RSM222 Midterm (Definitions and Key Ideas)

RSM222 First Midterm (Or Only Midterm) Unit 1-7

Planning

Establishing Goals and How to Achieve Them

Directing and Motivating

Mobilizing people to carry out plans and run routine operations

Controlling

Gathering feedback, proper execution of plan

Data Analytics

Using data for decision making

Financial Accounting

Summarizes past financial transactions and prepares statements

Managerial Accounting 

Future oriented, used for organizational decisions 

Business Process

A series of steps that are followed out to carry out some task or activity in a business

Value Chain

Major business functions that add value to a company’s products and services. (Research and Development, Product Design, Manufacturing, Marketing, Distribution, Customer Service)

Code of Ethics

Outline professional behaviour in terms of how members should conduct themselves in their dealings with the public, their association, and other members.

Intrinsic Motivation 

Refers to motivation that is internal 

Extrinsic Motivation

Refers to motivations that are external

Anchoring Bias

Discount that is simply too good to pass up

Cognitive Bias

Distorted thought process

Optimism Bias 

When people are overly optimistic about the future outcomes 

Confirmation Bias

When people seek info that confirms their thoughts

Direct Materials

Refers to all materials linked to a product

Raw Materials 

Refers to any materials used for a Final Good 

Indirect Materials

Refers to any materials that CANNOT be easily traced to a specific product

Indirect Labour

Labour costs that cannot be physically traced to individual products

Direct Labour

Labour costs that can easily be traced to individual units of production

Manufacturing Overhead 

All costs that are not included in direct materials and direct labour; focus on all costs used to keep production moving 

Non-Manufacturing Costs

Costs expensed on the income statement

Product Costs

All costs involved in acquiring or making products

Period Costs

Costs not included in product costs → Building inventory; Costs expensed on the Income Statement

Inventory Formula

Beginning Inv + Additions to Inv = Ending Balance + Withdrawals from Inventory

Merch COGS

COGS = Beg Merch Inventory + Purchases - Ending Merch Inventory 

Cost of Goods Sold Formula

Costs of Goods Sold = Beginning FG + Cost of Manufacturing + Ending Finished Goods Inventory

Fixed Costs

Costs that remain fixed in total but vary with unit changes

Variable Cost

Costs that vary in total but may change in accordance to unit changes

Differential Cost 

A difference in costs between any two alternative accounts 

Differential Revenue

Difference in two alt revenues

Opportunity Cost

Potential benefit given up when one alternative is chosen

Sunk Cost

Cost that has already been incurred and cannot be changed

Activity Base

Measure of whatever causes a variable cost to incur

True Variable Cost

Amount used varies in direct proportion to activity base

Step Variable Cost

Increases/Decreases when activity are fairly wide

Committed Fixed Costs

Cannot be significantly reduced without big change to activity base

Discretionary Fixed Costs

Arise from annual decisions in management, in certain fixed cost areas

Mixed Costs 

Costs that include both FC and VC 

Cost Volume Profit Analysis

Helps managers understand the relationship among cost, volume, and profit

Contribution Margin

The amount remaining from sales revenue after variable expenses have been deduced

Break Even Point

Level of sales when profit is 0, also known as when CM = FC

CM Ratio 

Contribution Margin / Sales 

Change In CM Dollars

CM Ratio * Change in Sales Revenue

Variable Expense Ratio

Variable Expenses / Sales

CM Ratio and Variable Expense Ratio Relationship

CM Ratio = 1 - Variable Expense Ratio

Target Operating Profit Analysis 

Units Sold to Attain the Target Profit = (FC + Target Profit)/ Unit CM 

Operating Income

(Unit CM * Quantity) - FC

CM Per Unit

Per Unit Sales - Per Unit VC

Break Even Point in Units Sold

Fixed Expense / Unit CM

Break Even Point in Total Sales Dollars 

Fixed Expense / CM Ratio 

Margin of Safety

The excess of budgeted sales over the break even level of sales

Margin of Safety Formula

Total Budgeted (or Actual) Sales - Break Even Sales (When FC = CM)

Cost Structure

Refers to the relative proportion of fixed and variable costs incurred by an organization 

Operating Leverage 

Measure of how sensitive operating income is to percent changes in sales. (High OL = Small % Increase in Sales can Produce Large % Increase in OI) 

Degree of Operating Leverage

CM / Operating Income

Sales Mix

Relative proportion in which a company’s products are sold

Weighted-Average CM

Total CM / Total Unit Sales

Absorption Costs 

All manufacturing costs, fixed and variable, are assigned to units of products; units are said to absorb manufacturing costs fully. 

Process Costing

When a company produces many of a singular product

Job Order Costing

Many different products and services produced each period

Bill of Materials

Record that lists the type and quantity of each item of the materials needed to complete a unit of product

Materials Requisition Form 

Document that specifies type and quantity of materials to be drawn the and identifies the job to which the costs of materials are to be charged. 

Job Cost Sheet 

A form prepared for each separate job that records materials, labour and overhead 

Time Ticket

Hour-by-hour summary of the employee’s activities in the day

Allocation Base

Measures direct labour hours or machine hours that is used to apply overhead costs to products and services

Predetermined Overhead Rate (Definition)

How manufacturing overhead is applied to products based on estimates q

Predetermined Overhead Rate Formula 

POHR = Estimated Total Manufacturing Overhead / Estimated Total Units in the Allocation Base 

The Overhead Applied using POHR

POHR * Actual Activity O

Overapplied Manufacturing Overhead

Actual Overhead - Estimated Overhead > 0

Underapplied Manufacturing Overhead

Actual Overhead - Estimated Overhead < 0

Processing Department 

A part of an organization where work is performed on a product and where materials labour or overhead costs are added to the product 

Equivalent Units (Definition)

The product of the number of partially completed units and the percentage completion of those units

Equivalent Units (Formula)

Number of Partially Completed Units * Percentage Completion

Weighted Average Method (Definition)

Units transferred Out are counted as 1, equivalent units in ending WIP are added by their percentage completed

Weighted Average Method (Formula) 

EUP = Units Transferred Out + Equivalent Units in Ending Balance (Don’t Look at Beginning) 

Cost Per Equivalent Unit (Formula)

Cost Per Equivalent Unit = (Cost of Beginning WIP + Cost Added During the Period) / Equivalent Units of Production

Activity Base Costing

Costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed and variable costs

Activity

Any event that causes the consumption of overhead resources

Activity Cost Pool 

Bucket in which costs are accumulated that relate to a single activity measure 

Activity Measure

Allocation base in an ABC system

Cost Driver

Used to refer to an activity measure

Transaction Driver

Simple count of the number of times an activity occurs

Duration Driver 

Measures the amount of time required to perform an activity 

Unit Level Activities

Happens every time one unit of product is made. Costs that grow with each individual item produced. 

Batch-Level

Happens once per batch regardless of how many units are in that batch. Costs tied to starting or finishing a group of items, not the items themselves.

Product-Level

Supports a specific product line overall, regardless of how many batches or units are made. Costs exist because the product exists.

Customer-Level Activities

Supports a specific customer or client, not a product. Costs tied to servicing or managing a relationship, not product.

Organization-Sustaining 

Supports the entire company, not any one product, batch, or customer. Costs needed to keep the lights on, but not traceable to a single output. 

Step 1 ABC Costing

Identify and define activities, create pools, and activity measure.

Step 2 ABC

Assigned overhead costs to activity pools. (2 stage process)

Step 3 ABC

Calculate activity rates

Step 4 ABC 

Assigned overhead costs to cost objects using the activity rates and activity measures 

Trad Costs vs ABC

Traditional costing assigns all manufacturing costs to products even if they don’t cause them. ABC excludes unrelated overhead like customer relations or admin.