Cost Accounting Flashcards
Breakeven Analysis
There are a number of underlying assumptions to breakeven analysis that need to be considered in the calculation and interpretation of breakeven computations.
One of these assumptions is that the behavior of total cost and total revenue is linear, even though in actuality it may not be.
It is important to note that under breakeven analysis, the linearity assumption is only applicable for a particular relevant range of activity and is not assumed for all levels of activity.
Since the actual behavior of total cost and total revenue within a relevant range is usually close to being linear, this assumption will only slightly affect the precision and reliability in a given breakeven calculation.
Breakeven Analysis
Breakeven analysis is based upon several simplified assumptions.
Included in these assumptions is that variable costs are constant per unit and, for a multiproduct company, that a given sales mix is maintained for all volume changes.
When absorption costing is used, operating income is a function of both production volume and sales volume. This is because an increase in inventory levels causes fixed costs to be held in inventory while a decrease in inventory levels causes fixed costs to be charged to cost of goods sold.
These fluctuations can dramatically affect income and the breakeven point. On the other hand, when variable costing is used the same amount of fixed costs will be deducted from income whether or not inventory levels fluctuate. As a result, the breakeven point will be the same even if production does not equal sales.
By-Product
A by-product may be developed into a main product.
Classifies and accounts for one product as a by-product rather than as a main product because it has low sales value when compared to the main products.
Some manufacturers choose not to develop a by-product into a main product due to the lack of facilities, cost, lack of fit with other main products, etc. However, this does not preclude others from taking the by-product and developing it into a salable finished product (for example, sawdust and wood ships manufactured into particleboard).
Conversion Costs
conversion costs are direct labor and manufacturing overhead
Indirect Materials
The use of indirect materials would be recorded by a credit to stores control (i.e., inventory of direct and indirect materials) and a debit to manufacturing overhead (MOH) control
Job Costing
Job order costing is used to accumulate costs related to the production of large, relatively expensive, heterogeneous (custom‐ordered) items.
Costing follows the general rules for manufacturing cost flows and is relatively straightforward:
- Costs are accumulated in individual work‐in‐process (WIP) accounts called job order cost sheets, the total of which is accounted for in the WIP control account.
- Overhead (OH) is applied based on a predetermined OH
- When goods are completed, costs flow on to finished goods and when sold, costs flow into cost of goods sold (COGS
Job Order Costing
Job-order costing systems are designed to accumulate costs for tasks or projects that are unique and nonrepetitive.
Service organizations are interested in identifying the costs applicable to each customer and/or each service call.
Period Cost vs Conversion Cost
- A cost that attaches to the physical units is termed a product cost.
- Product costs would include direct materials, direct manufacturing labor, and manufacturing overhead.
- Conversion cost is the cost involved in converting the direct materials into a finished product.
- Conversion cost is composed of direct manufacturing labor and manufacturing overhead. Any cost that does not attach to the physical units would be termed a period cost and would be expensed as incurred. Therefore, a cost is either a period or a product cost. Electricity cost, whether variable or fixed, would be included in manufacturing overhead and classified as conversion costs, and therefore cannot be classified as a period cost.
Period Cost vs Product Cost
- Product costs are costs that can be associated with the production of specific revenues.
- These costs attach to a physical unit and become expenses in the period in which the unit to which they attach is sold.
- Product costs include direct labor, direct material, and factory overhead.
- Period costs, on the other hand, cannot be associated with specific revenues and, therefore, become expenses as time passes.
Predetermined Overhead Rate
An overhead application rate is commonly called a predetermined overhead rate and is computed as follows:
Estimated Variable Overhead Costs
Estimated Activity Level
Estimated figures are used because actual figures are not known at the beginning of a period.
Prime Costs
Prime costs are direct labor and direct materials,
Prime vs Conversion Costs
- Think of prime costs as being the “primary” costs (i.e., direct materials and direct labor) of the product
- Think of conversion costs as the “costs of converting” direct materials into a product by using direct labor and overhead
Process Costing
Process costing is used to accumulate costs for mass‐produced, continuous, homogeneous items, which are often small and inexpensive.
Since costs are not accumulated for individual items, the accounting problem becomes one of tracking the number of units moving through the work‐in‐process (WIP) into finished goods (FG) and allocating the costs incurred to these units on a rational basis.
The cost allocation process is complicated because:
- There may be partially completed items in beginning and ending inventories.
- Each of the three factors of production (labor, material, and overhead) may be at different levels of completion, making it necessary to perform separate calculations for each factor.
- Some costs do not occur uniformly across the process; this is particularly true for direct materials (DMs). This is why the two categories of the factors of production indicated are typically DMs and conversion costs (i.e., direct labor [DL] and overhead [OH]). DL and OH are normally included together because they are typically uniformly incurred
Product Cost
Costs that are assigned to goods for resale.
Product costs are assigned to such goods to move the costs to cost of sales when they are sold and to value inventory for financial statement purposes.
