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Variable Cost
- The total dolar amount varies directly proportional to the changes in activity
- Variable costs remain constant when expressed on a per unit basis.
- Generally talking about the activity base as being the total volume of good sand servies provided by the organization.
- Ex. Raw Materials and Direct Labor
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Activity Base
- Measuer of whatever causes the incurrence of variable cost
- AKA cost driver
- It is what it is varible with respect to
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True Variable Costs
- The amount used during a period will vary in direct proportion to the level of productions activity
- Ex. Direct Materials
- Any amounts purchased but not used can be carried over
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Step-Variable Costs
- Cost of a resource that is obtainable only in large chunks and that increases or decreases only in response to fairly wide changes in activity
- Ex. is maintence workers
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Relevant Range
- Range of activity within the assumptions made about cost behavior are reasonably valid.
- Where the curve and straight line are the same
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Fixed Costs
- Total fixed cost remains the same even when the activity level changes within the relevant range.
- Fixed cost per unit goes down as activty level goes up
- AKA capacity costs
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Commited Fixed Costs
- Investments in facilities, equipment, and the basic organization that can't be significantly reduced even for short periods of time without making fudamental changes
- Even if things cutback, these will remain the same.
- Long term desicsion
- Ex. Depreciation on buildings and equip., real estate taxes, insurance expenses, sallaries ot top dog
- Do become locked into the decison
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Discretionaly Fixed Costs
- Arise from annual diecisions by managment to spend on certain fixed cost items.
- AKA managed fixed costs
- Ex. Advertising, research, public relations, management develoment programs, internships for students
- Short term around a year
- Can be cut for short periods of time with minimal damage
- Are not locked into decsions
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Mixed Costs
- Contains both variable and fixed cost elements
- AKA Semivariable costs
- Fixed portion represents the minimum cost of having a service ready and abailabel for use.
- Variable portion represents the cost incurred for actual consumpiton of the service
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Mixed Cost Equation
- Y= a + bX
- Y= total mixed cost
- a = Total fixed cost
- b = variable cost per unit of activity (slope)
- X= Level of activity
- The steeper the slope, the higher the variable cost
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Scatter Plot
- Dependent variable: Cost (Y) since the amount of cost incurred during a period depends on the level of activity for the period
- Independent: Activity (X) since it causes variations in the cost.
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High Low Method
- Based on Rise over run formula
- Variable cost= Change in cost/Change in activity
- Fixed Cost element= Total cost-Variable cost element
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Least squares Regression Method
- Uses all of the data to seperate a mixed cost into a fixed and variable components
- Great because usues all data points and has the goodness of fit.
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Multiple regression
An analytical method that is used when the dependent variable (i.e. cost) is caused by more than one factor.
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Taditional appraoch Income statement
- Is organized in a functional format.
- Emphasizes functions of production, administration and sales.
- No attempt made to distinguish between fixed and variable costs
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Contribution Approach
Seperates costs into fixed and variable.
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Contribution Margin
Amount remaining from sales revenue after variable expenses have been deducted
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Budget
Quantitative plan for acquiring a using resouces over a specifed time period
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Budgeting
Act of Preparing the budget
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Budgetary control
Use of budgets to control an organizations activity
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Master Budget
- Summary of a compnay;s plans including spedific targetsfor sales, production, and finacnicng acitivities.
- Lays out the financial aspects of managment's plans for the future and assits in monitoring actual expenditures relative to those plans.
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Planning
Developing golas and preparing various budgets to achieve those goals.
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Control
Steps taken by management to increase the liklihood that all parts of the organization are working together to achieve the ogoals set down at the planning stage.
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Advantages of budgeting
- Define goal and objective
- Communicate plans
- Cordinate activites
- Uncover potential bottle necks
- Allocating resources
- Planning future
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Responsibility Accounting
A manager sould be held responsible for those items, and only those items, that the mangaer can actually control to a significan textent.
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Continuous or perpetual budget
- 12-month buget that rolls forward one month or quarter as the current monthr is completed.
- One month is added to the end of the buget as each month comes to a close
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Self-Imposed Budget or Participant
Budgent that is prepared with the fulll cooperaton and participation of managers al all levels
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Advantages of Self-Imposed
- More accurate
- More motivation
- no excuses
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Sales Budget
- Everything depends on this
- Determines how many units need to be produced
- Sales in Units * Unit price = Total sales
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Production Budget
- List # of units that must be produced to satisfy sales needs and to provide for desired ending inventory.
- Budgeted unit sales + desired ending inventory = Need
- Needed - Beginnign inventory = Production
- *Beginning inventory is the previous months ending inventory
- This is all done in the finished goods T accout
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Direct Materials Budget
- Raw materials that must be purchased to fulfill the production budget and to provide for adequate inventoires
- Ending from production * Pounds + EI =Need
- Need - BI = RM to be purchesed
- RM to be puchases * cost per pound
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Direct Labor Budget
- Shows the direct labor-hours required to satisfy the procution budget.
- # from production budget * hours per unit needed = Labor hours needed
- Labor hours needed * rate per hour = Total diret labor costs
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Manufacturing O/H budget
- List all costs of production other than direct materials and Labor.
- Direct labor hours * OH rate per hour = Variable MOH
- Take Variable MOH + Fixed= Total MOH
- Total MOH - depreciation (noncash charge) = Cash disbursements for MOH
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Ending Finished Goods Inventory
- This caculates the carrying cost of the unsold units.
- Direct materials (pounded needed per unit * cost per unit)
- Direct Labor (hours needed per product * labor rate per hour)
- MOH (hours per unit times predetermined OHR)
- Add these together to get the unit product cost
- Then Ending finished inventory units times this cost is ending finished inventory in dollars
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Predetermined OHR
Total MOH/ Total direct labor hours
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Selling and Administrative Budget
- Units sold from beginning * Variable rate= Variable part
- Add Fixed = total expenses selling..
- Total - depreciation = Cash disbursement for selling and administrative expenses.
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Cash Budget
- Detailed play showing how cash resources will be used.
- Takes all cash disbursements for each month and finds how they move
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Quantity Standard
Specify how much of an input should be used to make a product or provide a service
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Cost (price) standards
Specify how much should be paid for each unit of input
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Managment by exception
Deviations from standards deemed significant are brought to the attention of management
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Ideal Standard
Attained only under best circumstances. 100%
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Practical Standards
Tight but attainable
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Standard Pricer per unit
For direct material should reflect the final, delivered cost of materials, net of an discounts taken.
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Variences
Difference between standard and actual
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Standard Quantity/Hours allowed
Means the amount of an input that should have been used to produce actual output of the period
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Actual
What is acutally used in production.
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Standard
What was allowed for the period
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U
- Unfavorable
- More of product was used than standards allowed
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F
- Favorable
- Actual is less than standard Quantity
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Advantages of standard costs
- Managment by exception
- Promotes economy and efficiency
- Simplified bookeeping
- Enhances responsiblibliy accounting
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Problems with Standard Costs
- Standard cost reports may not be times
- Emphasis on negative
- FAvorable variences my be misinterpreted
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Balanced scorecard
Consits of integreated set of perfomances measures that are derived from and support the companies strategy throughout the organization
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Delivery Cycle time
The amount of time from when a customer order is recieved to when the completed order is shipped
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Throughput time
- The amount of time required to turn raw materials into completed products
- AKA. Manufacturing cycle time
- Made up of Pricess time, inspection time, move time and queue time
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Product time
The amount of time work is actually done on the product
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Inspection time
THe amount of itme spent ensuring that the product is not defective.
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Move time
Time required to move materials or partially completed product form workstation to workstation
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Queue Time
Amount of time a product spends waiting to be worked on, to be moved, to be inspected or to be shipped.
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Manufacturing Cycle efficiency (MCE)
Value-added time(proccess time)/Throuput(manufacturing cycle) time
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Delivery cycle time
Wait time + Throughput time
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