Accounting 3110

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