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Differential cost

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In making business decisions, managers often have to choose between alternatives. You could buy something for 100 or 80, the diff cost is 20

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Marginal Cost

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The cost of producing hte last unit of the current production volume. Out of 100 units, the last unit is the marginal cost, if it is 99 units for 1000 dollars, the marginal cost is 0

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Cost Definition

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There are many ways of defining costs. Cost is usually the price paid to acquire a product or receive a service.

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Diff between Period and Product cost

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Product: Go into making the object material thing (Material, Labor, Overhead) stuff that can be loaded into inventory =Inventorial Vs Period: Like a furniture store, (Salary, rent, utilities) Stuff that is incurred per period

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cost driver

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The thing that drives your cost, coffee shop: the number of coffee you sell drives your cost

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3 main costs

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Fixed, Variable, and Sem-Variable

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Fixed Costs

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Remain constant, up to a relevant range, regardless of the level of activity. As more units are produced, there are no more costs, it just stays the same

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Variable costs

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the more the product is produced the more the costs go up or down. VICE VERSA

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Semi Variable Costs

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ok so if you sell 10 items, costs are 10 dollars, 20 items the costs are 20 dollars. In semi variable it would be more like 10 items, 3 dollars, the costs does change but not proportionally

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closing stock

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stuff that is unsold

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Prime cost

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The total of direct materials cost + direct labor cost is called prime cost

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Conversion Cost

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Direct labor cost +manufacturing overhead cost These costs are incurred to convert direct materials into finished products

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Carrying cost

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Storage costs, interest on borrowing. Costs of maintenance to keep something held in a compartment. Evaporation costs.

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ordering costs

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costs of ordering a product

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job costs

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the costs of completing a job (like building a dam)

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Process Costs

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costs of processing something, the costs of making oil into diesel ect

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Joint Costs

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The cost before the split off point, like the cost of extracting the oil before it is refined

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Set-up costs

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Costs of setting up a production product. A cookie has costs of material labor utilities ect

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Stock out costs

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The cost of running out of any of the inputs of production. materials, labor or an overhead item, and the resulting loss due to production shut down

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Discretionary costs

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costs that can be postponed usually by managers such as short term contracts ect

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non discretionary costs

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costs to which the organization is committed to such an extent that there is no way out in the short run. Longer term non cancelable contracts.

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Direct Costs

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Those that can be easily traced toa product or service that was produced as a result of incurring the cost. examples are direct material direct labor ect.

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Indirect costs

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costs that do not specifically have anything to do with making the product

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Opportunity Cost

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The money you could have made if you had not made the decision that you did. So if you decided to take the day off work and if you had gone you wouldv made 100 dollars. then the opportunity cost is 100 dollars

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Sunk Cost

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The cost that has been incurred in the past. Past cost that cannot be recovered by any means . Paying saint marys price but dropping out, but still having to pay it

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cost-volume-profit

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How costs behave? fc, vc, smc. Know these and you can plan the volume that delivers the desired profit.

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total cost

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the variable cost line where the fixed cost starts Fixed Cost + Unit Variable cost "Times" (quantity of units)

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Total revenue

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how much margin you have over your variable cost you buy muffins for 2 dollars and sell them at 3, so it should be for ever unit 1 above the variable cost

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Break even point

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where total cost and total revenue lines meet where you start actually making money

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UVC

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Unit variable cost

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USP

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Unit selling price

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Break Even Point (dollars)

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Total Fixed Cost / Contribution Margin Ratio (Contribution Margin/Sales)

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Contribution Margin

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The difference selling price and variable cost

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Break Even Point (Units)

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Total Fixed Cost / Contribution Margin

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TOI (Before Tax)

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TOI (After Tax) / 1 - (Tax Rate) "25% is .25"

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Required Volume (Unit)

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Total Fixed Costs (TFC) + TOI / Unit CM (UCM)

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Required Volumes (Sales)

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Total Fixed Costs (TFC) + TOI / CMR (Cont. margin ratio)

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Contribution Margin Ratio (CMR)

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Contr. Margin / Sales

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BEP (B) Bundles

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TFC / Bundle Contr Margin

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After you get the BEP for bundles you

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multiple the BEP Bundle number times the (ratio) amount of units, for example 1;3;2

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Margin of safety

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Sales - BEP (sales)

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Margin of Safety (ratio)

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Margin of safety / Sales

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Degree of Operating Leverage (DOL)

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DOL shows how a change in sales will cause a change in operating profit

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Point of Indifference (units)

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If you choose variable or FC either way they are the same (FC 1 - FC 2 / UCM 1 - UCM 2)

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Point of Indifference (Amounts)

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(FC 1 - FC 2 / CMR 1 - CMR 2) (Contribution margin ratio)

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expect profit

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cm - FC

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exam:

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pg. 60 2 a1 2 a2 2 b2 pg 66 236 37 38 39 40 2. 43. 2 47 2 54 2 60 2 61 2 66 ch 3 3. 32. 34 36 40 41 44 50 52 54 55 56

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Profit =

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(Sales − Variable expenses) − Fixed expenses

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Sales =

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Variable expenses + Fixed expenses + Profit

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Criteria of a sound regression model (pg 86-87)

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1. plausibility 2. goodness of fit

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Multi variable analysis/multi linear regression

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TC=FC +B1 (Cost driver) + B2 (cost driver)

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a

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FC

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B1

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VC #1

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E (error)

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the difference between the guess and the actual answer

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Goodness of fit

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is the accuracy of your guess on what the Total Cost will be (How well the model fits the reality) R2 or Co-efficient of multiple determination

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uni-variate

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1 cost driver

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which variate do you choose

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the one with the highest R2

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High Low method

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1. Plot the data, :X axis is unites Y is cost 2. Draw a line between the highest activity point and the lowest activity point 3. Identifying variable cost or slope 4. fill out the formula

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objective of plotting

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identify the outliers the points that are outside of the main line

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To find the slope/variable cost

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Y = A + B (X) TC= FC + VC (#units) or Starting with the highest!!!! Highest cost - Lowest cost/ Highest activity (corresponding) - lowest activity (corresponding) (the units)

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Finding the fixed cost for the slope with a graph

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TC = the highest row cost = FC (which is not found yet) + the variable cost times (the number of units in the same row)

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High Low method Strengths

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1. easy to compute and simple to understand 2. gives a reasonable approximation of cost behavior

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High Low method strengths

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1. It is based on only 2 date points - the highest and the lowest 2. Ignores all other data points 3. It is no truly representative of the information 4. Does not work in all activity levels

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Regression

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B= N (collumbs) * (Exy) - (x * E y)/ (Ex2) - (Ex)2 A= Ey - B Ex/ N

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R2 is

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he explanatory power of the function (it shows how much variations in Y (or costs) is explained by variations in x (activity level)

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Activity based management (ABM)

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Using the output of an activity-based cost accounting system to aid strategic decision making and to improve operational control of an organization

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Value-added cost

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the cost of an activity that a company cannot eliminate without affecting a product's value to the customer

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Cost management system

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A collection of tools and techniques of managing costs 2 categories (traceable) and (non traceable) 1. Cost estimation 2. Cost accumulation 3. cost assignment 4. cost control

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Traceable Costs

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Direct materials are one. You know which items go into what product so it is easy to trace

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Non-Traceable Costs

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If you had an oven, its hard to trace what products were made in the oven. Something that can be used with more than one subject or product for example a computer.

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Non-Value added costs

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Costs that company can eliminate without affecting a product's value to the customer

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Benchmarking

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The continuous process of comparing products, services, and activities to the best industry standards

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arbitrary

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this means that no matter what everyone pays the same thing like the tuition at saint marys

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ABC Activity based costs

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Bridges between resources and products Allocating stages 1. Allocating resource costs to the activities 2. From activities you assign those to the products does not help with products such as all other costs that are not specific

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Degree of Operating Leverage

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%Change in operating income/ % change in sales or operating income/ contribution margin

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why is the Sarbanes Oxley report 2002 controversial?

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THe costs of applying the Oxley act are greater than the benefits. This is true with the auditing of companies internal control systems.

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What two major considerations affect the design of all accounting systems?

answer

1. Cost Benefit balance:How well accounting will help reach the management's goals in relation to the cost system. 2. Behavioral effects: This says that an accounting system should be judged by how it will affect the behavior or decisions of the managers.

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Budget

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a quantitative expression of a plan of action

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Performance Report

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This compares actual results with the budget

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Variance

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This measures the differences between the budget costs and actual costs.

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Why are accountants concerned about product life cycles?

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Information that is relevant for decisions about a product depends on the product's life-cycle stage. Therefore, to prepare and interpret information, accountants should be aware of the current stage of a product's life cycle.

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"Accountants in every company should measure and eport on every function in the company's value chain." do you agree? explain

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No. Some functions in the value chain may not be present in some organizations and not all of the functions are of equal importance to the success of all organizations. Measurement and reporting should focus on those functions that enable a company to gain and maintain a competitive edge.

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What are management accountants starting to do more of.

answer

Management accountants are the information specialists. In non-hierarchical companies, they are more directly involved with managers and are often parts of cross- functional teams.

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To become a CMA, you must qualify with two parts.

answer

1. Financial planning, performance, and control 2. Financial decision making

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How are changes in economy effecting management accounting

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Changes in technology are affecting how accountants operate. Increasing computing capabilities and decreasing computing costs have changed how accountants gather, store, manipulate, and report data. Today accountants must be able to account for transactions efficiently and safely, integrate their accounting systems into ERP systems, and use XBRL to communicate information electronically.

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Briefly describe how a change in a plant's layout can make its operation more efficient?

answer

Moving tools and products that are in process from one location to another in a plant is an activity that does not add value to the product. So changing the plant layout to eliminate wasted movement and time improves production efficiency.

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Controller Acitivities

answer

Planning for control Reporting and interpreting Evaluating and consulting Tax administration Government reporting Protection of assets Economic appraisal

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Treasurer

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Provision of capital Investor relations Short-term financing Banking and custody Credit management and collections of cash Investments Risk management

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Traits of Management Accounting

answer

1. Field is less sharply defined 2. Provides internal consulting advice to managers 3. Is characterized by detailed reports 4. Has a future orientation

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Traits of Financial Accounting

answer

1. Has less flexibility 2. Is constrained by GAAP 3. Behavioral impact is secondary

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What is GAAP (financial acctg only)

answer

generally accepted accounting principles: a collection of rules and procedures and conventions that define accepted accounting practice

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Which employees have line or staff responsibilities? Indicate if it does another function as well

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1. President: Line, Support 2. District sales manager: Line, Marketing 3. Market research analyst: Staff, Marketing 4. Cost Accountant: Staff, Support 5. Head of legal department: Staff, Support 6. Production superintendent: Line, Production

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Value Chain

answer

The set of business functions or activities that add value to the products or services of an organizationin includes: Research and development Design of products, services, processes Production Marketing Distribution Customer Service

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Line Managers

answer

are directly involved with making and selling the organization's products or services

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Staff Managers

answer

are advisory---they support the line managers, they give advice

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CFO (chief financial manager)

answer

A top executive who deals with all finance and accounting issues, oversees the accounting function in most organizations

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Treasurer

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concerned mainly with the company's financial matters such as raising and managing cash

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Controller

answer

Concerned with operating matters such as aiding management decision making

question

List several costs and benefits of poor and ethical environments

answer

poor ethical (costs): 1. Legal costs 2. costs due to absenteeism and high employee turnover Ethical (benefits): 1. Improved morale 2. lower absenteeism and employee turnover 3. lower loss from theft

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IMA (Statement of Ethical Professional Practice)

answer

Management accountants should not condone the commission of acts by their organization that violate the standards of ethical conduct

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Unit activity costs

answer

Total activity cost / #units

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Managerial Accounting

answer

Managerial Accounting is the part of accounting that aids the managerial decision making. It emphasizes on the use of accounting information to help people internally in making decisions concerning routine and non-routine decisions. Decisions such as how much inventory to carry, how much inventory to order at a time, whether a new product line should be launched or an existing product to be postponed. It also extends to cash management, budgeting, variance analysis, performance evaluation, cost control, and designing control systems within organizations. The management accounting can help in hard environments by first identifying inefficiencies in all segments of supply, production, and distribution chains. Second, identifying product differentiation opportunities. Also specializing in products and services where the US has a competitive avantage, such areas are software intellectual property, leisure ect.

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