Cost Accounting Exam II Study Terms

Vocabulary flashcards covering core concepts, allocation methods, budgeting techniques, standard cost variances, and transfer pricing principles from Chapters 7 through 10 of Cost Accounting.

Common costs

Costs that arise when resources are shared by multiple cost objects, such as support department costs and joint production costs.

Producing department

A department that provides products or services directly to customers (e.g., personal banking, tax planning).

Support department

A department that provides essential services to producing departments and sometimes to other support departments; it would not be needed if there were no producing departments (e.g., HR, IT, Power, Maintenance).

Cost pool

The total cost of a support department being accumulated for allocation.

Cost object

The departments or entities receiving a service to which costs are assigned.

Cost driver

The measure used to assign a cost pool to cost objects (e.g., kilowatt-hours, number of employees, number of orders).

Good cost driver

A driver that reflects service usage or benefit received and is measured reliably; a poor driver distorts department and product costs.

Charging rate

Budgeted support costs divided by budgeted drivers; represents the price a support department charges in advance, functioning like a predetermined overhead rate.

Producing dept. inefficiency

$\text{Charging rate} \times (\text{Actual usage} - \text{Expected usage})$; occurs when actual usage exceeds expected usage.

Support dept. inefficiency

$\text{Actual cost} - (\text{Charging rate} \times \text{Actual usage})$; occurs when actual cost exceeds allocated cost.

Firm-level inefficiency

$\text{Actual cost} - \text{Expected cost}$, where expected cost equals $\text{rate} \times \text{expected usage}$; also equals the sum of support and producing department inefficiencies.

Single charging rate

One rate calculated as total (fixed + variable) cost divided by expected usage; it treats fixed costs like variable costs, leading to over- or under-charging when actual usage deviates from budget.

Dual rates

Separate allocation rates where fixed costs are allocated based on expected (budgeted/peak) usage and variable costs are allocated based on actual usage, correcting single-rate distortions.

Direct method (allocation)

A support department cost allocation method that assigns costs only to producing departments, ignoring all services provided among support departments.

Sequential (step) method

A method that ranks support departments, allocates the first-ranked department's costs to all others, and then allocates each remaining department's updated cost downward to lower-ranked and producing departments.

Updated cost (sequential)

A support department's own cost plus the allocated costs received from higher-ranked departments.

Reciprocal method

An allocation method that fully recognizes all interdepartmental support services by solving simultaneous equations for mutually dependent updated costs, eliminating allocation distortion.

Joint production

A manufacturing process producing two or more distinct products from a common input, where outputs cannot be separately identified until reaching the split-off point.

Joint products

Outputs of a joint production process that carry a relatively high sales value.

By-products

Secondary outputs of a joint production process that carry a relatively low sales value compared to joint products.

Split-off point

The distinct stage in a joint production process at which individual outputs become separately identifiable.

Joint costs

Manufacturing costs (direct materials, direct labor, and overhead) incurred prior to the split-off point.

Separable costs

Costs incurred after the split-off point to process individual products further.

Physical-units method

A joint cost allocation method that distributes joint costs based on each product's percentage of total physical output (e.g., units, pounds), ignoring market value.

Weighted-average method (joint costs)

A joint cost allocation method based on each product's percentage of weighted units ($\text{units} \times \text{weight factor}$ such as size, material used, price, or time), assigning higher costs to high-grade products.

Sales-value-at-split-off method

A joint cost allocation method that assigns costs based on each individual product's proportionate share of total sales value at the split-off point.

Net realizable value (NRV) method

A joint cost allocation method used when split-off values are unknown; allocates costs by share of NRV, where $\text{NRV} = \text{Final sales} - \text{Separable costs}$.

Constant gross margin % method

A joint cost allocation method that allocates costs so every product shares an identical gross margin percentage ($\text{GM\%} = 1 - \frac{\text{Total COGS}}{\text{Total sales}}$).

Budget

A quantitative plan, expressed primarily in financial terms, established for a specified period to support planning, resource allocation, and spending control.

Zero-based budgeting (ZBB)

A budgeting process where every expense must be justified each period from a zero base rather than adjusting the previous year's figures.

Master budget

A comprehensive financial plan for a period that combines all operating budgets and financial budgets.

Operating budgets

Budgets covering sales, production, direct materials, direct labor, overhead, COGS, and operating expenses that culminate in the budgeted income statement.

Financial budgets

Budgets comprising the capital expenditure budget, cash budget, and budgeted balance sheet.

Static budget

A budget that projects costs and revenues at a single planned level of activity.

Flexible budget

A budget that adjusts budgeted costs to actual activity levels using the formula: $\text{Budgeted cost} = \text{Fixed cost} + (\text{Variable cost per unit} \times \text{Actual units})$.

Production budget

A schedule determining the units required to be manufactured: $\text{Units to produce} = \text{Budgeted unit sales} + \text{Ending FG} - \text{Beginning FG}$.

Standard cost sheet

The primary standard costing document detailing standard quantities and standard prices for DM, DL, VOH, and FOH to establish the standard cost per unit.

Currently attainable standards

Operating standards based on efficient operating conditions while allowing for normal waste and downtime.

Kaizen standards

Standards that explicitly incorporate planned continuous incremental improvements over time.

Standard quantity (SQ)

The standard quantity of input allowed for the actual units produced.

Materials price variance (MPV)

$(AP - SP) \times AQ_{\text{purchased}}$; measures the difference between actual price and standard price paid for materials, calculated at the time of purchase.

Materials usage variance (MUV)

$SP \times (AQ_{\text{requisitioned}} - SQ)$; measures the difference between actual materials used and the standard quantity allowed, evaluated when materials are requisitioned.

Labor rate variance (LRV)

$(AR - SR) \times AH$; isolates the variance caused by differences between the actual hourly wage rate paid and the standard wage rate.

Labor efficiency variance (LEV)

$SR \times (AH - SH)$; measures labor performance by comparing actual direct labor hours worked against standard hours allowed for actual output.

VOH spending variance

$(AVOR - SVOR) \times AH = \text{Actual VOH} - (SVOR \times AH)$; reflects price/spending differences in variable overhead.

VOH efficiency variance

$SVOR \times (AH - SH)$; reflects the variable overhead variance caused by using more or fewer labor hours than standard allowed.

FOH spending variance

$\text{Actual FOH} - \text{Budgeted FOH}$; measures the difference between total actual fixed overhead and total budgeted fixed overhead.

FOH volume variance

$\text{Budgeted FOH} - \text{Standard FOH}$; evaluates capacity utilization, where positive values denote underutilized capacity and negative values denote economies of scale.

Mix variance

$\sum (AQ - SM) \times SP$, where $SM = \text{total actual input} \times \text{standard mix \%}$; isolates the cost impact of changing input ingredient proportions.

Yield variance

$(\text{Standard yield} - \text{Actual yield}) \times SP_y$; isolates the effect of using more or less total input than standard to produce the final output.

Standard yield

$\text{Actual total input} \times \frac{\text{Standard output}}{\text{Standard input}}$; the expected output given the actual quantity of total inputs entered.

Transfer price

The internal price charged by a selling (upstream) division to a buying (downstream) division within the same company for a transferred product or service.

Goal congruence

Alignment achieved when transfer prices motivate self-interested divisional managers to make decisions that are in the best financial interest of the overall firm.

Minimum transfer price (seller)

The selling division's opportunity cost: the revenue or contribution margin given up by selling internally (market price net of avoided costs, or variable cost if idle capacity exists).

Maximum transfer price (buyer)

The highest price the buying division is willing to pay: the cost of purchasing outside on the open market plus any extra costs saved.

Joint benefit (transfer pricing)

$\text{Max TP} - \text{Min TP}$ per unit; represents the total economic surplus created by an internal transfer, which is divided between divisions through negotiation.

False

Allocation increases total costs.

False

Support departments create products and services to make and sell.

False

A single charging rate uses the fixed costs of the support department.

True

Single charging rate combines the fixed and variable costs.

True

The sequential method allocates costs in ranking order of support departments

True

Costs that are easily traced to individual products are called separable costs

False

Budgeting means to set standards, receive feedback, and executing corrective action

True

The production budget describes how many units must be produced in order to meet sales and inventory needs

False

Price standards specify amounts and quantity standards specify prices

False

Standard costing is used in process industries because it’s more difficult to utilize

True

In computing efficiency variances, managers compute the standard quantity of materials used and the standard hours allowed

True

The variable overhead efficiency variance measures the change in variable overhead consumption due to efficient or inefficient use of the activity driver used to assign overhead costs to products

False

The minimum transfer price is the absolute maximum price that can be accepted.

False

A transfer price is the price charged by one division of a company to another company