Module 1-Cost Accounting
Cost accounting info is commonly used in developing ___ ____ info
Financial accounting
Financial accounting is used primarily for preparing the ___ ___
Financial statement
Remain unchanged as the volume of activity changes
Fixed Costs
Cost accounting focuses on ____, uses ___ time
Future Present
Financial accounting is governed by ____
GAAP
In financial accounting need to use ____ to that everyone understands, controlled by ____
GAAP FASB
Budgeting helps managers decide whether their ___ can be achieved, and if not, what ____ are necessary
Goals Modifications
Gross Margin equation
Gross Margin = Sales - COGS
The term ___ ___ for a manufacturing firm refers to the excess of sales over cost of goods sold, including fixed indirect manufacturing costs
Gross margin
In the long run, differential costs are ____ than in the short run
Higher
Financial accounting has a ___ focus
Historic
Prime Costs equation
Prime Costs = Direct Materials + Direct Labor
Cost assigned to units of production in the period they are incurred and recognized (expensed) when the product is sold
Product (Manufacturing) Costs
Decision on what products or services to offer (product mix)
Product Choice Decisions
The costs of fire insurance for a manufacturing plant is generally considered to be a:
Product costs
Managers evaluate value-added activities to determine how they contribute to the final product's ___, ____, and ____
Service, quality, and cost
The period of time over which capacity will be unchanged, usually one year
Short Run (Relevant Range)
DM of a skateboard and remote
Skateboard: board, frame, wheels Remote: plastic, keys (NOT INK)
An order that will not affect other sales and is usually a one-time occurrence
Special orders
Increase in steps
Step/Semifixed Cost
With the enactment of the Sarbanes-Oxley Act of 2002, CEOs and CFOs are now responsible for all of the following:
Stipulating that the financial statement do not omit material information Attesting to the adequacy of the company's internal controls Disclosing that they have notified the company's auditors and audit committee of any fraud that involves management
Costs incurred in the past that cannot be changed by present or future decisions
Sunk costs
Linked set of organizations that exchange goods and services in combination to provide a final or service to the customers
Supply (Distribution) Chain
Change profit into a break-even equation Profit=(cm *X) -TFC
TFC/cm=X
Target Cost equation
Target Cost=Target Price-Desired Profit
Target Sales equation
Target Sales=(Total Fixed Cost + Profits)/Contribution Margin Ratio
Target Units equation
Target Units=(Total Fixed Cost + Profits)/Contribution Margin Per Unit
In essence, the value chain and the supply chain are similar, each creates something for which the customer is ____ __ __
Willing to pay
Is Marketing a value added activity?
Yes
Responsibility does not work without ____
Accountability
____ systems are important because they are a primary source of information for managers
Accounting
Opportunity cost did not happen therefore not reflected in the ___ system. They are never on the ____ statement
Accounting Financial
We want information to be as ___ as possible
Accurate
Costing method that first assign costs to activities and then assigns them to products based on the products' consumption of those activities
Activity-Based Costing (ABC)
Managers rely on financial information that is either ____ info or ____ info
Actual Estimated
The goal of a value chain is t find areas where a company can either ____ value for reduce ____
Add Cost
Decision to add or drop a product line or close a business unit
Add-or-Drop Decision
Indirect costs ____ to the cost of product
Adds
Producing products ____ value, moving it around ____ ___ value
Adds Doesn't add
Performing a task correctly ____ value; correcting mistakes does _____ value
Adds Not add
____ expenses are necessary but not included as part of the value chain as they are included in every business function of the ___ ___
Administrative Value chain
Costs required to manage the organization and provide staff support, including executive and clerical salaries; costs for legal, financial, data processing, and accounting services; and building space fro administrative personnel
Administrative costs
Basis Account Balance
Beginning Balance + Transfer Ins - Transfer Outs = Ending Balance (BB + TI - TO = EB)
Cost of Goods Sold Equation
Beginning Inventory + Purchases of Inventory - Cost of Goods Sold = Ending Inventory (BI + Purchases - COGS = EI)
Cost of Goods Sold Equal =
Beginning Inventory + Purchases of Inventory - Ending Inventory
A continuous process of measuring a company's products, services, or activities against competitor's performance
Benchmarking
Operating where the work required limits production
Bottleneck
When total sales equals total costs; there is no profit
Break-Even
Break-Even Sales equation
Break-Even Sales=Total Fixed Cost/Contribution Margin Ratio
Break-Even Units equation
Break-Even Units=Total Fixed Costs/Contribution Margin per Unit
Financial plan of the revenues and resources needed to carry out activities and meet financial goals
Budget
What is an example of the distribution chain?
Buy from Amazon delivered by UPS
Includes only the actual costs of the goods that were sold
COGS
What do manufacturing costs include?
COGS Product (Manufacturing) Costs Period (Nonmanufacturing) Costs
Explains the relationship between sales, cost, and volume and their effect on profit
CVP Analysis
Method or process used to assign the costs in the cost pool to the cost object
Cost allocation rule
Any end to which a cost is assigned
Cost object
Classifying a cost as either direct or indirect depends upon the ___ ___ to which the cost is being related
Cost object
Distribution chain ____ to customers
Distributing
Cost, managerial, and responsibility accounting ____ depend on GAAP
Do not
Cost of goods sold ___ include selling costs
Does not
Exporting a product to another country at a price below domestic cost
Dumping
East Coast (EC) Division and West Coast (WC) Division share the Information System (IS) costs equally; each is charged $500,000 for IS services. The West Coast manager argues that WC is much smaller than EC so the allocation should be based on a measure of divisional size, such as revenues. EC revenue $80 million; WC revenue $20 million. The East Coast manager argues that most of IS time is spent on the WC, where the equipment is more complex and requires more maintenance
East Coast $800,000 West Coast $200,000 Work in notebook
Cost accounting system looks at the ___ to ___ cost
End to end cost
Integrated information systems that link the various systems of the enterprise into a single comprehensive information system
Enterprise Resource Planning (ERP) System
Compliance with Sarbanes-Oxley does not mean that the manager has met all of his or her ___ responsibilities
Ethical
Professional accountants, managers, and business owners face ___ situations on a everyday basis
Ethical
Cost charged against revenue in an accounting period
Expense
Cost of direct labor as an asset (WIP Inventory or Finished Goods Inventory) and is treated as an ____ (COGS) on income statement when related products are sold. Inventory ____ and COGS _____
Expense Decrease; Increase
Financial accounting is designed for ___ parties
External
Example fo a cost object
A unit of product or service, a department, or a customer
Process of assigning costs
Cost allocation
Want to target cost to be ___
More
Opportunity cost is also known as the
"Next best alternative"
Calculate conversion costs from the following information: Fixed manufacturing overhead $1,800 Variable manufacturing overhead $1,200 Direct materials $2,500 Direct labor $1,000
$4,000 1,000 + 1,800 + 1,200
During 2020, the Beach Resident had sales revenues and food costs fo $800,000 and $600,000, respectively. During 2021, Beach plans to introduce a new menu item that is expected to increase sales revenues by $100,000 and food costs by $60,000. Assuming no changes are expected for the other items, operational profits for 2021 are expected to increase by?
$40,000 (operating profits) 100,000-60,000 Increase in revenues-Increase in costs
Resolving an ethical dilemma (IMA):
-Discuss the situation with an immediate supervisor, expect when it appears that the supervisor is involved, or with the next level supervisor if involvement of the immediate supervisor is suspected -Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethical Counselor, an appropriate and confidential ethics hotline, or other impartial advisor -Consult your own attorney as to legal obligations and rights concerning the ethical conflict
What are the three lines of defense?
1. Responsible people 2. Internal controls 3. Auditors
Find the contribution margin ratio per unit: Selling price per unit $10 Variable cost per unit $7
30% Contribution Margin per unit=10-7=3 3/10
Ex of dumping
China-fidget spinners
Ex. of peak-load pricing
Christmas time, toilet paper
What is an example of a value added activity of a car?
Color of the car
Important criteria for financial accounting include ___ and ___ ___ (for investors)
Comparability Decision relevance
Individuals making decisions using financial accounting data are more interested in ____ firms
Comparing
Institute of Management Accountants (IMA) Code of Ethics:
Competence Confidentiality Integrity Credibility
A bottleneck is a ____ resource
Constraining
Activities, resources, or policies that limit the attainment of an objective
Constraints
How much sales is left, after paying off variable cost, that contributes towards paying the fixed costs
Contribution Margin
Contribution Margin Ratio per Unit equation
Contribution Margin Ratio=Contribution Margin per Unit/Selling Price per Unit
Contribution Margin Ratio equation
Contribution Margin Ratio=Total Contribution Margin/Total Sales
Contribution Margin per Unit equation
Contribution Margin per Unit=Selling Price per Unit - Variable Cost per Unit
Contribution margin per unit of a particular input with limited availability
Contribution margin per unit of scarce resources
Cost info itself is the product with its own customers, who are mangers that need to ___ and ____ operations
Control Improve
Conversion Costs equation
Conversion Costs = Direct Labor + Manufacturing Overheads
In general, if activities that don't add value too the company can be eliminated, then ____ associated with them will also be eliminated
Cost
In real world, the boundary between what is ___ accounting and what belongs to another discipline is often blurred
Cost
Sacrifice fo resources made to acquire it
Cost
Sarbanes-Oxley is important for managers who design ____ information systems
Cost
___ accounting is more likely to have ethical issues
Cost
The term ____ is used for managerial purposes, while the term ___ refers to external financial reports
Cost Expense
Provides much of the info necessary for the coordination fo the value chain
Cost Accounting System
Factors that cause costs to increase as the activity increases
Cost Drivers
Identify costs of producing defective units as well as the lost sales associated with poor-quality product
Cost of Quality Systems
Collection of costs waiting to be assigned to a cost object
Cost pool
Considering both the costs and benefits of a proposal
Cost-Benefit Analysis
Allow firms to target more precisely those customers who are profitable by assessing the costs to serve a customer along with the revenues a customer generates
Customer Relationship Management (CRM) Systems
Ex of product costs
DL, DM, overhead costs
Manufacturing Cost Flows
DM Inv/Raw Materials Inv -> WIP Inventory -> Finished Goods Inv -> COGS
Important criteria for cost accounting include ___ ___ (for managers) and _____
Decision relevance Timeliness
The design of the cost accounting system has the potential to be misused to ____ customers, employees, or shareholders
Defraud
What could be considered a responsibility center?
Department, division segment, or subsidiary
Value chain activities can overlap:
Design, production, distribution, and customer service
Cost accounting contains ___ info for management in the various operations segments of the business
Detailed
The process of estimating revenues and costs of alternative actions available to decision makers and of comparing these estimates to the status quo
Differential Analysis
Cost that changes in response to a particular course of action
Differential Costs
Costs that change in response to an alternative course of action
Differential costs
Product costs can include both ___ and ___ costs
Direct and indirect
Costs that can be unambiguously related to a cost object
Direct costs
Workers who can be identified directly with the product
Direct labor
Feasibly identified direct with the product
Direct materials
Costs that cannot be unambiguously related to a cost object
Indirect costs
Ex of printer paper
Indirect costs
Effective internal control system for publicly owned firms include:
Internal audits of strategic decisions A code of ethics A system of preparing and reporting on investment decisions
The Sarbanes-Oxley Act of 2002 requires an effective ___ ___ system for publicly owned firms
Internal control
Sunk costs are known as
Irrelevant costs
Activities are conducted just in time of their need thus reducing costs
Just-in-Time (JIT) System
Designed to minimize wasteful or unnecessary transaction processes
Lean Accounting Systems
Techniques that can be applied to design materials, and cost accounting decisions throughout the life of a product
Lean Manufacturing
Decision to make goods or services internally or purchase them externally
Make-or-Buy Decisions
Cost and responsibility accounting are subdivisions of ____ accounting
Managerial
Cost accounting is designed for ____
Managers
In cost accounting, information must be relevant for ____ making operational decisions
Managers
Cost of goods sold includes all ____ costs (both fixed and variable)
Manufacturing
All other costs of transforming the materials into a finished product
Manufacturing Overhead
How much room you have until loss
Margin of Safety
Margin of Safety Sales equation
Margin of Safety Sales=Total Sales - Break Even Sales
Margin of Safety Units equation
Margin of Safety Units=Total Units - Break Even Units
Costs required to obtain customer orders and provide customers with finished products
Marketing costs
If a cost is recorded as an asset it becomes an expense when the asset has been consumed
Matching Principle
Managers must be aware of the potential that cost information could be ___ or support ____ activity
Misleading Fraudulent
ABC provides ____ cost numbers than conventional
More
Adding value is good for ____ purchases by consumers
More
CM should be ____ than FC for profit
More
In an accounting system perfect information is ____ available, there is always some ____
Never Uncertainty
State whether the following is: value added or non-value added: Accounting
Non value added
If a poor facility layout exists and WIP inventory must be moved during the production process, the company is likely to be performing ____ activities
Non-value added
State whether the following is: value added or non-value added: Rework of defective items
Non-value. added
Financial accounting info is ___ for managers to make operational decisions
Not sufficient
Costs may change in response to ___ course of action but not in response to a ___ course of action
One Different
Forgone benefit that could have been realized from the best forgone alternative use of a resource
Opportunity Cost
Past, present, or future cash outflow
Outlay Cost
Distribution chain is part of the value chain ____ the firm
Outside
If a company cannot compete in a specific area of the value chain, it might ____ that portion of the value chain to another entity which can perform it better
Outsource
Having one or more of the firm's activities performed by another firm or individual in the supply or distribution chain
Outsourcing
Snuggle Toys, Inc. had the following summarized results for the month ending July 31: Revenues: Actual $60,000; Budget $52,000 Costs: Actual $53,600; Budget $45,600 Operating Profits: Actual $6,400; Budget $6,400 What did this show?
Overspent; your want the increase in revenue to be more than increase in cost
Ex of DL
Packaging labor, paint (NOT repair and maintenance
What is an example of a poor facility layout?
Part A is one corner, and Part B in another corner, with CDE in the middle
Practice of setting prices highest when the quantity demanded for the product approaches capacity
Peak-load pricing
A metric that indicates how well an individual, business product, or firm is working
Performance Measure
Managers need to understand that ____ ___ and ____ systems can lead to unethical conduct
Performance measurement Compensation
Where there is a lack of good performance measures, it is difficult to motivate managers by using _____ incentives
Performance-based
All other cohosts and are expensed as they are incurred
Period (Nonmanufacturing) costs
A company which manufacturers custom-made machinery routinely incurs sizable telephone costs in the process of taking sales orders from customers. What is the proper classification of this cost?
Period costs (selling)
Codes of conduct look good on paper, but ultimately much of ethical behavior comes from an individuals ___ beliefs
Personal
A code of ethics needs to be in ___ space where people can look at it
Physical
Ex of price discrimination
Pink packaging
Any product that has a ____ CM you should keep
Positive
What are legal issues relating to costs and sales price?
Predatory Pricing Dumping Price discrimination Peak-Load pricing Price fixing
Practice of setting price below cost with the intent to drive competitors out of business
Predatory pricing
What is an example of a matching principle?
Prepaid rent for an office building
The cost accounting system influences what ___ the product should be sold
Price
Practice of selling identical goods to different customers at different prices
Price discrimination
Agreement among businesses to set prices at a particular level
Price fixing
Cycle is concerned with covering costs in all categories of the life cycle
Product life cycle
The value chain focuses on the entire ___ __, as well as the sale of the product and services ___ the sale
Production process After
What is an example of relevant information?
Production schedule must be relevant
Anything above break even is a ___, anything below break even is a ___
Profit Loss
What are the different ways to write the profit equation?
Profit=TS * TC Profit=(s*X) - [(vc * X) + TFC] Profit=TS-(TVC+TFC) Profit=CM-TFC Profit=(cm*X)-TFC
Profit equation
Profit=Total Sales-Total Costs
Supply chain ___ ___ coming in
Raw materials
Eliminating non value dded activities always ___ costs without affecting the value fo the product to ____
Reduces Customers
Range within which the total fixed costs and unit variable costs do not change
Relevant Range
Differential costs are known as
Relevant costs
What are the categories of the life cycle?
Research and development Design Manufacturing Marketing and distribution Customer service Take back (disposal)
The value chain compromises activities from ___ through the ___ process to ___ ___
Research and development (R&D) Production Customer service
Specific units of an organization, assigned to a manager who is held accountable for it operations and resources
Responsibility Center
Managers are usually responsible for both the ___ and ___ needed to carry out activities and meet financial goals
Revenues and resources
Examples of expense
Salary and wages
What is an example of non value added activities?
Salary of HR department or accounting Nobody cares about these when they are buying a product
Desert Adventures has received a one-time offer for 5 additional tours at a discounted price of $700 per tour. The regular price is $900 per tour and they have enough idle capacity in the month to take the offer. Sales (20 tours at $900) $18,000 VC (20 tours at $300). $6,000 Total Contribution Margin $12,000 FC $5,400 Operating Profit $6,600 Find alternative and tell what to do Can't produce below ____
Sales $21,500 VC $7,500 Total Contribution Margin $14,000 FC $5,400 Operating Profit $8,600 Differential operating profit $2,000 $300
Has both fixed and variable components
Semi-Variable/Mixed Cost
Focuses on revenue and cost management when fixed with bottlenecks
Theory of Constraints
Sales dollars minus direct materials cost and variables such as energy and piecework labor
Throughput Contribution
Correcting mistakes takes more ___
Time
Contribution Margin equation
Total Contribution Margin=Total Sales-Total Variable Cost
Total Costs equation
Total Costs=Total Variable Cost + Total Fixed Cost
Management method by which the organization seeks to excel on all dimensions of quality by determining the company's performance standards according to what is important to customers
Total Quality Management (TQM)
Total Sales equation
Total Sales=Selling Price per Unit * Number of Units Sold
Break even equation
Total Sales=Total Cost
Total Variable Cost equation
Total Variable Cost=Variable Cost per Unit * Number fo Units Produced
Both ____ and ____ are likely to be affected by changes in the output
Total revenues Total costs
Set of activities that transforms raw materials into the goods and services end users purchase and consume
Value Chain
State whether the following is: value added or non-value added: Production
Value added
State whether the following is: value added or non-value added: Customer service (reply to customer service questions via email)
Value added
State whether the following is: value added or non-value added: Distribution: delivery of products or services to customers
Value added
State whether the following is: value added or non-value added: Marketing advertisement
Value added
State whether the following is: value added or non-value added: Product design
Value added
State whether the following is: value added or non-value added: Research and development
Value added
Under the value chain concept, ____ activities are those that firms perform and that consumers perceive as adding utility to the goods they purchase
Value-added
In the long run, an organization must cover all ___ and ____ costs-both manufacturing and selling
Variable Fixed
___ cost must always be covered. ____ cost must be covered in the long ru n
Variable Fixed
Change in direct proportion to the change in volume of activity
Variable Costs
Ex of predatory pricing
Walmart back in the day
Manufacturing Overhead includes...
indirect materials, indirect labor, other manufacturing costs