RSM222 Midterm

Using managerial accounting as a tool, managers engage in

Planning

Controlling

Directing and motivating

Decision making

Prime Cost

Direct Material + Direct Labor

Conversion Cost

Direct Labor + Manufacturing Overhead

Product Cost

DM + DL + MOH

True variable (aka proportionally variable) cost

the amount used during a period varies in direct proportion

Step-variable costs

the cost of a resource that is obtainable only in large amounts and that increases or decreases only in response to fairly wide changes in activity

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

Contribution margin

revenue - variable costs

UCM

UCM = CM / Q = P - UVC

CMR

CMR = CM / TR = UCM / P

Profit

profit = (TR-TC)(1-t)

BE point (units sold)

= FC / UCM

BE point (sales dollars)

= FC / CMR

Margin of Safety (in dollars)

= Sales - BE sales

Margin of safety (%)

= MOS in dollars / sales

Degree of Operating Leverage

= CM / operating income

Units sold to attain target operating profit

= (FC + target profit) / UCM

Dollar sales to attain target operating profit

= (FC + target profit) / CMR

Operating income

= (UCM*Q) - FC

Absorption Costing

all manufacturing costs, fixed and variable, are assigned to units of product

Process costing

- a type of absorption costing

- accumulate costs in a particular operation or department for an entire period and then divide this total cost by the # of units produced during the period

- Used in situations when company produces many units of a single product

Job-order costing

- a type of absorption costing

- Used in situations where many different products or services are produced in each period

POHR

= estimated MOH / Estimated units in allocation base

Cost per EU

= (Beg WIP + Cost added )/EU of production

EU

= units transferred to next dept + EU in ending WIP inventory

What to do if overhead is underapplied?

remaining balance is closed out to COGS

What to do if overhead is overapplied?

remaining balance is allocated among WIP, finished goods, and COGS in proportion to the OH applied during the current period in the ending balances of these accounts

Is MOH over or under applied?

Actual MOH - applied MOH

Activity based costing (ABC)

A method of allocating overhead based on each product's use of activities in making the product.

ABC defines 5 levels of activity

- unit level

- batch level

- product level

- customer level

- organization sustaining

activity cost pool

The overhead cost attributed to a distinct type of activity or related activities.

first stage allocation (ABC)

each cost is allocated across the activity cost pools by multiplying it by the percentages

activity rate

Activity rate = total cost / total activity

second stage allocation (ABC)

activity rates are used to apply overhead costs to products and customers

Product costs computed under ABC are often different from costs generated by a company's traditional cost accounting system because

- ABC assigns only costs caused by products

- ABC uses activity measures that aren't necessarily volume related

- ABC assigns non-manufacturing costs such as shipping on a cause-and-effect basis

difference between absorption and variable costing?

where fixed MOH is allocated (product cost in absorption and period cost in variable)

Production > sales, how do absorption and variable costing differ?

inventories increase -> A costing operating income > V costing operating income