Chapter 1 1 conceptual question Chapter 2 1 conceptual 2 mathematical 1 Cost Behavior Variable Costs any total cost that varies in proportion to a business activity o Total Variable Cost Number of Units x Price Fixed Costs a cost that does not change with the activity level Step Costs costs that are fixed over only a small range of activity Mixed Costs a mix of fixed and variable costs 2 Cost Estimation Cost Functions Scattergraph a graph that shows total costs in relation to volume or activity level o Literally draw a line so that it appears to fit that data well minimizing the distance between the line and the data points High Low Method requires the lowest point of activity and the highest point of activity Regression Analysis technique that identifies the line of best fit for the points plotted in a scattergraph a more precise approach to separating a mixed cost a statistical o Equation will be given All you do is plug in number of units where x is in the 3 Income Statement Formats GAAP Format vs Contribution Margin Format equation The Functional Income Statement GAAP Format does not help manager predict the financial results of their decisions due to the format of the GAAP statements which is based on cost function product sales administration rather than cost behavior o GAAP Function Contribution Margin Behavior Chapter 3 1 conceptual 3 mathematical 1 Cost Volume Profit Analysis Breakeven Point when sales revenue is exactly equal to total expenses Margin of Safety volume of sales that can be lost before the company begins to lose money the difference between current sales and breakeven sales represents the use the same formulas as with the breakeven point but instead of Target Operating Income setting the equation equal to 0 or 0 units set the equation equal to the desired operating income Target Net Income target operating income must calculate the operating income and then do the same thing as with What if Analysis 2 Operating Leverage Multiproduct CVP Analysis multiple products versus just one Sales1 Variable Expenses1 Sales2 Variable Expenses2 Fixed Expenses Operating Income OR Sales1 Sales2 Variable Expenses1 Variable Expenses2 Fixed Expenses Operating Income Operating Leverage the change in operating income relative to a change in sales o High operating leverage will experience a large percentage change in operating income as a result of a small percentage change in sales Degree of Operating Leverage income due to a change in sales volume at a given level of sales another way to compute the expected change in operating 3 Pricing Cost Plus Pricing company s operating costs and contribute to its profit adds an amount to the cost of the product or service to cover the o The plus amount it referred to as markup the difference between the selling price and the cost of the product computes the desired markup and the maximum cost the Target Costing company can incur to deliver a product or service at the market price Sales Cost of Goods Sold Manufacturing Costs Gross Margin Gross Profit Chapter 4 1 conceptual 1 mathematical 1 Cost Classifications Direct Costs vs Indirect Costs o Direct Costs product o Indirect Costs final product Product Costs vs Period Costs costs that can be directly traced to or easily identified with the final costs that cannot be directly traced to or easily identified with the o Product Costs o Period Costs and the administration of the business manufacturing costs costs incurred to manufacture a product non manufacturing costs costs associated with the selling of products Prime Costs and Conversion Costs o Prime Cost expenses the sum of all direct material costs direct labor costs and direct Prime Cost Direct Materials Direct Labor Direct Expenses o Conversion Costs in converting raw materials to finished items the costs of all activities and or resources that have been applied Conversion Cost Overhead Direct Labor Direct Expenses 2 Cost Flows Through Inventory Accounts 3 Calculate Ending Inventory Balances 4 Calculate Cost of Goods Manufactured Cost of Goods Sold Cost of Goods Manufactured whether or not it was started during the period the cost of everything that is finished during the period Finished Goods Inventory Beginning Balance Cost of Goods Manufactured Cost of Goods Sold Ending Balance Direct Materials Used Direct Labor Manufacturing Overhead Total Manufacturing Costs Beginning Work in Process Inventory Ending Work in Process Inventory Cost of Goods Manufactured Cost of Goods Sold Finished Goods Inventory Beginning Balance Cost of Goods Manufactured Ending Balance Cost of Goods Manufactured Beginning Finished Goods Inventory Goods Available For Sale Ending Finished Goods Inventory Cost of Goods Sold Cost of Goods Sold 5 Applying Overhead Predetermined Overhead Rate overhead and activity Predetermined Overhead Rate based on estimates of total manufacturing Budgeted Total Manufacturing Overhead Cost Budgeted Level of Application Allocation Base Disposing of Under of Over Applied Overhead o Under Increase Cost of Goods Sold o Over Decrease Cost of Goods Sold o If the amount of under or over applied overhead is large it is appropriate to prorate the amount to all of the accounts that contain overhead such as Work in Process Finished Goods Chapter 7 1 question Activity Based Costing Activity Based Costing products departments or customers based on the activities those cost objects require a costing technique that assigns costs to cost objects such as Developing Activity Based Product Costs o STEP 1 Identify Activities o STEP 2 Develop Activity Cost Pool o STEP 3 Calculate Activity Cost Pool Rates o STEP 4 Allocate Costs to Products or Services o STEP 5 Calculate Unit Product Costs Unit Product Cost Total Overhead Cost Total Number of Units Chapter 8 5 questions 1 Relevant vs Irrelevant Information for Decision Making Avoidable vs Unavoidable Costs o Avoidable Costs occur only with the implementation of a particular of a particular alternative o Unavoidable Costs incurred under all alternatives making it irrelevant Sunk Costs Opportunity Costs o Sunk Costs a cost that has been incurred in the past Irrelevant in deciding between two alternatives because they were incurred in the past not the future o Opportunity Costs the contribution margin of the next best alternative use of the Incremental Revenues Incremental Costs cost and the new revenue or cost the difference between the original revenue or facilities 2 Decision Making Special Orders
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