exam one accounting 311

Chapter 2, 3, 4, and 5

What is broad averaging and what consequences does it have on cost?

Broad averaging describes a casting approach that uses broad outages for assigning to cost of resources uniformly to cost objects

What is a possible consequence of using broad average to calculate unit costs?

By ignoring the variation in the consumption of resources, by different objects, broad averaging can lead to inaccurate product costing

What is costing system refinement what are the three guidelines for refinement?

this means making changes to a simple costing system that reduces the use of broad averages for assigning the cost of resources to cost objects and provide provides better measurements of the cost of overhead resources used by different Cost object objects

The three guidelines for refinement include

1.Classify as many of the total costs as direct cost as is economically feasible

2. expand the number of indirect cost pools until each of these pools is more homogeneous

3. use the cause-and-effect criteria when possible to identify the cost allocation for each indirect pool

Demand for requirements to the costing system has all accelerated due to

Competition in product markets

What is an​ activity-based approach to designing a costing​ system?

An​ activity-based approach refines a costing system by focusing on individual activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services.

Why is it important to classify costs into a cost​ hierarchy?

It is important to classify costs into a cost hierarchy because costs in different cost pools relate to different​ cost-allocation bases and not all​ cost-allocation bases are unit level. If costs were not classified into a cost​ hierarchy, the alternative would be to consider all costs as​ unit-level costs, leading to misallocation of those costs that are not​ unit-level costs.

Getting all the ingredients out before you bake some cookies is an example of which type of activity in the cost​ hierarchy?

Batch

top management compensation cost is an example of​ ________ in the cost hierarchy.

​facility-sustaining costs

With traditional costing​ systems, products manufactured in small batches and in small annual volumes may be​ ________ because​ batch-related and​ product-sustaining costs are assigned using​ unit-related drivers.

undercosted

Cost

A cost is a resource sacrificed or forgone to achieve a specific objective.

Two types of costs based on timing

Actual cost and Budgeted cost

Actual cost

A cost that has already occurred

$5,000 actually paid for materials

Budgeted cost

A predicted/planned cost

Expected materials cost of $6,000

Actual

Happened

Budgeted

Planned

Cost object

A cost object is anything for which a separate measurement of costs is desired

• product

• service

• project

• customer

• activity

• department

Which of the following can be a cost object?

Essentially anything you want to measure the cost of.

The basic purpose of cost accounting is to

accurately assign accumulated costs to cost objects

What are the two ways to assign costs?

Tracing and Allocation

Tracing

Used when you can directly identify a cost with a cost object

Direct Cost

Trace

Allocation

Indirect Cost

Direct Cost

A cost that can be conveniently and economically traced to a specific cost object.

Direct Cost

A company manufactures tables.

The wood used to make one table can be traced to that table.

Indirect Cost

A cost that cannot be conveniently and economically traced to a specific cost object.

Instead, it must be allocated using some reasonable method.

Indirect Cost

factory supervisor's salary.

The supervisor works on many products, so you can't easily say:

$200 of this salary belongs specifically to Table A

Indirect Cost

Supervisor Salary

Direct vs. Indirect depends on

the cost object

Cost Object - BMW X6

The equipment is used to make the BMW X6 → potentially direct

Cost object = Assembly line

The equipment lease is a cost of the entire assembly line → direct to the assembly line

Variable

A cost that changes in total in proportion to changes in activity/output volume.

The total changes.

But the cost per unit stays constant:

$5 per unit

Fixed Costs

A fixed cost remains unchanged in total for a given time period, regardless of the level of activity, within the relevant range.

Factory rent = $10,000/month.

Fixed Costs

the total stays the same.

BUT the fixed cost per unit changes.

Fixed cost:

Total → stays constant

Per unit → changes

Total Cost

VC: Changes

FC: Constant

Per unit

VC: Constant

FC: Changes

If the production increases

VC: Total increase

FC: total stays same

if the production decreases

VC: total decreases

FC: total stays same

Cost driver

A cost driver is a variable, such as the level of activity or volume, that casually affects costs over a time span

Cost Driver

What causes the cost to change

Possible cost Drivers

Cost	Possible Cost Driver
Machine maintenance	Machine hours
Labor cost	Labor hours
Delivery cost	Number of deliveries
Electricity	Machine usage

Relevant Range

The relevant range is the range of normal activity in which the relationship between the cost driver and the cost remains valid.

Relavant range example

A factory's rent may be $20,000/month when production is between 1,000–10,000 units.

If production suddenly increases to 50,000 units, the company might need another building.

So the original fixed-cost assumption no longer applies.

What happens to fixed and variable costs outside the relevant range?

You cannot assume the same cost behavior continues.

Total Cost Formula

Total Cost=Total Variable Cost+Total Fixed Cost

Total Cost Per Unit

Total Cost per unit = total cost /q

2. total cost per unit

total cost per unit = vc per unit + fc per unit

Product costs

All manufacturing costs are product costs.

Product Costs Include

Direct Materials, Direct Labor, and Manufacturing Overhead

MOH examples

• Factory rent

• Factory utilities

• Factory supervisor salary

• Factory depreciation

• Indirect materials

• Indirect labor

Direct Materials (DM)

Materials that become part of the product

Direct Labor (DL)

Labor directly Involved in manufacturing the product

Manufacturing Overhead

All manufacturing costs other than direct materials and direct labor

Product Cost formula

= DM + DL +MOH

Product cost vs Period Cost

Where does the cost occur?

Product Costs

Costs associated with production/manufacturing.

They are initially recorded as inventory.

Eventually, when the product is sold, they become:

Cost of Goods Sold (COGS)

Your lecture describes product costs as being captured in:

• Direct Materials Inventory

• Work-in-Process Inventory

• Finished Goods Inventory

and recognized as COGS when the product is sold.

Period Costs

Costs that are not manufacturing costs.

Period cost examples:

• Selling expenses

• Administrative expenses

• Advertising

• Corporate office expenses

Product vs. Period

Product Cost	Period Cost

Manufacturing	Non-manufacturing

Goes into inventory

Goes directly to expense

DM	Selling expenses

DL	Administrative expenses

MOH	Advertising

Becomes COGS when sold

Expensed in current period

Product

Production

Period

Everything else

Manufacturing Inventories

DM, WIP, FG

Direct Materials

Materials that will be used in production

Work in Process

Products that are partially completed

Finished Goods

Products that are completed but haven’t yet been sold

Manufacturing inventory process order

DM → WIP → FG → COGS

Cost Flow

DM + DL + MOH→WIP​

Then:

WIP→ Finished Goods

Then when sold:

Finished Goods→COGS​

Cost of Goods Manufactured

COGM= Beginning WIP + Total Manufacturing Costs − Ending WIP

Total Manufacturing Costs = DM used + DL + MOH

COGM = Beginning WIP + DM Used + DL + MOH - ending WIP

Total Manufacturing Costs

DM used + DL + MOH

Cost of Goods Sold

= Beginning finished goods + COGM - ending finished goods

Inventory Flow

DM→WIP→FG→COGS​

What Is CVP Analysis?

CVP = Cost-Volume-Profit

CVP

• P = Price

• V = Volume

• C = Cost structure

What Is CVP Analysis goal?

The goal:

Increase operating income/profit

So if a question asks what CVP analysis helps managers do, think:

Price + Volume + Costs → Operating Income

operating income equation

Revenue − TVC − TFC= Operating Income​

• Revenue = P × Q

• TVC = Variable Cost per Unit × Q

• TFC = Total Fixed Costs

Therefore P(Q)−VCU(Q)−TFC=Operating Income

P

Selling price per unit

Q

quantity/units sold

vcu

variable cost per unit

tvc

total variable costs

tfc

total fixed costs

cm

contribution margin

cmu

contribution margin per unit

cm %

contribution margin percentage

oi

operating income

Contribution margin

explains that contribution margin first goes toward covering fixed costs, and anything remaining becomes operating income.

Contribution Margin

Revenue - TVC

Sales revenue

↓

− Variable costs

Contribution Margin

↓

− Fixed costs

↓

Operating Income

Contribution Margin Per Unit (CMU)

The formula:

CMU=P−VCU​

Contribution Margin Percentage (CM%)

cm % = cm / revenue or cmu/p

What is break-even?

The break-even point (BEP) is the quantity of output sold where:

Operating Income=

no profit

no loss

to break even

CMU×Q−TFC=Operating Income

Operating Income=0

CMU×Q−TFC=0

BEP in Units= tfc / cmu

CMU = p - vcu

BEP= tfc / p - vcu

Break-Even in Sales Dollars question

Sometimes the question doesn't ask:

"How many units?"

Instead it asks:

"What sales revenue is needed to break even?"

Break-Even in Sales Dollars

BEP sales = tfc / cm %

Target Operating Income

This is basically break-even with a desired profit added.

Target Operating Income in Units:

Q = TFC + Target OI / CMU

Target Operating Income in Sales Dollars

If you're given CM% instead of CMU:

target sales = tfc + target OI / CM %

Target Net Income

This is where taxes come in.

Sometimes the problem gives you:

Target net income

instead of target operating income.

Your professor says you must first convert Net Income → Operating Income