ACG2071--Exam 2 Review

absorption costing

all manufactured costs are “absorbed” into the cost of the product (DM, DL, MOH)

variable costing

only variable manufacturing costs (DM, DL, VMOH) are treated as product costs and flow through inventory accounts with the product

Which costing method is used for external financial and tax reporting?

absorption costing

Which costing method is used for internal management purposes?

variable

product costs

stay in inventory until product is sold —> COGS

Period Costs

expensed during the period incurred

How is fixed MOH classified under absorption costing?

product cost

How is fixed MOH classified under variable costing?

period cost

Under what circumstances will variable costing and absorption costing result in the same operating income?

when the units produced equal the units sold

Segment

a part (or activity) of an organization about which managers would like cost, revenue, and/or profit data. (ex. divisions, store locations, geographic regions, customers, product lines)

Traceable Fixed Cost

fixed cost that is incurred because of the existence of a segment. If the segment didn’t exists, the fixed cost would not have been incurred.

Common Fixed Cost

a fixed cost that supports the operations of multiple segments but can’t be traced to one segment

Segment Margin

the margin available after a segment has covered all of its own costs. (Contribution Margin - Traceable Fixed Expenses)

Cost Volume Profit (CVP) Analysis

examines how sales volume, selling prices, variable costs, and fixed costs affect operating income

Contribution Margin

what remains after paying variable expenses

Breakeven Point

where operating income = $0

Sales Mix

the relative proportion of different products

Weighted Average Contribution Margin

the blended per-unit contribution margin for a company that sells multiple products. It accounts for the sales mix (the proportion of total units or revenue each product represents).

Margin of Safety

measures how far current or budgeted sales can fall before the company begins losing money

Operating Leverage

measures how sensitive operating income is to a percentage change in sales

Automation

often increased fixed costs but decreases variable cost per unit

Indiference Point

the volume where both options earn the same operating income

High-Low Method

1) pick the high and low volume months

2) find the slope

3) find the intercept

4) write the cost equation

y

total estimated cost

a

total fixed cost

b

variable cost per unit

x

activity level

R²

measures how well the regression explains variation in costs

• Higher % = Better Fit

Differential Cost

a future cost that differs between alternatives

Differential Revenue

future revenue that differs between alternatives

Incremental Cost

the additional cost of one alternative over another

Incremental Revenue

the additional revenue generated by one alternative over another

Sunk Cost

a cost that has already been incurred and cannot be changed (not relevant when making decisions)

Opportunity Cost

the potential benefit forgone by choosing one alternative over another

Avoidable Cost

a cost that can be eliminated by choosing one alternative over another

Unavoidable Cost

a cost that is incurred regardless of the alternative chosen (not relevant when making decisions)

Make or Buy Decisions

deciding whether to manufacture a good (perform a service) within the company or to have someone else do it

Special Order Decisions

a customer offers to purchase a large quantity of the company’s product but wants to pay less than the regular sales price

Goal of volume trade-off decisions

to understand the constraints that prevent companies from being able to produce all of the products their customers demand and to determine a product mix that will maximize profit given the constraints the company faces.

Constraint

anything that limits a company’s ability to produce products (or provide services)

ex. machine hours, labor hours, and facilities

Bottleneck

the most constrained resource that limits a business’ ability to produce products (or provide services)

Joint Products

two or more products produced from a single production process

Split-off Point

the point in the manufacturing process where joint products can be recognized as separate products

Joint Costs

all costs incurred up until the split-off point

Price-takers

• competitive

• generic products / commodities

(Target costing)

Price-Setters

• Less competition

• unique products

• branded

(Cost-plus Pricing)