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Absorbption and Variable Costing
- Absorption Costing Product Cost= Direct Materials, Direct Labor, Variable MOH,Fixed MOH. Period Cost= Variable Selling And administrative expenses, fixed selling and administrative expenses
- Variable Costing Product Cost= Direct materials, direct labor, Variable MOH. Period Cost= Fixed MOH, variable selling and administrative expenses, fixed selling.
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Acid Test Ratio
measures a company's ability to meet obligations withiout having to liquidate inventory. Quick assets include cash, marketable seurities, acounts receivable, current notes receivableQuick Assets / Current Liabilities
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Average Collection Period
- measures on average hw many days it taks to collect an account receivable
- 365 days / Accounts Receivable Turnover
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Average Sales Period
- measures how many days, on average it takes to sell the entire inventory
- 365 days / Inventory Turnover
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Define Budget
a detailed quantitaive plan fr acquiring and using financial and other resources over a specified forthcoming time period
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Order of Budgets
1) Sales Budget 2) Production budget 3) direct materials 4) direct labor 5) MOH 6) ending finised goods 7)selling and administrating expenses 8) cash budget 9) income statement 10)balance sheet
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Cash Budget Formula
Beg cash balance + receipts (collections from customers) = total cash avail. - disbursements (DM, DL, MOH, selling admin. , equip purch. , dividends) = Total disbursements (+,-) excess (deficiency of cash avail over disbursements)Financing: borrowing (at beg of qtrRepayments (end of year)Interest= End Cah balance
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Cash Budget is composed of four major sections
- The receipts section.
- The disbursements section.
- The cash excess or deficiency section
- The financing section
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Direct Labor Budget
- shows the direct labor-hours required to satisfy the production budget. By knowing in advance how much labor time will be needed throughout the budget year, the company can develop plans to adjust the labor force as the situation requires
- Units to be produced x DL time per unit (hr) = total DLH's needed x DL cost/hr = Tota DL cost
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Direct Materials Budget
- details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories
- Raw Materials needed to meet production schedule +desired ending inv of raw materials = Total Raw materials needed - beg inv of raw materials = Raw materials to be purchased
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MOH Budget
- lists all costs of production other than direct materials and direct labor
- Budgeted DLH's x Variable OH rate = total Variable OH + Fixed MOH = Total MOH - depreciation = cash needed (disbursement for MOH)
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Production Budget
- lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory
- Budgeted Unit sales + desired ending inventory (% of following qtr) = Total Needs - beg inventory (same as end inv of previous qtr) = Required Production
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Break Even in Dollar Sales Formula using both formulas
- Equation Method Profit = CM ratio × Sales – Fixed expenses (solve for sales)
- Formula Method Dollar sales tobreak even= Fixed expenses / CM ratio
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Break Even in Unit Sales Formula using both methods
Equation Method Profits = Unit CM × Q – Fixed expenses *Profits are zero at the break-even point. Formula Method Unit sales to break even= Fixed expenses /CM per unit
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Cost per Equivalent Unit Formula
- Cost of beg. Work in process inventory + cost added during the period
- Equivalent units of production
- * do that for both Materials and Conversion and add them up
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Contribution Format
(costs organized by behavior and used primarily by management) Sales - Variable expenses = Contribution Margin - Fixed Expenses = Net Operating Income
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Current Ratio Formula
- measures a company's short term debt paying ability.
- Current Assets / Current Liabilities
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CVP Formula
- Profit = (Sales – Variable expenses) – Fixed expenses
- Sales = Quantity Sold (Q) x Selling Price Per Unit (P)
- Variable Expenses= (Q) x Variable Expenses per unit (V)
- Profit= (QxP - QxV) - Fixed Expenses
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Contribution Margin Ratio
The CM ratio is calculated by dividing the total contribution margin by total sales.
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Define Cost Hierarchy the four levels
- -- Unit-Level
- -- Batch-Level
- -- Product Level
- -- Facility Level
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Cost Behavior true statements
- a.Fixed costs per unit vary with the level of activity.
- b.Variable costs per unit are constant within the relevant range.
- c.Total fixed costs are constant within the relevant range
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Comparing ROI to Residual Income
- ROI-- measure net operating income earned relative to the investment in avg operating assets
- Residual income -- measure net operating income earned less the minimum required return on avergage operating assets
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Common Fixed Cost
arise because of the overall operation of the copany and would not disappear if any particular segment were eliminated
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Cost Center
a segment whose manager has control over costs but not over revenues or investment funds
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Investment Center
A segment whose manager has control over costs, revenues, an investments in operating assets
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Profit Center
a segment whose manager has control over both costs and revevenues, but no control over investment fun
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Traceable Fixed Cost
arise because of th existence of a particular segment and would disappear over time if the segment itself disappeared
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Product Cost
Rent on equipment used in the factory, Lubricants used for machine maintenance, Soap and paper towels used by factory workers at the end of a shift. Factory supervisors' salaries, Heat, water, and power consumed in the factory,Manufacturing equipment depreciation. Direct materials costs. Electrical costs to light the production facility.
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Period Cost
Depreciation on salespersons' cars. Salaries of personnel who work in the finished goods warehouse. Advertising costs. The wages of the receptionist in the administrative offices.Property taxes on corporate headquarters.Sales commissions
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Variable Cost
- Total variable costs change when activity changes. Variable Cost per unit remains the same over wide ranges of activity
- Ex. 1.Merchandising companies – cost of goods sold. 2.Manufacturing companies – direct materials, direct labor, and variable overhead. 3.Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing. 4.Service companies – supplies, travel, and clerical.
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Fixed Cost
- Total fixed costs remain unchanged when activity changes. Avg fixed cost per unit goes down as activity level goes up.
- Ex. CommittedLong-term, cannot be significantly reduced in the short-term.
- -- Examples Depreciation on Buildings and Equipment and Real Estate Taxes. Discretionary May be altered in the short-term by current managerial decisions-- Examples Advertising and Research and Development
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Direct Labor and Indirect Cost
- Direct costs that can be easily and conveninetly traced to a unit of product or other cost object. Ex-- Direct material and direct labor
- Indirect costs that cannot be easily traced . Ex-- manufacturing overhead
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Debt to Equity Formula
- indicates the relative proportionsof debt to equity on a company's balance sheet
- Total Liabilities / Stockholders Equity
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Dividend Payout Ratio
Dividends Per Share / Earnings per share
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Dividend Yield Ratio
Dividends per share / Market price per share
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Define Direct Labor
labor costs that can be easily traced to individual units of product.Ex. Wages paid to automobile assembly workers
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Define Direct Materials and give examples
- Raw materials that become an integral part of the product and that can be conveniently traced directly to it.
- Ex. Radio installed in a car
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Earnings Per Share Ratio (EPS)
(Net income - Preferred Dividends) / Avg. number of common shares outstanding
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Gross Margin Percentage Ratio
Gross Margin / Sales
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Inventory Flow Formula
beginning balance + additions to inventory = ending balance + withdrawals from inventory
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Inventory Turnover
- measures how many times a companys inventory has been sold and replaced during the year
- COGS / Average inventory
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Job Order Costing Characteristics
- -- many different products are produced each period
- -- Products are manufactured to order
- -- the unique nature of each order requires tracing or allocating costs to each job, and maintaning cost records for each job.
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Unit-Level Used
- Activities include-- processing units on machines, processing units by hand, consuming factory supplies
- Activitity Measure--machine-hours, direct labor hours, units produced
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Batch-Level Used
- Activities include-- processing purchase orders, processing production orders, setting up equipment, handling materials
- Activity Measure-- purchase orders processed, production orders processed, number of setups, pounds of material handled
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Product Level
- Activities include-- testing new products, administering parts inventories, designing products
- Activity Measure-- hours of testing time, number of part types, hours of desing time
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Facility Level Used
- Activities include--general factory administration, plant building and grounds
- Activity Measure-- direct labor-hours, direct labor-hours
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Total Mixed Cost Line
- Y= a + bX
- Y=the total mixed cost
- a=the total fixed cost ( the vertical intercept of the line)
- b=the variable cost per unit of activity (the slope of the line)
- X=the level of activity
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High Low Method
- The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours. Ex Hours Cost
- High 800 9800
- Low 500 7400
- Change 300 2400 = $2400/300 hours= 8.00/hour
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Total Fixed cost in the High Low Method
- Total Fixed Cost = Total Cost – Total Variable Cost
- Total Fixed Cost = $9,800 – ($8/hour × 800 hours
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Manufacturing Cost Categories (Identify 3)
Direct Materials, Direct Labor, Manufacturing Overhead
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Non Manufacturing Cost (2)
- Selling costs = Costs necessary to get the order and deliver the product
- Administrative costs = All executive, organizational, and clerical costs.
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Net Present Value
determines whether or not the project is an acceptable investment. If NPV is POSITIVE- then the project is acceptable because it promises a return greater than the required rate of return. ZERO - then the project is acceptable because it promises a return equalto the required rate of return. NEGATIVE- then the project is not acceptable because it promises a return less than the required rate of return.
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Operating Leverage Formula
- is a measure of how sensitive net operating income is to percentage changes in sales. It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits.
- Degree of operating leverage= Contribution margin / Net operating income
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Overhead Applied Formula
POHR x Actual Activity
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Over/Under Applied
Use Applied Overhead = POHR x Actual Direct Labor Hours
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Overhead Cost per Unit Formula
- Expected Activity x Activity Rate
- Add them all up and divide by the number of units produced
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Total Overhead Applied
- Activity Rate x Actual Activity
- and add all the activities up
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Underapplied Overhead define
exists when the amount of overhead applied jobs during the period using the POHR is less than the total amount of overhead actually incurred during the period.
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Overapplied Overhead define
exists when the amount of overhead applied to jobs during the period using the POHR is greater than the total amount of overhead actually incurred during the period
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Operating Assets
include cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes. Examples of assets that are not included in operating assets (i.e., examples of nonoperating assets) include land held for future use, an investment in another company, or a building rented to someone else
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Predetermined Overhead Rate Formula
- estimated total MOH cost for the coming period
- estimated total units in the allocation base for the coming period (direct labor hours)
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Profitability Index
Net present value of project / Investment required
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Payback Period
- the length of time that i takes for a project to recover its initial cost out of the cash receipts that it generates.=
- Investment required / Net annual cash flow
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Price Earnings Ratio
Market Price Per Share / Earnings per share
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Process Costing
- -a company produces many units of a single product
- - one unit of product is indistinguishable from other units of product
- - identical nature of each unit of product enables assigning the same average cost per unit
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Product Costing
- --Weyerhaeuser (paper manufacturing)
- -- Reynolds Aluminum (refining aluminum Ingots)
- -- Coca-Cola (mixing and bottling beverages)
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Preference Decision
selecting from among several competing courses of action
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Return on Investment (ROI)
- ROI= Net operating Income / Avg operating assets
- Margin = Net operating Income / Sales
- Turnover= Sales / Avg operating assets
- ROI = Margin x Turnover
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Residual Income Formula
Net Operating Income - ( Avg operating assets x Min. required rate of return)
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Return on Total Assets Formula
[ Net income / (Interest Expense x (1 - Tax rate) ) ] / Avg. total assets
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Return on Common Stockholders Formula
( Net income - Preferred Dividends) / Avg. Stockholders equity
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Define Responsibility Accounting
Managers should be held responsible for those items and only those item that the manager can actually control to a significant extent
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Relevant Cost
a cost that differs between alternatives.
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Schedule of Cost of Goods Manufactured
- Raw Materials
- Beginning raw materials + Raw materials purchased = Raw Materials available for use in production - Ending raw materials inventory = Raw Materials used in production
- Manufacturing Costs
- Direct Materials + Direct Labor + Manufacturing Overhead = Total Manufacturing costs
- Work in Process
- Beg. work in process inventory + Total Mfg. cost = Total Work in process for the period - Ending work in process inventory = Cost of Goods Manufactured
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Schedule of Cost of Goods Sold
- WORK IN PROCESS
- Beg Work in process Inventory + Total Mfg costs = Total work in process for the period - Ending work in process inventory = Cost of Goods Manufactured
- FINISHED GOODS
- Beg. Finished goods inventory + Cost of Goods Manufactured = Cost of Goods Available for Sale - Ending finished goods inventory = Cost of Goods Sold
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Simple Rate of Return
- does not focus on cash flows rather it focuses on accountng net operating income.
- = Annual incremental net operating income / Initial investment
- * simple rate of return is not recommended because it ignores the time vaue of money andthe simple rate can fluctuate from year to year
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Traditional Approach Formula
(costs organized by function and used primarily for external reporting) Sales - Cost of Goods Sold = Gross Margin - Operating Expense = Net Operating Income
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Target Profit Analysis Formula
- Two ways to find the Target profit by
- The Equation forumula= Profit = Unit CM × Q – Fixed expenses
- The Formula Method= Unit sales to attainthe target profit= (Target profit + Fixed expenses) / CM per unit
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Price Variance
(AQ x AP) - ( AQ x SP)
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Quanitity Variance
(AQ x SP) - (SQ x SP)
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Material Price Variance
AQ ( AP - SP)
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Working Capital
- the excess of current assets over current liabilities.
- Current Assets - Current Liabilities
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