Term
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Definition
| the way that cost changes when some other level of activity changes |
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Term
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Definition
| total cost increase as the level of activity/volume increases; cost of unit remains unchanged as level of activity increases |
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Term
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Definition
| total cost remains unchange as level of activity/volume increases; cost per unit decreases as level of activity increases |
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Term
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Definition
| Total cost increases as level of activity/volume increases; cost per unit decreases as level of activity increases |
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Term
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Definition
| Cost behavior that can be described using the equation of a line |
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Term
Name 5 methods of determining cost Function
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Definition
- Account Analysis method
- Conference method
- Industrial engineering method
- High-low Analysis
- Regression Analysis
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Term
| Why do we want to estimate cost function? |
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Definition
- We can use cost function to estimate future cost
- To determine the usefulness of a possible cost driver
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Term
| What 2 assumptions are used in estimating cost functions? |
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Definition
- Variations in a single activity (cost driver) explains the variations in costs
- within the relevant range of activity, cost behavoir is linear
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Term
| How should the intercept of the cost function be interpreted? |
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Definition
| the intercept represents the fixed cost associated with operating in the relevant range |
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Term
| Discuss the advantages and disadvantages of the high-low and regression methods for estimating a cost function. |
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Definition
- both are quite simple
- high-low only requires 2 data points. Regression requires more than 2 data points. the more data points the more the regression works
- the quality of high-low estimates are limited because they only use 2 data points
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Term
| In the high-low method, which data points should be used? |
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Definition
the highest and lowest level of activity. these points define the relevant range of the cost function
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Term
| What are some common non-linear cost functions? |
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Definition
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Term
| What is the different between step-variable and step-fixed? |
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Definition
| step-fixed cost remain the same over a wide range of activity in the relevant range, in other word there are very step within the relevant range |
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Term
| What is an inventoriable cost? |
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Definition
cost that are considered as assets on the balance sheet when they are incurred but are expensed as cost of goods sold when the product is sold
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Term
| What are the three types of companies and which of their costs are inventoriable? |
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Definition
- Service- No inventoriable cost
- Merchandising- cost of purchasing inventory and having it delivered
- Manufacturing- Direct labor, Direct material and Manufacturing overhead
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Term
| Are all inventoriable cost manufacturing cost? |
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Definition
| No. Merchandinsing firms have inventoriable cost but no manufacturing costs |
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Term
| Are all manufacturing costs inventoriable under GAAP? |
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Definition
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Term
| When are manufacturing and inventoriable costs expensed? |
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Definition
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Term
| What do we call costs thatare not inventoriable? |
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Definition
| Period cost. Those cost are expensed as soon as incurred |
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Term
| Do service companies have any inventoriable costs? |
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Definition
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Term
| What are the three types of inventoriable manufacturing costs? |
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Definition
- Direct Material
- Direct Labor
- Manufacturing overhead
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Term
| What is absorption costing? |
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Definition
| inventory costing method where all variable and fixe manufacturing cost are included as inventory- this is a requirement by GAAP |
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Term
| What does cost flow show us, in general? |
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Definition
| Cost flows show as how manufacturing cost moves through inventory accounts on the balance sheet |
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Term
| What is the total maufacturing costs? |
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Definition
| The cost of direct material, direct labor and manufacturing overhead that was incurred during the period of production |
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Term
| What does cost of goods manufactured represent? |
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Definition
| the cost associated with units that were completed in the period |
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Term
| What does cost of goods sold represent? |
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Definition
the cost associated with units that were sold during the period
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Term
| What is the most likely cost behavior for direct material? |
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Definition
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Term
| What is the most likely cost behavior for direct labor? |
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Definition
| the process that is used to determine direct labor forces it to be variable |
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Term
| What is the most likely cost behavior for manufacturing overhead? |
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Definition
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Term
| What is idle time and how is the cost of idle time determined? |
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Definition
| idle time is the indirect cost that results when the circumstance prevent a worker from doing work. it is calculated as his normal wage multiplied by the number of idle hours |
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Term
| What is overtime premium and how is it determined? |
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Definition
| Overtime premium is an indirect labor cost that results when a worker works more than 40hrs. it is calculated by multiplying the hours more than 40 worked times the difference between the overtime wage and the normal wage |
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Term
| Why might absorption costing methods motivate mangers to over-produce inventory? |
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Definition
| absorption costing allows fixed manufacturing cost to be stored in inventory instead of being expensed. Overproduction means less fixed manufacturing cost are expensed which results in higher income. Managers rewarded based on income, then have an incentive to overproduce in order to increase income. |
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Term
| What are some ways to discourage overproduction of inventory? |
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Definition
1. Careful budgeting and inventory planning to prevent managers the freedom to overproduce.
2. Counter earnings based incentives with penalties for excess inventory, spoilage or obsolescence
3. Move away from annual evaluation periods.
4. Include inventory related non-financial measures of performance in the evaluation process.
5. Evaluate managers using internal measures of income such as from variable costing or throughput costing instead of absorption costing.
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Term
| Can variable costing be used for financial statement preparation. |
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Definition
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Term
| What is the only difference between absorption and variable costing? |
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Definition
| The treatment of fixed cost. In variable costing, fixed cost are treated like a period cost and are expensed in a lump sum. In absorption costing, fixed cost are only expensed when the units are sold. |
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Term
| Why is the contribution margin format of the income statement used in variable costing? |
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Definition
To emphasize the lump sum treatment of fixed manufacturing costs.
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Term
| What is another name for variable costing? |
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Definition
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Term
| What is throughput costing? |
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Definition
| Throughput costing is similar to direct costing except that the only inventoriable cost is direct materials. All overhead and labor is treated like a period cost and expensed in the period it is incurred. |
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Term
| How do differences in sales volume versus production volume affect income calculations from absorption and variable costing? |
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Definition
1. If sales is greater than production then net income will be lower under absorption than under variable costing.
2. If production is greater than sales then net income will be higher under absorption than under variable costing.
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Term
| What is cost assignement? |
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Definition
| General term for assigning direct and indirect costs to a cost object. Direct cost assignment is called tracing. Indirect cost assignment is called allocation. |
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Term
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Definition
| anything for which a measurement of cost is desired. Common cost objects are units and departments. |
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Term
| What is a direct cost of a cost object |
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Definition
| Cost that can be traced specifically to the cost object. |
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Term
| What is an indirect cost of a cost object |
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Definition
| Cost that cannot be specifically traced to a cost object. Indirect costs are allocated. |
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Term
| What are the four reasons we allocte costs |
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Definition
1. Provide information for economic decisions
2. Motivate managers and other employees
3. Justify cost or compute reimbursement acts
4. Measure income and assets-
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Term
| What criteria should be used in allocating cost? |
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Definition
1. Cause and effect
2. Benefit received
3. Fairness and equity
4. Ability to bear cost
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Term
| Is any criteria generally more important than the others? |
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Definition
| Yes, cause and effect is the best criteria if it is available. |
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Term
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Definition
| costs associated with a grouping of indirect cost items. |
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Term
| What is an allocation base? |
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Definition
| A systematic way of linking indirect costs to a cost object. For example, an activity that is expected to affect indirect costs and is measurable for all cost objects. |
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Term
| To allocate indirect cost to a cost object, what must we know? |
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Definition
1. total cost pool
2. total allocation base
3. quantity of allocation base used by cost object
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Term
| What do we get if we divide cost pool by the total allocation base? |
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Definition
| The allocation rate: we then multiply this rate base the quantity of allocation base used by the cost object to assign indirect cost to the cost object. |
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Term
| What do we get if we divide quantity of allocation used by a the cost object by the total allocation base? |
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Definition
| The percentage of the total allocation base used by the cost object. We then multiply this percentage by the cost pool. |
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Term
| When might a company use a job cost system? |
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Definition
| When the primary cost object is a unit or several units of a distinct product or service produced as a single job. |
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Term
| How do we trace direct costs in a job cost system? |
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Definition
| Direct material is generally traced with material requisition forms while direct labor is traced with time cards |
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Term
| What are examples of types of companies that migth use job cost system? |
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Definition
| Audit, tax, engineering, construction |
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Term
| Describe a normal costing system? |
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Definition
| traces direct costs to the cost object and allocates indirect costs based on budgeted costs and budgeted quantity of allocation base. |
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Term
| Describe an actual costing system? |
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Definition
| traces direct costs to the cost object and allocates indirect costs based on actual costs and actual quantity of allocation base. |
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Term
| What are the trade-offs between using a normal and actual costing system? |
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Definition
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Term
| How do manufacturing costs flow to the income statement in a job cost system? |
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Definition
manufacturing costs are are assigned to specific jobs and the cost of those jobs flow through the inventory accounts with the jobs. Total manufacturing costs equals the total direct labor, direct materials, and manufacturing overhead assigned to jobs during the period. The balance of the WIP account is equal to the sum of the costs assigned to jobs that are not yet complete. COGM for a period is equal to the sum of the cost of jobs that are completed in the period.
The balance of the finished goods account is equal to the sum of the costs assigned to jobs that are completed but not yet shipped.COGS for a period is equal to the sum of the cost of jobs that are sold shipped during the period.The balance in the COGS account equals the sum of the cost of the jobs that have been completed and shipped.
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Term
| What non-manufacturing costs might be considered when determining product costs? |
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Definition
- Research
- Design
- Distribution
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Term
| Can product costs that include non-manufactruing costs be used in the financial statements? |
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Definition
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Term
| Describe an over-costed product: |
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Definition
| An over-costed product is a product that has been assigned more cost than it should basedo n the relative resources that it required. |
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Term
| What problems can occur if products are over-costed? |
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Definition
1. Products that are unknowingly over costed might in turn be over-priced resultign in lost sales.
2. managers may waste valuable resources trying to reduce costs unnecessarily.
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Term
| Describe an under-costed product: |
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Definition
| An under-costed product is a product that has been assigned less cost than it should based on the relative resources that it required. |
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Term
| What problems can occur if products are under-costed? |
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Definition
1. Products that are unknowingly under-costed might in turn be under-priced resulting in less profit.
2. Managers may not see a point in spending time trying to reduce costs.
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Term
| What is product cross- subsidization? |
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Definition
| Cross-subsidization means that any time a product is under-costed, there is at least one other product over-costed. |
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Term
| What are three signs that a company might need a refined cost system? |
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Definition
1. Increase in product diversity
2. Increase in indirect costs
3. Competition
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Term
| What are three guidelines for refining a cost system? |
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Definition
1. Direct cost tracing
2. More indirect cost pools that are homogenous – same cost driver
3. Allocate costs based on cost driver, if available then benefits received
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Term
| Describe an activity based costing system. |
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Definition
| An activity based costing system is a refined costing system that identify cost pools whose are categorerized as either unit level costs, batch-level costs, product-sustaining costs, or facilitating costs. |
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Term
| What is a unit-level cost? |
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Definition
cost of activiites performed on each of product.
Example- Machine operation, distribution
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Term
| What is a batch-level cost? |
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Definition
cost of activiites related to a group of products
Example: machine setups, order entry, invoicing,
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Term
| What is a product-sustaining cost? |
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Definition
Cost of activities to support an individual product regardless of units or batches produced.
Examples - Design, research product specific testing
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Term
| What is a facility-sustaining cost? |
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Definition
Cost of activities that cannot be traced to products but serve the organization as a whole.
Example - Administartive resources
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