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Flashcards in Cost Accounting Deck (15):

Labor efficiency variance

Std Cost x Actual Hours
(Std Cost x Budgeted Hours)

= Variance


Material usage variance (efficiency)

Std Material Cost x Actual Usage
(Std Material Cost x Budgeted Usage)

= Variance


Price variance

x (Std Price - Actual Price)

= Price Variance

Focuses on the purchasing department b/c it is charged with the responsibility of making purchases and adhering to the budget


Variable vs. Absorption Costing

Variable Costing assumes that fixed overhead is a PERIOD cost and only variable overhead is INVENTORIABLE to the ending inventory balances.

Fixed Overhead hits the I/S. It will never hit the B/S!

Variable Costing is direct costing and not for GAAP. Only for managerial use.

When an exam question asks you to compute the ending inventory's cost under the Variable Costing method, you IGNORE the Fixed Overhead since it is going to hit the I/S anyway. Remember your Ending Inventory is going to the B/S (only variable overhead is inventoriable!)

Absorption Costing assumes that fixed overhead AND variable overhead costs are INVENTORIABLE - meaning the costs can be allocated to the finished goods and WIP and sit on the B/S then reclass to I/S as expenses in the period sold.

Absorption Costing is full costing and GAAP.

Simple: Both concerns fixed overhead cost. Variable treats the fixed overhead cost as PERIOD cost (expense immediately to I/S) and Absorption books fixed overhead cost as PRODUCT cost (book to Inventory on B/S first until sold later)


Order of the Master Budget

Sales budget
Production budget*
Direct materials, direct labor, and manufacturing overhead budgets
Selling and administrative budgets
Budgeted income statement
Cash budget
Budgeted balance sheet

*We don't have to buy anything unless we are starting from scratch. This order of the Master Budget assumes we have been in business for some time and already established inventory levels.


What is carrying cost and what counts as a carrying cost?

Represents cost of holding inventory over time

Typical costs are rent and utilities on storage facilities, salaries for custodial personnel, insurance, write-off of obsolete inventory, lost interest on the funds tied up in inventory aka opportunity cost.

Remember that it costs money to hold inventory and it is expensive b/c your cash is tied up with the inventory until sold. You are foregoing the opportunity to use the money elsewhere than being tied up in inventory.


Economic Order Quantity (EOQ)

EOQ = square root of 2SD/Ci

S = setup OR ordering cost per order
D = annual Demand in units

C = Cost per unit
i = Carrying cost as % of inventory


Average inventory level using EOQ formula

Safety Stock + EOQ / 2 = Average Inventory Level


Reorder Point

RP = (Avg daily inventory level x LT / 360) + SS

LT = Lead Time
SS = Safety Stock

Avg daily inventory level = (BI + EI) / 2


Variable overhead efficiency variance

Actual quantity x Std Price
(Std quantity x Std Price)

= Variable overhead efficiency variance


Activity Based Accounting (ABC)

Basic premise is products and services require activities and these activities consume the company's resources


When forecasting for a flexible budget, what technique is appropriate and why?

A flexible budget includes variable and fixed costs.

The appropriate technique for forecasting the components of a flexible budget is Regression Analysis.

Regression Analysis takes past data and breaks it down into variable and fixed costs using:

y =a + b(x) where:

a is the constant (Fixed Cost)
b is the variable rate


Net Variance means...?

Total variance. Can be "material net variance", which really means material TOTAL variance.

Standard Cost @ standard qty
(Actual Cost @ Actual qty)

= Total variance


Labor Rate Variance

Actual Hours Worked
x (Actual Hourly Rate - Standard Hourly Rate)

= Labor Rate Variance


Safety Stock

(Max LT - Min LT) x Daily Usage = SS