Cost & Managerial Accounting D101

Comprehensive practice flashcards covering product costing, job-order costing, process costing, activity-based costing (ABC), cost-volume-profit (CVP) analysis, standard costing variances, and short-term differential decision making.

Product Costs

Costs that are assigned to inventory and expensed as cost of goods sold when products are sold, including factory materials, direct labor, utilities, rent, and depreciation.

Period Costs

Non-manufacturing costs expensed in the accounting period incurred, such as administrative costs unrelated to production.

Direct Materials

Raw materials that are physically and directly incorporated into a finished product, such as wood used to make a table.

Direct Labor

The compensation of factory employees who work directly on converting raw materials into products, such as assembly-line wages and benefits (excluding indirect factory staff such as custodians and controllers).

Manufacturing Overhead

All manufacturing costs other than direct materials and direct labor, including indirect materials, factory supervision, utilities, insurance, and property taxes.

Job Order Costing

A costing system that tracks attributable direct materials, direct labor, and allocated overhead by individual product, project, or batch to assess job profitability.

Predetermined Overhead Rate (POHR)

An estimated overhead allocation rate established prior to the accounting period because actual overhead costs cannot be traced directly to individual units.

Predetermined Overhead Rate (POHR) Formula

_____= Total Estimated Manufacturing Overhead Costs / Total Estimated Allocation Base

Underapplied Overhead

The condition where actual overhead incurred exceeds applied overhead, which is adjusted by debiting Cost of Goods Sold and crediting Manufacturing Overhead, increasing Cost of Goods Sold expense.

Overapplied Overhead

The condition where applied overhead exceeds actual overhead incurred, which is adjusted by debiting Manufacturing Overhead and crediting Cost of Goods Sold, decreasing Cost of Goods Sold expense.

Direct Materials Used Formula

$$\text{Direct Materials Used} = \text{Beginning Raw Materials} + \text{Purchases} - \text{Ending Raw Materials}$$

Total Manufacturing Costs Formula

$$\text{Total Manufacturing Costs} = \text{Direct Materials Used} + \text{Direct Labor} + \text{Applied Overhead}$$

Cost of Goods Manufactured (COGM)

The total manufacturing cost of inventory completed and transferred from work-in-process to finished goods during the period.

Cost of Goods Manufactured (COGM) Formula

_____= Beginning Work-in-Process +

Total Manufacturing Costs - Ending Work-in-Process

Unadjusted Cost of Goods Sold Formula

_____= Beginning Finished Goods +

Cost of Goods Manufactured - Ending Finished Goods

Adjusted Cost of Goods Sold

The cost of goods sold after adjusting for overhead variances by adding underapplied overhead or subtracting overapplied overhead.

Adjusted Cost of Goods Sold Formula

_______=Unadjusted Cost of Goods Sold +

Underapplied Overhead - Overapplied Overhead

Process Costing

A costing methodology used for continuous mass production of homogeneous (identical) units, such as chemicals, petroleum, and concrete, where direct materials are added at the start and conversion costs are added continuously.

Conversion Costs

The combination of direct labor and manufacturing overhead incurred continuously during production to convert raw materials into finished units.

Equivalent Units of Production (EUP)

A measurement metric that translates partially completed units into an equivalent number of fully completed units.

FIFO Method for Equivalent Units

An inventory costing method that computes equivalent units of production based solely on the manufacturing activity performed during the current accounting period.

FIFO Equivalent Units of Production Formula

_____=EUP to Complete Beginning WIP +

Units Started and Completed + Ending WIP EUP

EUP to Complete Beginning Work-in-Process Formula (FIFO)

_____= Beginning WIP Units x (1 -

Beginning Completion Percentage)

Ending Work-in-Process EUP Formula

_____= Ending WIP Units x

Ending Completion Percentage

Started and Completed Units

Units that were both begun and finished within the current accounting period, always treated as $100\%$ complete with respect to both materials and conversion costs.

Activity-Based Costing (ABC)

A costing system based on the philosophy that activities consume resources and products consume activities, best applied when diverse products consume overhead and support infrastructure in differing proportions.

Cost Pool

A centralized grouping of all overhead costs associated with a specific operational activity.

Cost Hierarchy Levels

The four operational levels of activity in ABC: Unit-Level (performed per single item), Batch-Level (performed per group of items), Product-Line Level (performed to support an entire line), and Facility-Support Level (sustains overall plant capacity as common costs).

Activity Rate

The predetermined overhead allocation rate calculated for a specific activity cost pool per unit of cost driver.

Activity Rate Formula

____= Total Cost Pool Dollars / Total Expected Cost Driver Volume

Allocated Overhead Formula (ABC)

_____=(Qty1 × Rate1) + (Qty2 × Rate2) + (Qty3 x Rate3)

Stepped Fixed Cost

A cost that remains constant over a specific activity interval, then abruptly increases to a higher fixed amount once an activity threshold or capacity limit is reached.

CVP Total Revenue Slope

On a Cost-Volume-Profit graph, the slope of the Total Revenue line represents the Selling Price per Unit.

Contribution Margin (CM)

The portion of sales revenue remaining after deducting all variable costs, available to cover fixed expenses and generate profit.

Unit Contribution Margin Formula

____= Selling Price per Unit -

Variable Cost per Unit

Contribution Margin Ratio (CM Ratio)

The percentage or proportion of each sales dollar that is available to cover fixed costs and contribute to operating income.

Contribution Margin Ratio Formula

____= Unit CM / Selling Price per Unit or ___= Total CM / Total Sales

Break-Even Point in Units Formula

____= fixed costs / unit CM

Target Sales in Units Formula

_____= fixed costs + target operating income / unit CM

Target Sales in Dollars Formula

_____= Fixed Costs+ Target Operating Income / CM ratio

Multi-Product Break-Even Sales Dollars Formula

_____= Total Fixed Costs / Weighted-Average CM Ratio

Degree of Operating Leverage (DOL)

A multiplier measuring how sensitive a company's operating income is to a given percentage change in sales volume.

Degree of Operating Leverage Formula

____= total contribution Margin / Net Operating Income

Percentage Change in Operating Income Formula

____= (New Income - Old Income) / Old Income x 100

Favorable Variance (F)

A standard costing outcome where actual costs are lower than standard allowed or actual input quantities used are less than standard inputs allowed.

Unfavorable Variance (U)

A standard costing outcome where actual costs exceed standard allowed or actual input quantities used exceed standard inputs allowed.

Materials Price Variance (MPV)

A purchasing variance evaluated at the point of purchase reflecting differences between actual and standard material purchase prices, caused by supplier discounts, shipping choices, or material grades.

Materials Price Variance (MPV) Formula

____= Actual Purchase Cost - (Quantity Purchased x Standard Price)

Standard Quantity Allowed (SQ) Formula

_____= Actual Units Produced x Standard Material per Unit

Materials Quantity Variance (MQV)

A production variance evaluated at usage reflecting differences between actual materials consumed and standard allowed, caused by scrap, poor quality, or worker inexperience.

Materials Quantity Variance (MQV) Formula

____= (Actual Quantity Used - SQ) × Standard Price

Labor Rate Variance (LRV)

A direct labor variance measuring differences between actual wages paid and standard planned wage rates, caused by overtime premiums or mismatched employee skill levels.

Labor Rate Variance (LRV) Formula

____= Actual Labor Cost -

(Actual Hours Worked × standard rate)

Standard Hours Allowed (SH) Formula

____= Actual Units Produced × Standard Direct Labor Hours per Unit

Labor Efficiency Variance (LEV)

A direct labor variance measuring worker time productivity relative to the standard hours allowed for actual production.

Labor Efficiency Variance (LEV) Formula

_____= (Actual Hours Worked - SH) × Standard Rate

Variable Overhead Spending Variance Formula

______= Actual Overhead Incurred - (Actual Hours Worked × POHR)

Variable Overhead Efficiency Variance

A variance evaluating whether actual labor hours (the allocation driver) were higher or lower than standard hours allowed for actual production, priced at the predetermined rate.

Variable Overhead Efficiency Variance Formula

_____= (Actual Labor Hours - SH) × POHR

Differential (Incremental) Costs

Future costs that differ between competing decision alternatives.

Sunk Costs

Past costs that cannot be changed by any future decision (e.g., historical joint processing costs, past equipment purchase price) and are always irrelevant to short-term decisions.

Common / Allocated Fixed Costs

Unavoidable overhead shared across business units or corporate headquarters that will continue regardless of a specific decision, making them irrelevant.

Opportunity Cost

The foregone benefit or lost profit resulting from choosing one alternative over another.

Special Order Decision Rule

Accept a special order if incremental revenue exceeds incremental costs. Fixed costs are ignored if excess capacity exists; otherwise, lost contribution margin from displaced regular sales must be deducted.

Special Order Change in Net Income Formula (Excess Capacity)

_____= Order Quantity x (Special Order Price - Variable Cost per Unit)

Make-or-Buy Decision Rule

Choose the option resulting in lower total relevant cost, comparing avoidable make costs (direct materials, direct labor, variable overhead, and avoidable fixed costs) against buy costs.

Make-or-Buy Net Financial Impact Formula

____= Total Relevant Cost to Make - Total Relevant Cost to Buy

Segment Margin Formula

_____= Sales - Variable Costs - Traceable Fixed Costs

Segment Margin Keep-or-Drop Rule

Drop a segment only if avoidable fixed costs saved exceed lost segment contribution margin plus any new opportunity benefits.

Net Income Impact from Dropping a Segment Formula

_____= Avoidable Fixed Costs Saved + New Opportunity Revenue - Lost Contribution Margin

Sell or Process Further Decision Rule

Process joint products further if incremental revenue exceeds incremental further processing cost, completely excluding all joint costs incurred prior to split-off as sunk.

Incremental Revenue Formula (Sell or Process Further)

______= Units x (Final Processed Price per Unit - As Is Sales Price per Unit)

Net Advantage of Processing Further Formula

____= Incremental Revenue - Further Processing Cost

Capacity-Constrained Decision Rule

When fixed capacity restricts operational alternatives, decisions must be made by comparing the total contribution margin per constrained resource run or flight rather than focusing on unit metrics alone.

Total Segment Contribution Margin Formula (Constrained Capacity)

_____= Capacity (Seats or Units) × Unit CM