BUSI2112 Units 5-7

Under Absorption costing, what happens when units sold › units produced?

• Absorption FC will look higher than Variable FC

• Absorption income ‹ Variable income (on income statement)

Under Absorption costing, what happens when units sold ‹ units produced?

• Absorption FC will look lower than Variable FC

• Absorption income › Variable income (on income statement)

What is a profit center?

Separate business unit

Absorption costing vs. Variable costing

Absorption costing assigns fixed overhead to product cost. Variable costing does not.

What is included in product cost under absorption costing?

Direct materials, direct labour, variable overhead and fixed overhead.

What is included in product cost under variable costing?

Direct materials, direct labour, variable overhead.

How do we assign fixed overhead to products under absorption costing?

Using a predetermined fixed overhead rate.

Fixed overhead in Absorption costing vs. Variable costing

Absorption costing : it is inventoriable
Variable costing : it is expensed in the period it occurred (period expense)

Is the product cost greater under Absorption costing or Variable costing?

Absorption costing, because we add FOH

COGS formula

• Cost of goods available for sale - Ending inventory

• Cost of product x Units sold

Fixed expenses in segmented income statements

Broken down into 2: direct fixed and common

What are direct fixed expenses (avoidable or traceable)?

Fixed expenses directly traceable to a segment. They vanish if segment disappears.

What are common fixed expenses?

Jointly caused by more than one segment. Remain if segment disappears.

How to calculate Segment Margin?

Contribution margin - Direct fixed overhead - Direct Selling and Admin

How to calculate contribution margin?

Sales - Variable COGS - Variable expense

What are ordering costs and carrying costs?

Cost associated with material or good purchased from an outside source

What are setup costs and carrying costs?

Costs associated with material or product produced internally

Definition of ordering cost

Cost of placing and receiving an order

Definition of carrying costs

Costs of keeping and storing inventory

Definition of stockout costs

Cost of not having a product or material available when demanded by a customer or needed for production.

Why carry inventory?

1. To balance ordering and setup costs and carrying costs

2. To satisfy customer demand

3. To avoid shutting down

4. To buffer against unreliable production processes

5. To take advantage of discounts

6. To hedge against future price increases

How to calculate Total invetory-related costs?

Ordering cost + Carrying cost

How to calculate Ordering cost?

Number of orders per yer x Cost of order placing

How to calculate Average number of units in inventory?

Units in order / 2

How to calculate Carrying cost?

Average number of units in inventory x Cost of carrying one unit

What two questions should be answered when carrying inventory?

1. How much should be ordered?

2. When should order be placed

What is the Economic Order Quantity (EOQ)?

Ideal number of units in your order (Number of units in the optimal size order)

How to calculate EOQ?

√(2x Order Cost x Annual demand) / Carrying cost per unit

What is a reorder point?

Time when a new order should be placed or new setup started

What is the Lead time?

Time it takes for order to come in

How to calculate Reorder point

Lead time x Rate of usage

What is safety stock?

Extra inventory kept as insurance against changes in demand

How to calculate safety stock?

(Maximum daily usage - Average daily usage) x Lead time

What is Just-In-Time Approach?

Goods should be pulled through the system according to present demand rather than pushed out on a fixed schedule based on anticipated demand. McDonald’s is an example.

How does JIT solve problems related to factory closing or idle workers?

By emphasizing total preventative maintenance, total quality control, and building good relationships with suppliers.

Is JIT easy to implement?

No, it requires time and effort to build good relationships with suppliers. Requires careful and thorough planning.

How to calculate Unit costs?

Total cost / Number of units

How to calculate Actual Cost?

Actual DM + Actual DL + Actual OH

How to calculate Normal Cost?

Actual DM + Actual DL + Estimated OH

How to calculate OH rate

Estimated annual overhead / Estimated annual activity level

How to calculate Applied OH?

Predetermined OH rate x Actual activity level

Calculate Total cost under normal costing

Actual DM + Actual DL + Applied OH

What does it mean when Applied OH is smaller than Actual OH?

OH is underapplied, add difference to COGS

What does it mean when Applied OH is bigger than Actual OH?

OH is overapplied, subtract difference from COGS

What is the difference between Actual OH and Applied OH called?

OH variance

How to calculate Plantwide OH rate?

All estimated OH / All estimated activity

How to calculate departmental OH rate?

Estimated dep. OH / Estimated dep. activity

What’s included in a job-order cost sheet?

Job description, job material, labour, overhead

What is a materials requisition form?

Form containing information about assigning materials to jobs

What is included in a Job Time Ticket?

Employee name/number, hourly wage, hours worked on each job

What makes up Finished goods inventory?

All the job-order cost tickets of finished and unsold jobs

What makes up Work in Progress Inventory?

All job-order tickets of jobs started but not finished

What makes up COGS?

All job-order tickets of jobs finished and sold

What is a producing department?

Department directly responsible for creating the product or service

What is a support department?

Provide essential services, but do not make the product

3 methods of assigning support department costs to producing departments

Direct method, Sequential method, Reciprocal method

What is the direct method of assigning support department cost?

Assigns the support department costs only to producing departments

What impairs the accuracy of plant wide overhead rates?

Non-unit related overhead, which doesn’t change as units produced increases, and product diversity

What is a unit-level type of cost?

Cost that changes with units produced

What is Batch-level type of cost?

Varies with number of batches produced

What is product-sustaining type of cost?

Varies with number of lines (like quality control for Lulu align or wundertrain)

What is facility-sustaining type of cost?

Necessary for plant operation but does not vary with batches, units, or products.

What is an activity driver?

what causes an activity to happen

How to calculate consumption ratio?

Amount of activity driver per product / Total driver quantity

What is a value added activity?

Activity necessary to remain in business. Must meet 3 requirements: Produces a change in state, Change of state was impossible in preceding steps, Enables other activities to be performed.

What is Cycle time?

Measures how long it takes to get from raw materials to finished inventory

How to calculate Cycle time?

Time/Units produced

What is velocity?

Units of output that can be produced in a given period of time

How to calculate Velocity?

Units produced / Time