Chart
is a chart that follows the movement of costs through the different stages of production.
Negotiated Budgeting Style
is a combination of both the imposed and participative budgeting styles.
Master Budget
is a combination of the interrelated budgets of an organization for a period 12 months. This budget consists of the cash budget, sales budget, production budget and other subsidiary budgets.
Absorption (Total/Full) Costing
is a cost accumulation and reporting method of accounting that treats all (fixed and variable) manufacturing costs as product costs and fixed and variable non-manufacturing costs as period costs.
Mixed Cost Curve
is a curve that is made up of the fixed and variable cost curve.
Receiving Report
is a document that is used to report the receipts of materials ordered.
Time Sheets
is a document which shows the amount of time spent working and the labour costs incurred.
Fixed Cost Curve (per unit)
is a downward sloping curve which shows that the more units you acquire the smaller (per unit cost) the portion of your fixed cost each would be incurring.
Cost driver
is a factor that has a direct cause-effect relationship to a cost, an activity creating a cost.
Break-Even Graph
is a graphical representation of the break even analysis.
Fixed Cost Curve (total)
is a horizontal line because it never changes regardless of output. Examples of fixed costs include: rent,insurance.
Idle Time
is a period of inactivity on the part of factory workers due to machine breakdown, industrial actions etc. - Payment made for idle time should be treated as an indirect cost.
Equivalent Units
is a physical unit stated in terms of completed units. It is the sum of completed and incomplete units at the end of the process.
Cost-Volume-Profit Analysis (CVP)
is a procedure that examines the changes in costs and volume levels and the resulting effects on net income.
An activity
is a repetitive action performed by people or machines in a business to make a product, provide a service or satisfy a customer .
Process/Batch Costing
is a system or method used to determine and allocate costs in industries with mass production of similar or identical products that are produced in a continuous flow.
Job (Order) or Traditional Costing
is a system used to determine costs of the production of specific/unique products or services. For example: building construction, marketing firm, furniture company. (special orders or customized production)
Predetermined Overhead Rate (POHR)
is also called the Overhead Absorption Rate (OAR) and it is used to calculate manufacturing overheads to products. (per unit indirect costs really, but cannot be stated as that because overheads cannot be easily traced back to production)
Manufacturing Account
is also known as a schedule of cost of goods manufactured, is an account that is used to determine the production cost for an accounting period.
Fixed Salary
is an agreed amount that is paid monthly or weekly to an employee.
Commission
is an amount that is paid to an employee based on a percentage of the employee's sales undertaken. (Commission= %*Sales)
Standard Cost
is an estimated cost benchmark to provide a service or produce a good.
Bonus
is an incentive system that is given to workers when the perform a task in a shorter period or better than expected.
Conversion Cost
is cost on converting raw materials into finished goods. This is calculated as the sum of direct labour and factory overheads. (direct labour + factory overheads)
Target Profit Analysis
is done by estimating what sales volume is needed to achieve a specific target profit.
Costing System
is method used in identifying, collecting and presenting costs associated with the manufacturing of a product or the provision of a service.
Remuneration
is money paid for labour.
independent investment projects
is one that stands alone and can be undertaken without influencing the acceptance or rejection of any other project.
Discounted Payback Period
is similar to payback period except it uses discounted cash flows to calculate the payback period.
Marginal Cost
is the additional cost incurred for making one extra unit. This cost would increase variable cost but leave fixed cost remaining constant.
Annuity
is the amount to be paid on investments annually or monthly.
Payroll Accounting
is the calculation of wages and salaries for employees.
Marginal (Direct/Variable) Costing
is the cost accumulation and reporting method that includes only variable production costs (direct materials,direct labour, direct expenses and variable overhead) as product costs and fixed overheads (manufacturing and non-manufacturing overheads) as period costs.
Stock (Inventory) Valuation
is the cost that is associated with an organizations inventory at the end of a reporting period.
The Margin of Safety
is the difference between a business planned and budgeted sales and break even sales.
Net Cash Flows
is the difference between cash inflows and outflows for a period.
Contribution margin per unit
is the difference between selling price per unit and variable price per unit (selling price per unit-variable price per unit)
Net Present Value(NPV)
is the difference between the present value of net cash flows and initial investments.
Economic Order Quantity (EOQ)
is the estimated optimal order size (in units) that will minimize the sum of ordering and carrying costs.
Break-Even Point
is the level of activity where a business is making neither a profit or a loss as their total costs is equal to total revenue
Cost
is the monetary measure of resources that is given up to attain a product or service.
Pay-back Period
is the number of years a business needs to recover the costs they used to make an investment.
Budgetary Control
is the principle of using a budget to control activities in business. For example budgetary control ensures that revenues and expenses adhere to the financial plan of the business (budget).
Cost Classification
is the process of arranging cost items into groups based on their degree of similarity.
Cost Allocation
is the process of assigning full indirect cost to a cost center (Purchases,Sales or Personnel Department)
Relevant Range
is the range at which a business is expected to operate during the short term, where variable cost per unit remains constant and total fixed costs remains constant.
Contribution (Margin)
is the sales cost remaining after the deduction of variable costs which contributes to the coverage of fixed costs. (sales-variable cost)
Break-even Analysis (pcs)
is the study of the relationship between sales,cost and profit which help in decision making.
Prime Cost
is the sum of all your direct costs. = direct labour + direct expense + direct materials
Internal rate or return (IRR)
is the true interest rate earned on a project. This is the point at which the net present value of an investment equals zero. If IRR is greater than discount rate accept the project.
Indirect Labour
is the work by factory employees that cannot be easily traced to production.
Direct Labour 2
is the work by factory employees, that can be easily traced to production or the conversion of raw materials to finished goods.
Cash Collection Schedule
is to determine the amount of cash that would be received from customers in a given month. (Sales)
Cost apportionment
is to distribute overhead cost over various cost centers.
Cash payment/disbursement schedule
is used to show cash payments for goods and services in a given period. (Purchases-Suppliers)
Purchase requisition
issued by the production department requesting material to be ordered.
Purchase order
issued by the purchasing department to suppliers, requesting the supply of materials.
Decision Making
managers use costs to make day to day decisions concerning the organization. These costs can either be avoidable or unavoidable.
Margin of Safety Percentage
margin of safety/ total sales *100
Profitability Index Method (PI)
measures the NPV per dollar of the initial investment and provides a basis for ranking projects that require different initial investment.
Overhead Variances
occur because costs are allocated to jobs before costs are known thus will leave there to be a difference in the actual/absorbed and budgeted overhead costs.
Over applied/Over-absorbed Overhead
occurs if the amount budgeted/applied exceeds the actual cost of the overhead, which means that cost of goods sold is too high and should be decreased.
Under-applied/Under-absorbed Overhead
occurs if the amount budgeted/applied is less than the actual costs, which means that cost of goods sold is too low and should be increased.
Relevant Total Cost=
ordering cost + carrying cost = (D/O *OC) + (O/2 *C)
Batch Level Activities
performed each time a batch is produced at a group level.
Product Sustaining Activities
performed to support the product or service for example design costs and equipment maintenance
Direct Materials Purchased =
production requirement units + closing inventory units - beginning inventory units
Holiday Pay
refers to pay given to employees for working on public holidays.
Phantom profits
refers to the difference between absorption and marginal costing net profits which is caused by the fixed manufacturing overhead.
Variable Cost Curve
resembles a 45 degree line, cost changes in proportion to output. Examples of variable costs include: commission, electricity payable at a fixed rate per kilowatt.
Production Cost Report
shows all the costs associated with producing for a product.
Sales Budget
shows expected sales for the budget period expressed in dollars and units
Production Budget
shows the number of units that should be produced each period.
Economic Order Quantity=
square root of 2DO/C -where D is total demand in unit, O is ordering cost and C is carrying cost. (answer is in units)
Safety Stock
the amount of inventory carried in addition to the expected demand or delayed lead time.
Usage
the amount of inventory used or sold daily.
Ordering Cost
the costs associated to facilitate the purchase of inventory, including the cost of data entry, transport costs and phone calls etc.
Shift Premium
the extra pay given to employees that is above normal pay received by factory workers due to a particular shift worked.
Capital Budgeting / Investment Appraisal
the process of evaluating potential investments and making decisions regarding the business long term assets.
Lead time
the time it takes to place an order and its arrival time
Main difference of Marginal and Absorption Costing
the treatment of fixed manufacturing overheads is different. In marginal costing it is treated as a period costs while in absorption costing it is treated as a product cost.
Avoidable Costs (Relevant Costs)
these are costs that are not necessarily going to be incurred but its incurrence depends on the course of action chosen.
Step Variable Cost Curve
these are costs that change drastically due to a change in expenditure that which cannot be spread over an accounting period.
Indirect Costs (Factory Overheads)
these are indirect material,labour and expense costs which support production but are not traceable to the production of each unit. For example: rent of factory, indirect materials used,wages paid to factory managers.
Work in progress/process
these are referred to as goods that are still in the production process and have not yet been completed.
Direct Labour
these include costs associated directly to the actual production process. For example: direct wages,wages of machine operators and factory wages
Participative Budget Style
this budgeting style is also called the bottom up approach and it is where budget decisions are built upwards, which is usually used in decentralized organizations.
Imposed Budgeting Style
this budgeting style is also called the top down approach and it is where budget decisions are made only by top management, which is usually used in centralized organizations.
Total Cost Curve
this curve starts where your fixed cost curve line begins. This cost is the sum of your fixed and variable costs. - TC=FC+VC
Overtime
this is the additional work that an employee will put in outside of the business times which is usually charged a time and a half (1.5) or double time (2). (basic rate* number of hours worked*overtime rate). Overtime is treated as indirect labour.
Piece Rate
this is where an employee is paid based on the number of units they produce in any given period. (hourly rate* quantity of goods)
Hourly Rate
this is where employees are paid on a basic rate per hour for any work undertaken throughout the work week. (basic rate*number of hours per week)
Break-even Analysis: Contribution Margin Method
this method assumes that each unit sold provides a certain amount of contribution margin to fixed costs.
Annual Rate of Return
this method looks at the average net income expected from an investment as a ratio of the capital invested. This method looks at profitability rather than speed.
First-in, first-out (FIFO) method
this method states that the first items to to enter inventory are the first ones to be sold.
Last-in, first-out (LIFO) method
this method states that the last items to enter inventory are the first ones to be sold.
Weighted Average (AVCO) method
this method states that with each receipt of goods the average costs in the inventory is recalculated and assumes that all costs are the same.
Planning and Control
this process requires cost accountants to predict costs then compare them to actual results.
Contribution Margin Income Statement
this statement is used for internal reporting only. Sales Less: Variable Cost CONTRIBUTION Less: Fixed Cost NET PROFIT
At Economic Order Quantity
total ordering cost is equal to total carrying cost (OC=CC)
Target Profit Analysis: Equation Method
units to reach target profit= variable cost + fixed cost + target income
In process costing
with the production of each identical unit of good the same amount of resources are being used up. Meaning that products are produced in the same manner and they consume the same amount of direct costs and overhead.
