Balanced Scorecard (BSC)
An accounting report that addresses a firm's performance in four areas: financial customer, internal business processes, and innovation and learning
Cost Leadership
Broad cross section of the market, lowest cost in the industry, limited selection of product line, lowest possible cost and essential features (production emphasis), Low price (marketing emphasis)
Differentiation
Focused cross section of the market, Unique product or service, Wide variety of products, innovation in differentiating products, premium price and innovative features (market emphasis)
Costs
incurred when a firm uses a resource for some purpose
Cost Pools
assembled meaningful groups of costs (by type of cost or source)
Cost drivers
Any factor that has the effect of changing the level of total cost
Cost Object
is any product, service, customer, activity, or organizational unto to which costs are assigned for some management purpose.
Cost assignment
The process of grouping costs into cost pools or ascribing them from cost pools to cost objects
Direct Costs
can be conveniently and economically traced to a cost pool or a cost object
Direct Materials
can be readily traced to outputs = purchase price of materials + freight - purchase discounts + reasonable allowance for scrap and defective units
Direct Labor
labor that can be readily traced to outputs = wages paid plus a reasonable allowance for nonproductive time
Indirect Costs
Cannot be traced conveniently or economically to a cost pool or object (they are allocated)
Indirect materials
cost of materials cannot readily be traced (rags, lubricant, small tools)
Indirect labor
labor costs that cannot be readily traced (manufacturing support costs)
Mixed Costs
refers to total cost when total costs include both variable and fixed cost components
Step Costs
When it varies with the cost driver, but in steps
Cost allocation
Is the assignment of indirect costs to cost pools and cost objects (Indirect costs)
Allocation bases
are the cost drivers used to allocate costs
Prime Costs
DM + DL
Conversion Costs
DL + OH
Unit Costs
or Average cost�is the total manufacturing cost (DM, DL, OH) divided by the number of units of output
Product Costs
include only the costs necessary to complete the product at the manufacturing step in the value chain
Period Costs
include all other costs incurred by the firm in managing or selling the product (selling/admin costs)
Relevant costs
is the range of the cost driver in which the actual value of the cost driver is expected to fall and for which the relationship to total cost is assumed to be approximately linear.
Opportunity costs
The benefit lost when choosing one option precludes receiving the benefits from the alternative option (could have worked, the $105 you would have made is the opportunity cost)
Sunk Costs
are costs that have been incurred or committed in the past and are therefore irrelevant in current decision making
Activity Based
Are developed at a detailed level of operations using activity analysis-a cost driver is determined for each activity (most accurate)
Volume Based
relate to the amount produced or quantity of service provided
Structural
facilitate strategic decision making because they involve plans and decisions that have long-term effects (scale, technology, experience and complexity are considered in hopes of improving competitive position)
Executional
facilitate operational decision making by focusing on short-term effects (workforce involvement, design of the production process and supplier relationships are considered in an attempt to reduce costs)
The role of relevant range in cost prediction
Is the range of the cost driver in which the actual value of the cost driver is expected to fall and for which the relationship to total cost is assumed to be approximately linear
Use of cost drivers for prediction vs. explanation
How accurately cost drivers can predict depends largely on how strong the historical correlation is between changes in the cost driver and changes in the cost; To use cost drivers to EXPLAIN changes in the related cost, you need a good theory or explanati
Correlation
when one things moves the other will move (temperature--A/C Bill)
Attributes of cost information for decision making
relate to the behavior of costs (how they change in response to one or more activities)
Fixed Costs
the portion of total cost that does not change with changes in output
Variable Costs
is the change in total cost associated with each change in quantity of the cost driver
Mixed Costs
refers to total cost when total costs include both variable and fixed cost components
Controllability of costs
is a basic consideration in evaluating managers and providing feedback
job costing
Is a product costing system that accumulates costs and assigns them to a specific job, customer, project, or contract. Uses a job cost sheet
process costing
used by a firm that produces one or a few homogenous products or services. It is economically impractical to trace most costs to individual products.
Actual costing
uses actual costs incurred for all product costs including direct materials, direct labor, and factory OH. Are rarely used because they can produce unit product costs that fluctuate significantly, causing potential errors in pricing, product lines, and pe
normal costing
uses actual costs for direct materials and direct labor, and normal costs for factory OH. Normal costing involves estimating a portion of OH to be assigned to each product as it is produced.
standard costing
uses standard costs and quantities for all three types of manufacturing costs, DM, DL, and OH. Standard costs are expected costs the firm should attain. They also provide a basis for cost control, performance evaluation, and process improvement.
Volume based costing systems assignment of OH costs
allocate OH using a cost-driver, such as DL hours, DL costs, or machine hours.
Activity based costing system assignment of OH costs
allocate OH to products using a cause-and-effect criterion with multiple cost drivers, both volume-based and non-volume based.
Decision-facilitating vs. decision influencing role of management acctg. Information
Some management accounting info helps facilitate wise decisions. Knowing how much it costs to make your product can help you set a selling price.
Cost Flows-Direct Materials
Debit:WIP INVENTORY, Credit: MATERIALS INVENTORY
Cost Flows-Direct Labor
Debit: WIP INVENTORY, Credit: ACCRUED PAYROLL
Cost Flows-Factory Overhead
Debit: FACTORY OVERHEAD, Credit: ACCRUED PAYROLL OR MATERIALS INV
PREDETERMINED OVERHEAD RATE (PDOH)
Estimated factory overhead divided by Estimated cost driver(labor hrs)
Actual overhead < applied overhead
overapplied (credit F-OH)
Actual overhead > applied (budgeted)
underapplied (debit F-OH)
Job costing in service industries
Used extensively in service industries such as advertising agencies, construction companies, hospitals, and repair shops as well as consulting, architecture, accoutning and law firms.
Operation costing
is a hybrid costing system that uses job costing to assign direct materials costs to jobs and process costing to assign conversion costs to products or services
What's wrong with assigning overhead costs using a volume-based system
tends to undercharge for low-volume complex products and overcharge for high-volume simple products�referred to as product cost cross-subsidization
How can you lower the overhead costs assigned to your department by a volume-based system
lower the cost driver or have other department lower production
Resource consumption cost drivers
measure the amount of resources consumed by an activity. Used to assign OH costs to activities (such as the number of items in a purchase or sales order)
Activity consumption cost drivers
measure the amount of activity performed for an object. Used to assign cost pool costs of activities to cost objects like products (as as the number of batches used to manufacture product Y
Step 1 in the ABC System
Identify resource costs and activities (Stage One)
Step 2 in the ABC System
Assign resource costs to activities (Stage One)
Step 3 in the ABC System
Assign activity costs to cost objects (Stage Two)
Activity analysis
The process includes gathering data from existing documents and records, as well as collecting additional data using questionnaires, observations, or interviews of key personnel
unit-level activity
is performed on each individual unit of product or service of the firm (e.g., direct materials)
batch-level activity
is performed for each batch or group of units of products or services (e.g., setting up machines or placing purchase orders)
product-level activity
supports the production of a specific product or service (e.g., engineering changes to modify parts for a product)
facility-level activity
supports operations in general (e.g., property taxes and insurance)
Activity Based Management
manages activities to improve the value of products or services to customers and increase the firm's competitiveness and profitability
Operational ABM
enhances operational efficiency and asset utilization and lowers costs; focuses on doing things right and performing activities more efficiently
Strategic ABM
attempts to alter the demand for activities and increase profitability through improved activity efficiency
Activity analysis
an organization assesses each of its activities based on its need by the product or the customer, is efficiency, and its value content
Value-added analysis
performed in an effort to eliminate activities that add little or no value to the customer; resource consumption can be reduced and the firm can focus on activities that increase customer satisfaction
High-value added activities
are necessary to meet customer requirements/needs. Increase significantly the value of the product or service
Low-value added activities
consume time resources, or space and add little in satisfying customer needs
Customer profitability analysis
identifies customer service activities, cost drivers, and the profitability of individual customers or groups of customers.
Customer cost analysis
is the first step in a customer profitability analysis; it identifies activities and cost drivers to service customers before and after sales.
Customer unit-level
resources consumed for each unit sold to a customer�such as sales commissions, shipping costs based on units sold or shipped
Customer batch-level
resources consumed for each sales transaction, such as order-processing costs or invoicing costs
Customer-sustaining costs
resources consumed to service a customer regardless of the number of units or batches sold�such as monthly processing costs and collection costs for late payments.
Distribution-channel costs
resources consumed in each distribution channel the firm uses to service customers�such as cost of operating a regional warehouse or distribution center...Amazon
Sales-sustaining costs
resources consumed to sustain sales and service activities that cannot be traced to an individual unit, batch, customer, or distribution channel�such as general corporate expenditures