cost exam 3

equivalent unit of production

The number of completed physical units that are equivalent to a company’s partially completed units.

weighted average method

A process-costing method that combines costs and units produced in a period with the costs and units in beginning work in process inventory.

first in first out (FIFO)

A process-costing method that does not mix production costs or units between periods. As a result, the […] method provides very accurate cost information about the costs and units produced in each period.

cost per equivalent unit of production

The assigned value for the cost of materials, labor, and overhead to each equivalent unit of production.

transferred in costs

Total production costs (both direct materials and conversion costs) accumulated in prior production processes.

management control system

A set of rules, activities, and information that an organization uses to make and execute planning and control decisions and to direct employee behavior.

formal controls

The explicit rules, procedures, safeguards, incentive plans, and information systems employed in an organization.

cost accounting system

The system that aggregates, monitors, and reports information about revenues, costs, and profitability through the use of forms, processes, controls, and reports.

human resources management system

The system that helps the organization manage all aspects of HR, including compliance with employment laws. It includes information about compensation and benefits, time and attendance, and employee training.

quality management system

The system that records and tracks product quality, including production, defects, and customer service data, such as late deliveries and product ratings.

informal controls

An organization’s norms, morals, ethical values, and shared culture, which all guide employees’ behavior and strategic decision making.

behavior controls

Control activities that direct or restrict the way employees carry out their jobs.

output controls

Control activities that measure the results of employees’ work and evaluate employee performance.

decentralized organization

An organizational structure in which senior management delegates a significant amount of decision-making authority and responsibility to business-unit (or sub-unit) managers.

autonomy

Freedom to make decisions.

centralized organization

An organizational structure in which senior management maintains decision-making and control responsibilities.

suboptimal decision making

Occurs when a decision benefits one business unit at the expense of the overall organization.

responsibility center

A sub-unit of an organization that has its own goals and responsibilities. May be classified as a cost, revenue, profit, or investment center.

cost center

A sub-unit that does not generate revenue but supports the business and incurs costs.

revenue center

A sub-unit responsible for sales, which may be defined by the product line or the geographic region served.

profit center

A sub-unit in which the manager is responsible for revenues and costs.

investment center

A sub-unit in which the manager is responsible for the costs, revenues, and investment decisions.

investments

The assets or working capital used to generate income.

performance measurement

The process of collecting and analyzing information about organizational performance and comparing it to expectations and goals.

return on investment (ROI)

A financial performance measure calculated as a measure of profit (or operating income) divided by a measure of investment.

DuPont method

A method for calculating ROI developed in 1912 by the CFO of the […] Corporation, Donaldson Brown. This method deconstructs ROI into return on sales and asset turnover, which helps determine how each aspect of this business is performing.

return on sales

The profit earned for each dollar of sales. Calculated as operating profit divided by sales.

asset turnover

Total sales divided by average total assets. A measure of how effectively assets are used to generate sales.

residual income (RI)

A measure of a sub-unit’s (or organization’s) financial success. […] measures the amount of net income from an investment in assets that remains after the investment has been recovered.

imputed investment cost

The implicit cost of using an asset. It is used to calculate RI.

minimum rate of return

The lowest acceptable amount of earnings from an organization’s investment in assets. Also known as required rate of return or cost of capital.

economic value added (EVA)

A financial performance measure that focuses on the profit generated during a period. […] considers the after-tax operating income and the weighted average cost of capital to evaluate performance.

weighted average cost of capital (WACC)

The after-tax average cost of all long-term investments. Used in the calculation of EVA to measure a sub-unit’s financial performance.

transfer price

The price one sub-unit charges another sub-unit within the same organization for its products or services.

market based transfer price

A transfer price based on the prices that outside suppliers are currently charging.

cost based transfer price

A transfer price that allows a business sub-unit to recover its costs. It can cover the sub-units variable production costs, variable and fixed costs, or the full cost of production.

hybrid transfer price

A transfer price that takes into consideration both the market price and the production costs. Often the price is set through negotiations between the buying and selling sub-units.

budget

An estimate of the activities that will be carried out over a specified future period of time.

master budget

The overall budget for the organization as a whole.

operating budget

Budget of all the resources needed to execute an organization’s operations, including sales, production, purchasing, and marketing.

financial budget

Budget describing the sources and uses of funds for planned capital expenditures and the operations anticipated during the period.

static budget

A budget that is set at the beginning of the period and does not change until the budget period is over.

budget period

The period of time that a budget covers.

budget cycle

The process of developing a master budget: (1) Business units prepare and submit budgets, (2) senior management approves the budgets, (3) operations are executed during the budget period, and (4) performance is evaluated and compared to the budget.

sales budget

Budget that identifies expected (or forecasted) sales in units and dollars.

sales forecast

A prediction of the amount of sales that will take place during the budget period.

production budget

A calculation of the total units that must be produced during the budget period to meet expected sales requirements.

beginning finished goods inventory

The number of units that have already been produced and are available for sale.

ending finished goods inventory

The amount of finished goods that the company would like to have left over after all the sales are complete at the end of the period.

direct materials cost budget

The budget containing each direct material item and its cost.

bill of materials (BOM)

A list of all the raw materials and the quantity of each needed to produce one unit of an item.

route sheet

Used to summarize a manufacturing process, identifies the workstation where the work is done, as well as the planned time spent at each station.

COGS budget

The budget used to plan for and track COGS.

pro forma financial statements

Financial statements that reflect the organization’s performance if it operates as expected.

sensitivity analysis

A financial modeling tool used to examine how changes to the underlying assumptions in the model may affect the outcome.

flexible budget

A tool that reproduces the budget at various levels of unit sales.

controllability

The extent to which employees have influence over the costs, revenues, and other performance factors that are used to evaluate them.

participative budgeting

Bottom-up budgeting that allows employees who are affected by the budget to be involved in developing it.

stretch target

A challenging but achievable target; a budget tool used to encourage employees to work hard.

authoritative budgeting

Top-down approach to budgeting in which top management makes all budgeting decisions.

negotiated budgeting process

A budgeting process in which employees develop initial budgets based on their knowledge of operations and expectations, which they submit for review and approval from top management.

budgetary slack

A built-in budget cushion that increases the chance of meeting or beating expectations.

myopia

Decision making that focuses on the short term, often to the detriment of long-term goals.

environmental social governance (ESG)

Organizations are strongly encourage to consider these issues when conducting operations.

carbon offset

An activity that prevents the release of, reduces, or removes carbon emissions from the atmosphere.