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U1 Flashcards

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1
Q

What is the formula for Cost of Inventory?

A

Direct Labour + Manufacturing Overhead + Direct Materials

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2
Q

: What are Prime Costs?

A

Direct Materials + Direct Labour

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3
Q

What are Conversion Costs?

A

Direct Labour + Manufacturing Overhead

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4
Q

What is the Total Cost formula?

A

Fixed Costs + (Variable Costs × Units)

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5
Q

Why are prime and conversion costs useful classifications?

A

They help managers analyze efficiency and production cost behavior.

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6
Q

What costs are traced into Work-in-Progress (WIP)?

A

Direct Materials and Direct Labour

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7
Q

How is Manufacturing Overhead treated in job costing?

A

It is allocated (not directly traced) into WIP

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8
Q

What is the typical flow of product costs in manufacturing?

A

Raw Materials -> WIP -> Finished Goods -> COGS

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9
Q

What triggers the movement of inventory to COGS?

A

A sale is made.

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10
Q

What are the 3 steps of job costing?

A

: 1) Identify the job (cost object)
2) Trace direct costs
3) Allocate MOH using a predetermined rate

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11
Q

What is the MOH rate formula?

A

Budgeted MOH / Budgeted Cost Driver Activity

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12
Q

Why use a predetermined MOH rate?

A

To estimate costs during the period and enable timely decision-making.

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13
Q

What happens if MOH is overapplied or underapplied?

A

Adjustments are made at period-end to COGS and/or inventory

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14
Q

Are period costs included in inventory?

A

No, they are expensed when incurred

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15
Q

Give examples of period costs

A

Admin salaries, advertising, head office expenses

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16
Q

Give examples of product costs.

A

Direct labour, materials, factory utilities, factory rent

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17
Q

Give examples of conversion costs

A

Factory supervisor wages, depreciation, utilities

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18
Q

What is the relevant range?

A

The activity range over which cost assumptions remain valid

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19
Q

What are step costs?

A

Costs that remain fixed over a range but jump when activity exceeds the range

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20
Q

Difference between step variable and step fixed?

A

Step variable changes in small steps (e.g., hourly staff), step fixed in large steps (e.g., new
facility)

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21
Q

What is the cost function formula?

A

Total Cost = Fixed Cost + (Variable Cost × Activity Level)

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22
Q

What is the High-Low Method?

A

A quick way to estimate variable and fixed costs using the highest and lowest activity levels

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23
Q

What are the steps in the High-Low Method?

A

1) Identify high and low activity points
2) Calculate variable cost/unit
3) Back into fixed cost
4) Form the cost function

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24
Q

What is a drawback of the High-Low Method?

A

It uses only two data points, which may be outliers.

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25
What is the Account Analysis Method?
A method using managerial judgment to classify accounts as fixed, variable, or mixed
26
When is account analysis useful?
When historical data is limited or managerial insight is strong
27
What is a controllable cost?
A cost that can be influenced by a manager
28
What is a non-controllable cost?
: A cost that cannot be influenced in the short term
29
What is the Controllability Principle?
Managers should only be held accountable for costs they can control
30
Why is controllability important in performance evaluations?
It ensures fairness and focuses managers on relevant decisions
31
What are the 3 types of costs in planning & control?
1) Discretionary (e.g., training, R&D) 2) Committed (e.g., leases, long-term contracts) 3) Engineered (e.g., direct materials)
32
What is an opportunity cost?
The benefit forgone when choosing one option over another
33
Is opportunity cost recorded in accounting?
No, it's used for decision-making only
34
What is a sunk cost?
A cost already incurred that cannot be recovered
35
Why are sunk costs irrelevant in decision-making?
Because they do not change with future choices
36
What are the 4 options for choosing an allocation base?
1) Actual Activity - accurate but delayed 2) Estimated Activity - timely but risky 3) Average Activity - smooths over time 4) Practical Capacity - avoids idle cost distortion
37
What are the consequences of choosing estimated activity for MOH?
If volume drops, cost per unit rises, leading to a "death spiral"
38
What is the benefit of using practical capacity?
It separates product cost from unused capacity cost
39
How do you fix overapplied MOH at year-end?
DR: MOH CR: COGS and/or FG/Raw Materials depending on what's affected
40
When is overhead underapplied?
When applied MOH < actual MOH incurred
41
What is the formula for Contribution Margin (CM)?
CM = Sales Price – Variable Costs
42
How is the Contribution Margin Ratio calculated?
CM Ratio = CM / Sales Price
43
How do you calculate break-even in units (single product)?
Break-Even Units = Fixed Costs / CM per Unit
44
How do you calculate break-even in dollars (single product)?
Break-Even ($) = Fixed Costs / CM Ratio
45
How do you calculate break-even for multiple products using WACM?
BE (units) = Fixed Costs / WACM per unit BE ($) = Fixed Costs / WACM ratio
46
How do you calculate WACM per unit?
WACM per unit = Total CM for all products / Total units
47
How do you calculate WACM ratio?
WACM Ratio = Total CM for all products / Total sales
48
Why is WACM important in multi-product break-even analysis?
It accounts for the relative proportion of each product’s contribution margin.
49
How do you calculate required units for a target profit?
TP (units) = (Fixed Costs + Target Profit) / CM per Unit
50
How do you calculate required sales for a target profit?
TP ($) = (Fixed Costs + Target Profit) / CM Ratio
51
How do you calculate target profit in units with income taxes considered?
TP = [Fixed Costs + (Net Profit ÷ (1 – Tax Rate))] / WACM per Unit
52
How do you calculate target profit in dollars with income taxes?
TP = [Fixed Costs + (Net Profit ÷ (1 – Tax Rate))] / WACM Ratio
53
Why is tax-adjusted target profit calculation important?
Because the company’s true goal is net profit after taxes.
54
What is the margin of safety (MOS) in units?
MOS (units) = Expected Units – Break-Even Units
55
How is the margin of safety calculated in dollars?
MOS ($) = Expected Sales – Break-Even Sales
56
What is the margin of safety percentage?
MOS (%) = (Expected Sales – Break-Even Sales) / Expected Sales
57
What does a high margin of safety mean?
Less risk of incurring a loss.
58
What is the Degree of Operating Leverage (DOL)?
DOL = CM / Operating Income
59
What does a high DOL indicate?
Greater sensitivity of profits to changes in sales (higher risk and reward)
60
What types of companies typically have high operating leverage?
Companies with high fixed costs and low variable costs (e.g., airlines, software)
61
What are relevant revenues?
Revenues that differ between alternatives and affect the decision.
62
What are relevant costs?
Costs that differ between alternatives and are avoidable.
63
What are avoidable fixed costs?
Fixed costs that can be eliminated if a decision is made.
64
What are sunk costs and are they relevant?
Past costs already incurred; they are not relevant.
65
Are opportunity costs relevant?
Yes, because they represent benefits forgone by choosing one option over another.
66
What is differential income?
The difference in total relevant revenues and total relevant costs between two alternatives.
67
When should a special order be accepted?
If incremental revenue exceeds relevant costs and qualitative factors are favorable.
68
What costs are relevant in a special order?
Incremental (avoidable) costs: DM, DL, variable MOH, and any added costs for the order.
69
What qualitative factors should be considered in special orders?
Long-term customer relationship Risk of undercutting existing prices Impact on brand perception Capacity constraints
70
What is the key question in make-or-buy decisions?
Is it cheaper to make the product internally or buy it from an external supplier?
71
What costs are relevant in make-or-buy decisions?
DM, DL, variable MOH Any avoidable fixed costs Purchase price from supplier
72
Are fixed overhead costs always relevant?
No, only if they are avoidable.
73
What qualitative factors are important?
Reliability and quality of supplier Control over production Long-term strategic impact
74
What is the constraint in decision-making?
The limited resource that restricts the company's ability to produce.
75
How do you evaluate products under constrained resources?
Calculate CM per unit of constraint Rank products from highest to lowest CM per constraint Allocate capacity to maximize total CM
76
What if a product has a higher CM per unit but lower CM per constrained resource?
Prioritize based on CM per constraint, not per unit.
77
What is TOC?
A management philosophy that focuses on identifying and managing constraints that limit a system's performance
78
What are the three performance metrics of TOC?
Throughput = Sales – Direct Materials Investment = Total assets used in operations Operating Costs = All costs to earn throughput, excluding DM
79
What are the five steps in the Theory of Constraints?
The rate at which the system generates money through sales.
80
What are the three levels of strategy?
Corporate-level: What industries/businesses to be in Business-level: How to compete in each industry Functional-level: How functions (marketing, ops, etc.) support business strategy
81
What are the three types of business-level strategies?
Differentiation: Unique product/service Cost leadership: Lowest cost structure Focused/Niche: Target a specific segment or market
82
What are examples of a differentiation strategy?
Apple (innovation), Lululemon (quality/performance wear)
83
What are examples of a low-cost strategy?
Walmart, Costco
84
What is a niche/focus strategy?
Competing by focusing on a narrow market segment with specific needs.
85
What is a vision statement, and who is it primarily targeted at?
A vision statement is a future-oriented, inspirational declaration of what the organization wants to become. It is primarily targeted at employees and leadership to guide long-term direction and motivation..
86
What is a mission statement, and who is it intended to communicate with?
A mission statement defines the organization's current purpose, what it does, who it serves, and how it does it. It is intended for both internal (employees, leadership) and external audiences (customers, shareholders, public).
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