COB 242 Final JMU

Direct cost

easily and conveniently traced to specific cost objects

Indirect cost

cost that cannot be easily and conveniently traced to a specific cost object

Cost object

anything for which cost data is desired (product, customers, jobs)

Product costs

Debit inventories when incurred; become expenses when sold; direct material, direct labor, manufacturing

Period cost

Expenses when incurred; selling & admin, research and development, and income taxes

Direct materials

cost of raw material that is used to make, and can be conveniently traced, to the finished product

Direct labor

cost of salaries, wages, and fringe benefits for personnel who work directly on the product; sometimes called touch labor

Manufacturing overhead

all other manufacturing costs: indirect material, indirect labor, and other costs that cannot be readily traced to a finished product such as depreciation on PP&E, utilities, etc.

Indirect labor

cost of personnel who do not work directly on the product

Indirect material

materials used to support the production process

Period costs include:

selling costs and administrative costs

Selling costs

all costs incurred to secure customer orders and get the finished product to customers (advertising, shipping, sales travel)

Administrative costs

all costs associated with the general management of an organization (executive compensation, general accounting, public relations)

Differential cost

a difference in costs between any two alternatives

Differential revenue

a difference in revenue between any two alternatives

Opportunity cost

potential benefit that is given up when one alternative is selected over another

Sunk cost

cost that has already been incurred and cannot be changed by any decision made now or in the future

Visual fit method

scatter diagram of past observations

High Low method

estimate slope and intercept using two activity levels

Least squares regression

statistical procedure used to determine the relationship between variables such as activity & cost

Contribution margin per unit

price - variable cost

Target profit=

fixed cost+target profit/contribution margin

Intercept

Fixed cost

Slope

variable cost

Step-fixed costs

Total cost doesn't change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity

Step-variable costs

total cost remains constant within a narrow range of activity, total cost increases to the next higher range of activity

Fixed cost =

total cost - (variable cost x # of units)

Total cost =

fixed cost + (variable cost x # of units)

Direct materials used =

raw materials beg inv + purchases - end inv

to close underapplied MOH

Debit to COGS, credit to MOH; debits>credits

to close overapplied MOH

Debit to MOH, credit to COGS; credits>debits

Predetermined overhead rate

estimated total MOH costs / estimated total activity

Why would MOH be over or under applied?

We did not accurately estimate the actual $ amount of overhead, or did not accurately estimate the actual level of the cost driver used to apply overhead

Cost volume profit analysis

about the relationships between sales volume, revenue, expenses, and profit

Contribution margin

the amount that each unit of sales contributes to the fixed costs and profit of the organization

Operating leverage

measure of how sensitive net operating income is to a given percentage change in dollar sales; the higher the proportion of fixed costs in a company's cost structure, the greater the impact of a change in sales

Margin of safety

excess of budgeted or actual sales dollars over the breakeven volume of sales dollars; amount by which sales can drop before loses are incurred

margin of safety in dollars =

total budgeted (or actual) sales - break even sales

Under variable costing, fixed costs are treated as...

expenses when incurred and are not assigned to inventory

If you sell exactly what you produce...

net income under absorption costing = net income under variable costing; inventories will be constant

if you sell less than what you produce...

net income under absorption costing > net income under variable costing; inventories will grow

if you sell more than what you produce...

net income under absorption costing < net income under variable costing; inventories will shrink

difference in income between variable and absorption costing =

fixed unit costs * change in inventory

ABC costing

another way to allocate MOH; uses more than one predetermined overhead rate

Step one for ABC costing:

Identify the activities involved in your production process and assign overhead costs to an activity cost pool

Step two for ABC costing:

Identify appropriate activity measures (i.e. cost drivers) for each activity cost pool and assign costs to products based on the quantity of cost driver it consumes

Unit-level activities

performed each time a unit is produced; costs of unit-level activities should be proportional to the number of units produced

Batch-level activities

performed each time a batch is handled or processed, regardless of how many units are in a batch

Product-level activities

related to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold

Customer-level activities

relate to specific customers (sales calls, catalog mailings, general tech support)

Organization-sustaining activities

carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made

What is the purpose of the cash budget?

A tool to help you plan your financing activities. It will allow you to anticipate your cash needs and to negotiate your line of credit during a period when you can receive favorable terms.

Variances between the flexible budget and planning budget

activity variance

revenue or spending variance

variances between the actual results and flexible budget

The price variance is computed on...

the entire quantity purchased

The quantity variance is computed on...

the quantity used

The reason we have a favorable MOH efficiency variance is...

we used less cost driver than expected; the amount of the cost driver determines variable overhead

The favorable variable overhead spending variance could be the result of...

paying less than expected for units of variable overhead (i.e. indirect materials) and/or from using less of the variable overhead items than expected

Budget variance

Results from paying more or less than expected for overhead items

Volume variance

Results from the fact that we did not operate at the planned activity level

Cost center

Segment has control over the incurrence of costs; cost standards

Profit center

Segment has control over both costs and revenues; contribution income statement

Investment center

has control over profits and invested capital; ROI or residual income

Traceable fixed cost

should be used in the evaluation of a profit center

Common fixed cost

should NOT be used in the evaluation of a profit center

ROI =

Net op income / Average op assets

Residual income =

net op income - (avg op assets * min required rate of return)

Minimum required rate of return

Investment center requirement to invest in any project whose rate of return exceeds this minimum

Balanced scorecard

A mixture of financial and non-financial measures each compared to a goal; may include customer satisfaction, quality goals, delivery time, and employee turnover

Information is relevant to a decision problem when:

it has a bearing on the future and it defers among competing alternatives

With excess capacity

Relevant costs usually will be the variable costs associated with the special order

Without excess capacity

opportunity cost of using the firm's facilities for the special order are also relevant

Add back this first to net income when doing SCF

depreciation

What do you do with the loss on a sale of an asset

add it back to net income

What do you do with the gain on a sale of an asset

subtract it from net income

current ratio

current assets/current liabilities

working capital

current assets - current liabilities

AR turnover

sales on account / ((beg AR + end AR)/2)

Avg collection period

365 days/AR turnover

Inventory turnover

COGS / ((beg inv + end inv)/2)

Avg sales period

365 days / inv turnover

Gross margin percentage

(Sales-COGS)/Sales

EPS

Net Income / Avg # of common shares outstanding

Current ratio

want to be higher; test of a company's ability to pay current liabilities from existing resources

Working capital

want to be higher; measures company's ability to repay current liabilities using only current assets

AR turnover

want to be higher; measure of company's ability to turn AR into cash

Avg collection period

want to be lower; avg number of days to collect AR after the sale; a rising collection period indicates customers are not as good quality as before

Inventory turnover

want to be higher; a measure of how many times a company's inventory has been sold and replaced during the year

Avg sale period

want to be lower; avg # of days it takes to sell an item of inventory; rising sale period may indicate your product is outdated or over-priced, relative to your competitors

Gross margin percentage

want to be higher; falling margin indicates that either cost of product has risen or there is competitive pressure on company's sales price; rising percentage indicates increasing profitability

EPS

want to be higher; portion of a company's profit/loss allocated to each outstanding share of common stock; important since earnings are the driver of dividend payments and future increases in the value of shares; rising price indicates profitability

Segment Margin

segment sales - variable costs - traceable fixed costs