Definitions

Question 1

Cost object

Answer 1

Anything for which costs are measured and assigned. Examples include: activities, products, plants, and projects

Question 2

Activity

Answer 2

An activity is a basic unit of work performed within an organization. Examples include materials handling, inspection, purchasing, billing and maintenance.

Question 3

Quality product/service

Answer 3

One that exceeds expectations

Question 4

Quality of performance

Answer 4

measure of how a product meets its specifications

Question 5

Defective product

Answer 5

One that does not conform to specifications

Question 6

Robustness

Answer 6

Exact conformance to target value

Question 7

Cost of quality

Answer 7

Costs that exists because poor quality may or may not exist

Question 8

Control activities

Answer 8

Performed by an organization to prevent or detect poor quality

Question 9

Failure activities

Answer 9

Performed by an organization or its customers in response to poor quality

Question 10

Failure costs

Answer 10

costs incurred by an organization because failure activities are performed

Question 11

Just-in-time manufacturing, what is it and how does it decrease costs?

Answer 11

• Production is made in cycles (“small factories”) when needed and quantity demanded
• Decreases costs by multitasking skills (eliminate e.g. inspection and decentralization.

Question 12

Lean manufacturing

Answer 12

Persistent pursuit and elimination of waste

Question 13

The controller (management accountant):

Answer 13

Supervises accounting departments. Participates in planning, controlling and decision-making activities Responsible for both internal and external accounting requirements

Question 14

The treasurer

Answer 14

Responsible for the finance function, raises capital and manages cash, investments and investor relations. In charge of credit and collections as well as insurance

Question 15

Direct tracing

Answer 15

Process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object.

Question 16

Overhead

Answer 16

production costs other than direct materials and direct labor, i.e. depreciation, taxes, indirect costs.

Question 17

Prime cost:

Answer 17

Sum of direct labor and direct material

Question 18

Conversion cost:

Answer 18

Sum of direct labor and overhead cost

Question 19

Period costs

Answer 19

Expenses not inventoried, and accounted for in the period they are incurred, e.g. marketing or administrative

Question 20

Learning-Curve

Answer 20

Labor hours per units decrease with units increase

Question 21

Experience-Curve

Answer 21

The more you perform a task, the lower the cost is of doing it

Question 22

Traditional cost accounting

Answer 22

Assumes that all costs can be classified as fixed or variable with respect to changes in the units or volume. Uses only unit-based activity drivers to assign costs

Question 23

Activity-based cost accounting

Answer 23

Emphasizes tracing over allocation (i.e. putting the costs to the direct cost object instead of allocating the indirect costs) Uses both unit- and non-unit based activity drivers

Question 24

Cost behavior

Answer 24

The term is used to describe whether a cost changes when the level of output changes, e.g. fixed or variable cost

Question 25

Practical capacity

Answer 25

The activity level where the activity is performed efficiently

Question 26

The industrial engineering method

Answer 26

A forward-looking method of determining, through physical observation and analysis, just what activities, in what amounts, are needed to complete a process.

Question 27

Operating leverage

Answer 27

Use of fixed costs to extract higher percentage changes in profits as sales activity changes. The greater the operating leverage, the more the changes in sales activity will affect profits. The mix of costs that an organization chooses can have a considerable influence on its operating risk profit level.

Question 28

Flexible budgets

Answer 28

Total budgeted production costs increase as output increases. Flexible budget variances are generated by comparing budgeted costs for the actual level of activity with actual costs for the same level

Question 29

Responsibility center

Answer 29

A part of the business whose managers is accountable for specified activities. Types e.g. revenue center (responsible only for revenues), profit center (responsible for both revenues and costs)

Question 30

Responsibility accounting

Answer 30

A system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome.

Question 31

Residual income

Answer 31

Difference between operating income and the minimum dollar return required by a company’s operating assets

Question 32

Economic Value Added (EVA)

Answer 32

After-tax operating profit minus the total annual cost of capital (i.e. After tax OI – Capital*WACC). If positive, the company is creating wealth. If negative, the company is destroying wealth

Question 33

Transfer prices

Answer 33

The prices charged for goods produced in one division and transferred to another. The area between the floor and the ceiling is called bargaining range. If division is operating on full capacity, it will only accept market price or more In general: Multinational companies might shift costs to high tax countries and revenue to low tax countries with the purpose to evade taxes.

Question 34

Competitive advantage

Answer 34

creating customer value for the same or lower cost than competitors

Question 35

Customer value

Answer 35

difference between customer realization and customer sacrifice (i.e. experienced value compared to what you pay).

Question 36

Internal linkages:

Answer 36

Relationships among activities within a firm’s value chain.

Question 37

External linkages:

Answer 37

Relationships among activities outside a firm’s value chain, i.e. with suppliers and customers.

Question 38

Value chain analysis

Answer 38

(Identifying and exploiting internal and external linkages to strengthen a firm’s strategic position)

Question 39

TQC:

Answer 39

Strives for a defect-free product design and manufacturing process

Question 40

AQL:

Answer 40

Permits or allows defects to occur provided that it do not exceed a predetermined level

Question 41

Value adding activities:

Answer 41

Necessary to remain in business. Contribute to customer value and/or help to meet an organization’s needs

Question 42

Value added costs:

Answer 42

The costs to perform value added activities with perfect efficiency. If the following conditions are met the activity is seen as value adding: The activity produces a change of state. The change of state was not achievable by previous activitiesThe activity enables other activities to be performed

Question 43

Non value adding activities:

Answer 43

Unnecessary and are not valued by internal or external customers. Fail to produce a change in the product’s state or replicate work because it wasn’t done correctly the first time

Question 44

Manufacturing cycle efficiency:

Answer 44

measures the proportion of manufacturing cycle time attributable to value-added processing: Without waste, ratio should be 1. Formula: Processing time/(Processing time + Non value added time, i.e. waste)

Question 45

Velocity:

Answer 45

number of units of output that can be produced in a given period of time

Question 46

Cycle time:

Answer 46

is the length of time it takes to produce a unit of output.

Question 47

Activity capacity:

Answer 47

The number of times an activity can be performed

Question 48

Kaizen costing:

Answer 48

characterized by constant , incremental improvements to existing processes and products. Kaizen costing is concerned with reducing costs by identifying small, continuous improvements for existing products and processes

Question 49

Non value added costs:

Answer 49

Costs that are caused either by non-value-adding activities or the inefficient performance of value-adding activities. Examples of non value adding activities: Scheduling, Moving, Waiting, Inspecting, Storing