Decision Making Flashcards
Total Cost Equation
TC = Fixed + Var (x) RELEVANT RANGE
1) TC = Dependent variable
2) Fixed = constant at any volume (fixed in total, variable per unit)
3) Var = variable cost (variable in total, fixed per unit)
4) X = volume/independent variable (cost driver)
Mixed Cost
Semi-variable (fixed and variable component)
High-Low Method
1) Figure out slope of the variable component based on highest and lowest observations
2) Take highest - lowest cost/difference in activity at those points
3) Intercept - where slope crosses Y axis
Cost Classifications (Product Costs)
Product costs are matched to product and not expensed until product is sold
1) Direct materials - materials physically included in final manufactured product (normal spoilage included)
2) Direct labor - wages paid to employees working with the direct materials to change them from raw state to finished goods
3) Overhead - all other costs related to manufacturing (indirect materials and indirect labor)
Prime Costs
Direct materials + direct labor
Conversion Costs
Direct labor + overhead
Period Costs
Expensed in the period incurred
1) Non-manufacturing costs
2) SG&A
3) Marketing, freight-out, re-handling costs
4) Abnormal spoilage
Cost Systems
1) Actual cost system
2) Standard cost system - all costs based on standards
3) Normal cost system - (DM & DL based on actual, MFG O/H based on standards)
Predetermined Overhead Rate
Estimated OH costs/Estimated DL $/hr =
Predetermined OH rate X actual production =
Applied OH into WIP
Debit: WIP Control
Credit: Factory OH Applied
Actual OH
Debit: Factory OH Control
Credit: Cash
Underapplied/Overapplied (Factory OH Applied & Control are closed out at the end of the period)
Debit: Factory OH Applied
Debit: COGS (plug) or Credit: COGS if overapplied
Credit: Factory OH Control
Flow of a Cost System (Cost of Sales calculations) (Merchandising Company)
BI + Purchases = COGAFS - EI = COGS
Flow of a Cost System (Cost of Sales calculations) (Manufacturing Company)
1) Raw Materials –> WIP –> Finished Goods –> COGS
2) Raw materials
Beg RM + Purchases = Available - Ending RM = Materials Used (DM used)
3) WIP
Beg WIP + DM Used + DL + Applied Mfg OH (from the WIP Control debit entry from applied OH) = WIP Avaliable - Ending WIP = Cost of Goods Manufactured/Completed (COGM)
4) Finished Goods
Beg FG + COGM = FG Available - Ending FG = COGS
5) COGS
COGS + Underapplied - Overapplied (based on difference between Factory OH applied and control entries closed out) = COGS
Most Common Base Selected
1) Direct labor hours ($ applied per direct labor hour)
2) Direct labor dollars (% of direct labor dollars)
3) Machine hours
Absorption/Full Costing/GAAP
Sales (Var COGS) (Fix COGS) = Gross Margin (Var SGA) (Fix SGA) = Operating Income
1) Under absorption, the fixed mfg overhead for whatever units aren’t sold are absorbed into inventory as product costs (or are expensed in the period in which the units to which fixed overheadhas been applied are sold)
2) Production > Sales = Higher operating income under absorption
3) Production < Sales = Lower operating income
4) Income difference will be number of units produced not sold x fixed overhead per cost driver
Direct/Variable/Prime/CM/Internal Costing
Sales (Var COGS) (Var SGA) = Contribution Margin (CM) (Fix Mfg Costs) (Fix SGA) = Operating Income
1) Fixed overhead is a sunk cost and is expensed in period incurred
2) Under both methods, DM, DL, and V OH are inventoriable costs
3) F OH included in absorption but not Variable
Cost-Volume-Profit (Break-Even in Units)
(FC + Profit/Loss)/(SP - VC(CM))
1) Break even when FC = CM
2) The SP - VC(CM) here is CM per unit
3) To find units at desired profit/loss is when you add or subtract profit or loss
Cost-Volume-Profit (Break-Even in Sales Dollars)
(FC + Profit/Loss)/CM Ratio (cm/sales price)
1) CM ratio is CM expressed as a percentage of sales
2) Can also find break-even units and multiply by sales price per unit
3) To find units at desired profit/loss is when you add or subtract profit or loss (in this case, it is the desired return on sales, express as a percentage of sales x sales needed for that return)
(FC + % of sales x sales) / CM ratio = sales (sales is the x variable)
Margin of Safety
Total sales - break even sales = margin of safety
1) Amount by which sales can drop before losses begin to be occurred
2) If operating at a profit and experience increase in costs (VC and/or FC) –> break-even point increased and margin of safety decreases
Standard Costing
1) Standard cost (DMPV)
2) Standard quantity (DMUV)
3) Standard rate (DLRV)
4) Standard hours (DLEV)
5) Predetermined overheadrate (SFR)
SQ X SP = Standard allowed for actual production
Variance Analysis (DM)
1) DM Price Variance (purchasing) = AQ (SP - AP)
2) DM Usage Variance (production) = SP (SQ - AQ)
Variance Analysis (DL)
1) DL Rate Variance (personnel) = AH (SR - AR)
2) DL Efficiency Variance (production) = SR (SH - AH)
Overhead Variances (OA)
Overhead Applied = SDLH (at actual) x POHR
Overhead Variances (OSV)
Overhead Spending Variance = (ADLH x PVOHR + Budgeted FO) - Actual OH (or FBE @ Actual - Fixed OH @ Actual)
Overhead Variances (OEV)
Overhead Efficiency Variance = PVOHR x (SDLH - ADLH) (or variable parts of FEB @ Standard - FEB @ Actual)
Overhead Variances (OVV)
Overhead Production Volume Variance = (SDLH x PFOHR) - Budgeted FO (or fixed part of Applied - Budgeted FO)
