Module 1 Flashcards
(22 cards)
Q: 🏷️ What are product (inventoriable) costs and period costs in cost accounting?
A:
Product (Inventoriable) Costs
Costs that are capitalized as inventory on the balance sheet
Become expenses (COGS) only when the product is sold
Include:
Direct materials
Direct labour
Manufacturing overhead (e.g., factory utilities, depreciation)
Period Costs
Expensed in the period incurred — not tied to production
Appear on the income statement immediately
Include:
Selling expenses
Administrative costs
R&D, advertising, office rent
🧠 Key Insight:
Product costs = tied to production → go to inventory first
Period costs = tied to time → go to expense immediately
Q: 🎯 What is a cost object in cost accounting?
A:
A cost object is anything for which a company wants to measure costs.
Examples:
A product
A service
A customer
A department
A project
A sales region
🧠 Key Insight:
A cost object is the target of cost measurement.
Once defined, all related direct and indirect costs are traced or allocated to it.
Q: 📈 What is the relevant range in cost accounting?
A:
The relevant range is the level of activity (output or volume) within which cost behavior assumptions remain valid.
Within the relevant range:
Fixed costs stay constant in total
Variable costs stay constant per unit
Outside the relevant range:
Fixed costs may jump (e.g., need a new facility)
Variable cost per unit may change (e.g., bulk discounts, overtime premiums)
🧠 Key Insight:
Cost predictions are only reliable within the relevant range — it’s the “safe zone” for linear cost behavior.
Q: 🛠️ What are prime costs and conversion costs in manufacturing?
A:
Prime Costs
Costs that are directly traceable to the product
Formula:
Prime Costs = Direct Materials + Direct Labour
Conversion Costs
Costs needed to convert raw materials into finished goods
Formula:
Conversion Costs = Direct Labour + Manufacturing Overhead
🧠 Key Insight:
Direct labour is included in both prime and conversion costs
Prime = what goes into the product
Conversion = what transforms it into a finished item
Discretionary Versus Engineered Costs
Q: ⚖️ What is the difference between discretionary and engineered costs?
A:
Engineered Costs
Have a clear cause-and-effect relationship with output
Vary directly with the level of activity
Are typically quantifiable and measurable
Examples:
Direct materials
Direct labour
Utility cost per machine hour
Discretionary Costs
Arise from periodic decisions about spending limits
Do not have a direct link to output level
Based on judgment, not efficiency
Examples:
Advertising
Executive training
R&D
🧠 Key Insight:
Engineered costs = efficiency-driven
Discretionary costs = decision-driven
Managing each requires different control tools
Q: 🎯 What are relevant costs in decision making?
A:
Relevant costs are future costs that differ between alternatives.
To be relevant, a cost must be:
1. Future-oriented — not already incurred (i.e., not sunk)
2. Incremental or avoidable — changes depending on the decision
Examples of relevant costs:
Direct materials needed for one option but not another
Extra labour cost for a special order
Avoidable fixed costs if a department is closed
Non-relevant (irrelevant) costs include:
Sunk costs (already incurred)
Allocated costs that don’t change between options
Committed costs that can’t be avoided
Q: 🔢 What is the contribution margin (CM), and how is it calculated?
A:
The contribution margin is the amount that remains from sales revenue after variable costs are deducted. It contributes to covering fixed costs and then to profit.
Formulas:
CM per unit = Selling price per unit − Variable cost per unit
Total CM = CM per unit × Units sold
CM ratio = CM per unit ÷ Selling price per unit
Q: 📊 What is Cost-Volume-Profit (CVP) analysis, and what is it used for?
A:
CVP analysis is a decision-making tool that helps managers understand the relationship between costs, volume, and profit.
Uses:
Determine the break-even point
Forecast operating income at different sales volumes
Analyze impact of cost structure and pricing decisions
Evaluate risk and margin of safety
Q: 🧮 What is the break-even point, and how is it calculated?
A:
The break-even point is the level of sales at which total revenues = total costs, so operating income is $0.
Formulas:
In units:
Break-even units = Fixed costs ÷ CM per unit
In dollars:
Break-even revenue = Fixed costs ÷ CM ratio
Tip: No profit, no loss at break-even.
Q: 💰 How do you calculate target operating income in CVP analysis?
A:
To find the sales needed to earn a specific target operating income, include the desired profit in the fixed cost total:
Formulas:
Units needed = (Fixed costs + Target operating income) ÷ CM per unit
Revenue needed = (Fixed costs + Target operating income) ÷ CM ratio
Q: 🚨 What is the margin of safety?
A:
The margin of safety tells you how much sales can fall before the company reaches break-even.
Formulas:
In dollars:
Margin of safety = Actual (or budgeted) sales − Break-even sales
As a %:
Margin of safety % = Margin of safety ÷ Actual (or budgeted) sales
Key insight: A higher margin of safety = lower risk of loss.
Q: ⚖️ What is operating leverage?
A:
Operating leverage measures how sensitive a company’s operating income is to a change in sales. It’s driven by the proportion of fixed costs in the cost structure.
Formula:
Degree of operating leverage = Total CM ÷ Operating income
This tells you:
“For every 1% increase in sales, operating income will increase by DOL%.”
Tip:
High fixed costs = high leverage = income grows faster (but riskier)
Low leverage = more stability, less upside
Q: 📶 What are step costs and mixed costs in cost behavior analysis?
A:
Step Costs (also called step-fixed or step-variable):
Costs that remain fixed over a small range of activity, but jump to a new level once a threshold is passed
Not linear — change in chunks
Example: One supervisor per 50 workers → hiring a 2nd supervisor at 51 workers
Mixed Costs (semi-variable):
Contain both fixed and variable components
Total cost increases with volume, but not proportionally
Example: Utility bill with a fixed monthly charge + per kWh usage fee
🧠 Key Insight:
Both break the clean fixed/variable split and are harder to model in basic CVP unless estimated using regression or high-low methods.
Q: 🧮 What is sales mix and how is it used in multi-product CVP analysis?
A:
Sales mix refers to the relative proportion of each product sold in a multi-product business.
Why it matters:
Different products have different contribution margins, so the overall CM per unit or dollar depends on the sales mix.
Used in CVP to calculate:
Weighted-average CM per unit or CM ratio
Break-even sales in units or dollars across all products
Target operating income in multi-product scenarios
Formula:
Weighted CM per unit = (CM of Product A × % of A in mix) + (CM of B × % of B) + …
🧠 Tip:
If the sales mix changes, the break-even point and CVP outcomes also change.
Q: 🛠️ What is the high–low method, and how is it used to estimate mixed costs?
A:
The high–low method estimates the variable and fixed components of a mixed cost using the highest and lowest activity levels.
Steps:
1. Identify the periods with the highest and lowest activity levels (units, hours, etc.)
2. Calculate the change in cost and change in activity
3. Estimate variable cost per unit:
Variable cost per unit = (Cost at high – Cost at low) ÷ (Activity at high – Activity at low)
4. Plug into:
Total cost = (VC per unit × activity) + Fixed cost
🧠 Tip:
Simple but not as accurate as regression — works best when cost behavior is consistent.
Q: 🔒 What factors should you consider when making a shutdown decision (e.g., drop a segment)?
A:
To decide whether to shut down or drop a segment, consider:
- Relevant Costs
Drop if avoidable fixed costs saved > CM lost
Keep if fixed costs will remain and CM covers them - Qualitative Factors
Will shutting down hurt customer relationships?
Will it damage the brand or affect other departments? - Capacity Use
Can freed-up capacity be used profitably elsewhere?
Formula:
Drop if:
CM lost < Fixed costs avoided
🧠 Tip:
Ignore sunk costs. Focus only on future avoidable costs and lost CM.
Q: 📌 What are the key assumptions of CVP (Cost-Volume-Profit) analysis?
A:
CVP analysis relies on the following core assumptions:
Costs are classified clearly as either fixed or variable
Selling price and variable cost per unit are constant
Total fixed costs remain unchanged
Production = sales (no change in inventory)
Only one product or a constant sales mix in multi-product settings
All costs and revenues are linear within the relevant range
🧠 Why it matters:
Violating these assumptions (e.g., cost jumps, pricing tiers) makes CVP less accurate.
Q: 🎯 What is a focus statement, and how is it used in strategy and performance management?
A:
A focus statement is a short, clear description of a company’s core strategic goal based on the Hedgehog Concept.
It defines the organization’s unique advantage and serves as the anchor for:
Balanced Scorecard objectives
Operating priorities
Communication of purpose to employees
Example:
“To be the lowest-cost provider of customized industrial solutions with unmatched reliability.”
🧠 Why it matters:
Without a focus statement, it’s hard to align goals, design effective measures, or choose between competing priorities.
Q: 🦔 What is the Hedgehog Concept in strategic management?
A:
The Hedgehog Concept helps organizations find long-term strategic focus by identifying the intersection of three key circles:
What you can be the best in the world at?
What you are deeply passionate about?
What drives your economic engine (how you create value)? (Often expressed as “revenue or profit per unit of measure”, such as:
profit per customer, profit per employee.)
🧠 Key Insight:
Great organizations simplify their strategy to the one thing they can do better than anyone else — and build everything around it.
This is the strategic core that should guide Balanced Scorecard objectives, resource allocation, and performance measures.
Q: 📊 What are non-financial performance measures, and why are they important?
A:
Non-financial performance measures track drivers of long-term success that don’t show up directly on financial statements, but are essential for executing strategy.
Examples by Balanced Scorecard Perspective:
Customer: Customer satisfaction, loyalty, on-time delivery
Internal Process: Cycle time, rework rate, order fulfillment accuracy
Learning & Growth: Employee satisfaction, training hours, system reliability
Why they matter:
-Financial results are lagging indicators
-Non-financials are leading indicators of future performance
-Help align day-to-day work with strategic goals
🧠 Key Insight:
Use non-financial measures to track the execution of strategy, not just its outcomes.
Q: 📊 What makes a good non-financial performance measure?
A:
A good non-financial measure must meet three key criteria:
- Clearly defined calculation
Can you explain how it’s measured?
Example: On-time delivery rate = Deliveries on time ÷ Total deliveries - Reliable data source
Is the data available, objective, and consistent?
Example: Pulled from customer service logs, internal tracking, or HR systems - Strategic relevance
Does the measure support the focus statement and strategic objectives?
Example: If the focus is “fast, customized service,” cycle time is relevant
🧠 Key Insight:
A non-financial measure is only useful if it is quantifiable, verifiable, and strategically aligned.
Q: 📝 What must a focus statement answer according to the Hedgehog Concept?
A:
A strong focus statement should clearly answer the three key questions of the Hedgehog Concept:
- What can we be the best in the world at?
-Your core competitive strength or capability - What are we deeply passionate about?
-What motivates your team, culture, or mission - What drives our economic engine?
-The key financial denominator (e.g., profit per customer, revenue per service hour)
🧠 Key Insight:
The focus statement is the strategic heartbeat of your organization — it gives direction to every Balanced Scorecard measure and performance target.
