Cost Allocation and Financial Metrics

These flashcards cover essential concepts related to cost allocation, financial metrics, and decision-making processes in a business context.

Allocated cost

Total cost to allocate multiplied by the percentage of allocation base used.

Joint costs

Costs that are allocated based on sales value at the split-off point.

Residual income (RI)

Income generated above a minimum required return, calculated as investment center income minus (average assets times target rate).

Profit margin

Measures profit earned for every dollar of sales, calculated as income divided by sales.

Investment turnover

Sales divided by average assets.

Return on investment (ROI)

Income divided by average assets; can also be calculated as profit margin times investment turnover.

Special orders

Orders accepted if incremental revenue is greater than incremental costs, ignoring fixed costs unless they specifically increase.

Contribution margin

The contribution margin must be greater than avoidable fixed costs to keep a business segment.

Relevant benefits

Benefits that differ among alternatives and impact decisions, focusing on future benefits.

Relevant costs

Future costs that differ between choices; includes additional materials and avoidable fixed costs while excluding sunk costs.

Sunk cost

Costs already incurred that cannot be changed and should be ignored in decision making.

Opportunity cost

The benefit given up by choosing one alternative over another.

Net present value (NPV)

The difference between the present value of cash inflows and cash outflows.

Accounting rate of return (ARR)

Annual after-tax net income divided by annual average investment, using accounting income.

Present value of $1

The current worth of a single sum to be received in the future, calculated using a present value formula.

Present value of an annuity

The current worth of a series of equal payments, calculated as payment times an annuity present value factor.

Payback period

The time it takes to recover the cost of an investment, calculated as the cost of investment divided by annual net cash flow.