Cost D101.1: Managerial Accounting and Cost Concepts

Vocabulary flashcards covering product costing systems, CVP analysis, budgeting, standard cost variances, differential analysis, capital budgeting, and performance measurement.

Job-Order Costing

A product costing system designed for custom or unique batch products.

Flow of Costs in Job-Order Costing

Raw Materials $\rightarrow$ Work in Process (WIP) $\rightarrow$ Finished Goods $\rightarrow$ Cost of Goods Sold (COGS).

Predetermined Overhead Rate (POHR)

A rate established prior to the start of a period to allocate estimated manufacturing overhead based on an estimated activity base.

Predetermined Overhead Rate (POHR) Formula

$$=\frac{\text{Estimated Total Overhead}}{\text{Estimated Allocation Base}}$$

Applied Overhead

The amount of manufacturing overhead allocated to work in process inventory based on actual activity recorded.

Applied Overhead Formula

$$=\text{POHR}\times\text{Actual Base Used}$$

Underapplied or Overapplied Overhead

The difference between actual overhead incurred and overhead applied to jobs, which is reconciled directly to Cost of Goods Sold (COGS).

Process Costing

A product costing system utilized for mass, continuous production of identical or homogeneous goods.

Equivalent Units of Production (EUP)

A metric that translates partially completed units into the equivalent count of whole, finished units.

Weighted-Average Method EUP Formula

Units Completed and Transferred Out + (Ending WIP Units × % Completion)

Cost per Equivalent Unit Formula

$$=\frac{\text{Total Accumulated Costs}}{\text{Total EUP}}$$

Activity-Based Costing (ABC)

A costing approach that replaces a single plantwide rate with multiple activity cost pools and specific cost drivers.

Activity Rate (AR) Purpose

Assigns overhead more accurately across activities to reduce product cost distortion.

Activity Rate (AR) Formula

$$=\frac{\text{Total Cost in Activity Pool}}{\text{Total Activity Level}}$$

Contribution Margin (CM)

The amount of sales revenue remaining after deducting variable expenses, available to cover fixed expenses and yield profit.

Contribution Margin (CM) Formula

$$=\text{Sales}-\text{Variable Costs}$$

Contribution Margin Ratio (CM Ratio)

The percentage of each sales dollar remaining after variable costs to cover fixed costs and contribute to operating income.

Contribution Margin Ratio (CM Ratio) Formula

$$=\frac{\text{CM}}{\text{Sales}}$$

Break-Even Point (Units)

The sales volume in units at which total revenue equals total expenses, yielding zero profit.

Break-Even Point (Units) Formula

$$=\frac{\text{Total Fixed Costs}}{\text{Unit CM}}$$

Target Income (Units)

The unit sales volume necessary to cover all fixed costs and achieve a designated target profit.

Target Income (Units) Formula

$$\text{Target Income (Units)} = \frac{\text{Total Fixed Costs} + \text{Target Profit}}{\text{Unit CM}}$$

Master Budget Sequence

Sales Budget $\rightarrow$ Production Budget $\rightarrow$ Direct Materials / Direct Labor / Overhead Budgets $\rightarrow$ Cash Budget $\rightarrow$ Budgeted Financial Statements.

Required Production Units Formula

$$\text{Required Production Units} = \text{Budgeted Sales} + \text{Desired Ending Inventory} - \text{Beginning Inventory}$$

Flexible Budget

A budget that dynamically adjusts revenue and expense benchmarks according to the actual level of activity achieved.

Materials Price Variance (MPV) Formula

$$=(AQ\times AP)-(AQ\times SP)=AQ(AP-SP)$$

Materials Quantity Variance (MQV) Formula

$$=(AQ\times SP)-(SQ\times SP)=SP(AQ-SQ)$$

Labor Rate Variance (LRV) Formula

$$=AH(AR-SR)$$

Labor Efficiency Variance (LEV) Formula

$$=SR(AH-SH)$$

Favorable Variance Condition

Occurs when the actual cost incurred is lower than the standard cost allowed.

Unfavorable Variance Condition

Occurs when the actual cost incurred is higher than the standard cost allowed.

Differential Analysis (Relevant Costing)

A decision-making methodology focusing solely on future costs and revenues that differ between viable alternatives.

Costs Strictly Ignored in Differential Analysis

Sunk costs (past expenditures already incurred) and unavoidable allocated fixed costs.

Common Differential Analysis Decision Scenarios

Special orders, make-or-buy decisions, and keep-or-drop decisions.

Special Orders Decision Rule

Accept the order if incremental revenue exceeds incremental cost (accept if incremental revenue > incremental cost)

Payback Period Method

A capital budgeting assessment measuring the time required to recover an initial cash outlay while ignoring the time value of money.

Payback Period Formula

$$=\frac{\text{Initial Investment}}{\text{Annual Cash Inflow}}$$

Net Present Value (NPV) Decision Rule

Present value of future cash inflows minus initial cash outflow; projects are acceptable if $NPV \ge 0$.

Internal Rate of Return (IRR)

The specific discount rate at which the Net Present Value of an investment project equals zero ($NPV = 0$).

Balanced Scorecard

A strategic performance measurement system that evaluates an organization across four comprehensive operational perspectives.

Four Perspectives of the Balanced Scorecard

Financial, Customer, Internal Business Processes, and Learning & Growth.

• What account is debited when purchasing raw materials on account?

Raw Materials Inventory
(Increases the asset account for materials on hand)

What account is debited when using raw materials as indirect materials?

Manufacturing Overhead
(Indirect costs accumulate in overhead before being applied to products)

What account is debited when applying overhead to the manufacturing process?

Work-in-Process (WIP) Inventory
(Adds overhead cost into active production)

What account is debited when transferring completed goods to the warehouse?

Finished Goods Inventory
(Moves completed products from WIP to finished inventory)

What account is debited when selling completed goods?

Cost of Goods Sold (COGS)
(Recognizes the product cost as an expense upon sale)

Direct labor

directly adds value to products currently in production and creates a liability for wages owed.

What increases Work-in-Process Inventory

Debit- adds direct labor cost directly to production

What cost is a Sales office rent?

period/administrative cost

When overhead is applied to production jobs, what account is credited?

Debit Work-in-Process, Credit Manufacturing Overhead

To close overhead that was under applied at year-end, what should you do to Cost of Goods Sold (COGS)?

_____ means too little overhead was charged. To fix it, add the expense by Debit COGS

What is included in total manufacturing costs?

Direct labor + direct materials + manufacturing OH (applied)

What is included in manufacturing OH Costs?

Indirect materials, indirect labor, building rent, depreciation product equipment

What is allocation base?

Direct labor hours

COGM formula

____= Beginning WIP + total manufacturing costs - ending WIP

What is Work-in-Process (WIP) Inventory?

An asset account that tracks the cost of goods currently being manufactured but not yet completed

What costs are added to WIP?

Direct Materials Used, Direct Labor, Applied Manufacturing Overhead

When is WIP credited?

When goods are completed and transferred to Finished Goods Inventory (Cost of Goods Manufactured)

How do you calculate Direct materials used?

____= beg. Raw materials + purchases - ending raw materials

Unadjusted COGS Formla

_____= beg. Finished goods + COGM - ending finished goods

Adjust for OH

Applied OH - actual OH

(If + it’s over applied / if - it’s under applied)