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Cost Accounting Ch 1, 2, 3, 10

Managerial Accounting

Future orientation, helps managers make decisions, No GAAP, detailed information for Internal Users.

Financial Accounting

Follows GAAP rules, summarized information for external users.

Cost of Making a Product

DM, DL, FO

Direct Materials

the direct and variable costs that can be traced back to the cost object.

Direct Labor

the direct and variable costs related to the labor that goes into production.

Factory Overhead

indirect and fixed costs related to the factory used for production.

Example of FO

property tax, property insurance, and property rent

Actual Cost

cost incurred

Budgeted Cost

predicted cost

Direct Cost

can be traced to the cost object in a cost-effective way (DM, DL)

Indirect Cost

can not be traced to the cost object in a cost-effective way (FO)

Variable Cost

costs vary as the level of activity change. changes in total proportion to changes in the related level of total activity/volume (DM, DL)

Fixed Cost

costs that do not change regardless of the level of activity as long as it is with in the relevant range. (FO)

Relevant Range

band of normal activity level or volume in which there is a specific relationship between the level of activity/volume and cost in question.

Mixed Cost (Semi-Variable)

a little fixed & a little variable

Example of Mixed Cost

Pay for Print: $100 for first 500 copies, $0.06 for each copy over 500.

DM Used

Beg Inv of DM (Jan 1) + Purchases of DM - End Inv of DM (Dec 31)

Total Mnf Costs Incurred

DM + DL + FOH

CoGMnf

Beg WIP Inv + Total Mnf Costs Incurred-End WIP Inv

Operating Income

Gross Profit - Sales & Admin Exp -or- Rev - VC - FC

Product Cost (per unit)

Product Cost / Units Produced

Prime Cost

DL + DM

Conversion Cost

DL + FOH

Gross Profit

Rev - COGS

Goods Available for Sale

COGM + Beg Finished Goods

COGS

Goods Available for Sale - End Finished Goods

Ending Inventory

Beg Inv + Purchased DM - Cost of DM Available for use

Cost Object

the product being made

CM (per unit)

SP-VC (per unit)

BE Units

FC / CM per unit

BE Revenue

BE Units x SP -or- FC / CM%

Product Costs

DM, DL, FOH

Period Costs

Selling and Administrative

Example of Period Costs

Advertising, Depreciation of Office Equipment, Shipping Costs

Types of Inventorial Costs

Product and Period Costs

Cost Driver

Drives the cost of production. ex. labor hrs, materials, machine hours

Classifications of Mfg Costs

Direct, Indirect, Mixed, Fixed, Variable, etc.

Conversion Costs

DL + FOH

Cost Volume Profit (CVP)

examines the behavior of total rev, total costs, Op Inc as changes occur in the output level, selling price, variable cost per unit, or the fixed costs of a product

Net Income

Op Income - Income Taxes

Contribution Margin (CM)

Total Rev - Total VC

CM % (ratio)

CM per unit / SP

Revenue

SP x Units Sold

Variable Costs (VC)

VC per unit x Units Sold

Break Even Point

when total revenue = total cost, Op Income = 0

Margin of Safety

amount by which budgeted (actual) revenue exceeds the BE Revenue.

MoS (formula)

Sales Revenue - BE Revenue

MoS (in units)

Budgeted Sales(units) - BE Sales (units)

MoS %

MoS in $ / Budgeted (actual) Revenue [Revenue would have to decrease by the MoS % to reach the BE Revenue]

Operating Leverage

describes the effects that FC have on changes in Op Income as changes occur in units sold (CM)

Degree of Op Leverage

CM / Op Income [Op Leverage is high when the entity has a high proportion of FC in its cost structure)

Sales Mix

quantities of various products (services) that constitute total unit sales of a company

High Low Method

# of Units: H1 and L1, Cost: H2 and L2
VC per Unit: (H2 - L2 / (H1-L1)
FC: L2 - VCL -or- H2 - VCH
VCH: H1 x VC per Unit
VCL: L1 x VC per Unit

Write the Equation (slope)

y = FC + (VC Per Unit x Activity Measure or Unit)

Least Squares Regression Method

∑xy = (FC)(∑x) + (VC)(∑x^2)
∑y = (n)(FC) + (VC)(∑x)
solve for a & b, then write the formula/equation: y = FC + (VC x Units)

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