Cost Accounting, Pricing, and Variance Analysis

Vocabulary practice flashcards covering cost-plus pricing, target costing, absorption and variable costing income statements, AA/AB/BB variance tables, sales mix, and market share/size variance analysis.

Markup on Cost of Goods Sold

A markup pricing formula where the markup base and denominator is Cost of Goods Sold ($\text{COGS}$), and the numerator includes Selling and Administrative expenses plus operating income: $(\text{S\&A} + \text{Operating Income}) \div \text{COGS} \times 100\%$

Markup on Direct Materials

A markup pricing formula where the markup base and denominator is Direct Materials ($\text{DM}$), and the numerator includes Direct Labor ($\text{DL}$), Overhead ($\text{OH}$), Selling and Administrative expenses ($\text{S\&A}$), and operating income: $(\text{DL} + \text{OH} + \text{S\&A} + \text{Operating Income}) \div \text{DM} \times 100\%$

Markup on Direct Costs

A markup pricing formula where the markup base and denominator is direct costs ($\text{DM} + \text{DL}$), and the numerator includes Overhead ($\text{OH}$), Selling and Administrative expenses ($\text{S\&A}$), and operating income: $(\text{OH} + \text{S\&A} + \text{Operating Income}) \div (\text{DM} + \text{DL}) \times 100\%$

Cost-Plus Pricing

A pricing method that adds a markup to a cost base to set the selling price, calculated using: $\text{Selling Price} = \text{Cost Base} \times (1 + \text{Markup Rate})$

Target Costing

A pricing approach that begins with the target selling price and works backward to determine the maximum allowable cost: $\text{Target Cost} = \text{Target Price} - \text{Desired Profit}$

Absorption Costing Unit Product Cost

Product cost per unit under absorption costing, calculated as: $\text{DM} + \text{DL} + \text{Variable OH} + \text{Fixed Manufacturing OH per Unit}$, where $\text{Fixed Manufacturing OH per Unit} = \text{Total Fixed Manufacturing OH} \div \text{Units Produced}$

Variable Costing Unit Product Cost

Product cost per unit under variable costing, calculated as: $\text{DM} + \text{DL} + \text{Variable OH}$. The only product-cost difference between variable costing and absorption costing is fixed manufacturing overhead.

Absorption Costing Income Statement

An income statement format organized around gross profit: $\text{Sales revenue} - \text{Cost of goods sold} = \text{Gross profit}$, and $\text{Gross profit} - \text{Selling \& administrative expenses} = \text{Operating income}$. Fixed manufacturing overhead is included in inventory product cost.

Variable Costing Income Statement

An income statement format organized around contribution margin: $\text{Sales revenue} - \text{Variable costs} = \text{Contribution margin}$, and $\text{Contribution margin} - \text{Fixed costs} = \text{Operating income}$. Fixed manufacturing overhead is expensed in the period.

Production and Sales Relationships (Absorption vs. Variable Income)

Rules determining relative operating income: if production is greater than sales, absorption income is typically higher; if production is less than sales, variable income is typically higher; if production equals sales, incomes are equal (assuming no beginning inventory effects).

Manufacturing Unit Product Cost Rule

Manufacturing unit product cost excludes selling and administrative expenses under both absorption costing and variable costing methods.

Sales Price Variance

A revenue variance measuring the effect of changes in actual selling price: $\text{Sales Price Variance} = \text{AA} - \text{AB}$, where $\text{AA} = \text{Actual price} \times \text{Actual units}$ and $\text{AB} = \text{Budgeted price} \times \text{Actual units}$. Positive indicates favorable (F); negative indicates unfavorable (U).

Sales Volume Variance

A revenue variance measuring the effect of changes in quantity sold: $\text{Sales Volume Variance} = \text{AB} - \text{BB}$, where $\text{AB} = \text{Budgeted price} \times \text{Actual units}$ and $\text{BB} = \text{Budgeted price} \times \text{Budgeted units}$. Positive indicates favorable (F); negative indicates unfavorable (U).

Total Contribution Margin Variance

A variance measuring the total change in contribution margin by comparing column AA to column BB: $\text{Total CM Variance} = \text{AA} - \text{BB}$, where $\text{AA} = \text{Actual units} \times \text{Actual CM per unit}$ and $\text{BB} = \text{Budgeted units} \times \text{Budgeted CM per unit}$

Contribution Margin Volume Variance

A variance measuring the contribution margin volume effect by comparing column AB to column BB: $\text{CM Volume Variance} = \text{AB} - \text{BB}$, where $\text{AB} = \text{Actual units} \times \text{Budgeted CM per unit}$ and $\text{BB} = \text{Budgeted units} \times \text{Budgeted CM per unit}$

Budgeted Average Contribution Margin per Unit (BACM)

The weighted-average budgeted contribution margin per unit calculated as: $\text{BACM} = \text{Total Budgeted CM} \div \text{Total Budgeted Units}$, where $\text{Total Budgeted CM} = \sum(\text{Budgeted product units} \times \text{Budgeted CM per unit})$

Sales Mix Variance

A variance analyzing the effect of a change in proportions of products sold, calculated for each product as: $(\text{Actual Units} - \text{Budgeted Units}) \times (\text{Budgeted CM per Unit} - \text{BACM})$, then summed across all products for the total F/U.

Budgeted Market Share

The planned proportion of total industry demand captured by a company, calculated as: $\text{Budgeted Market Share} = \text{Budgeted Company Units} \div \text{Budgeted Industry Units}$

Actual Market Share

The realized proportion of total industry demand captured by a company, calculated as: $\text{Actual Market Share} = \text{Actual Company Units} \div \text{Actual Industry Units}$

Market Share Variance

Measures company competitiveness and whether the company captured more or less of the market than planned by comparing actual vs. budgeted market share percentages using actual industry units ($\text{AIU}$): $(\text{AMS} - \text{BMS}) \times \text{AIU} \times \text{BACM}$

Market Size Variance

Measures the effect of change in total industry demand (whether the entire industry grew or shrank) by comparing actual vs. budgeted industry units using budgeted market share ($\text{BMS}$): $(\text{AIU} - \text{BIU}) \times \text{BMS} \times \text{BACM}$

Limitations of Profit Measurement

Shortcomings of relying strictly on profit: profit can be affected by accounting methods; absorption costing income can increase when inventory increases; short-term profits do not always show long-term success; and nonfinancial outcomes such as quality and customer satisfaction matter too.

Legal System and Ethics in Pricing

Conceptual principles requiring companies to consider competition law, fair pricing, and ethical customer treatment when determining selling prices.