Term
cost-volume-profit analysis |
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Definition
allows an entity to identify the level of production at which all its fixed costs are covered. |
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tangible inputs (and costs of bringing those inpts) to the manufacturing process, that can practicably be traced to the product |
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cost of human labor that can feasibly be traced to the product. |
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manufacturing overhead (MO) |
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onsists of all mfg. costs that are not DM or DL |
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tangible inputs to the mfg. process that cannot practicably be traced to the product. |
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cost of human labor connected with the mfg. process that cannot be practicably be traced to the product |
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DM + DL = costs directly attributable to a product |
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DL + MO = costs of converting raw materials into the finished product |
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incurred in getting the product from the factory to the consumer. |
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not directly related to producing or marketing the product. |
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can be traced to a particular cost object in an economically feasible way. |
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cannot be traced to a particular cost object in an economically feasible way. Thus, they must be allocated to that object. |
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account in which similar indirect cost elements with a common cause are allocated; MO is a common cost pool for mfg. costs. |
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important issue in mgmt. accounting |
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Definition
whether to capitalize costs in finished goods (FG) inventory or to expense them as incurred. |
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product/inventoriable costs |
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capitalized as part of FG inventory, eventually becoming part of CoGS. |
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expensed as incurred and are therefore excluded from CoGS |
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all mfg. costs (DM, DL, variable and fixed overhead) must be recognized as product costs. All S&A costs are period costs; required for GAAP reporting |
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only variable mfg. costs are treated as product costs; often used for internal reporting |
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excess of sales over CoGS that consists of var. and fixed mfg. costs. Only calculation can be used in GAAP. |
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excess of sales over sum of var. mfg. and var. S&A costs
CM = amount available to cover fixed costs Often used in managerial reporting purposes. |
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Term
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beg. inv. + purchases – end. inv. |
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Term
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beg. WIP inv. + total mfg. costs – end. WIP inv. |
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Term
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Definition
beg. DM inv. + net purchases (purchases – returns/discounts) + freight-in = DM avail. for use – end DM inv. = DM used in production + DL + MO = total mfg. costs + beg. WIP – end. WIP = CoGM + beg. FG = GAFS – end. FG = CoGS. |
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future costs that vary depending on the action taken. All other costs are constant and irrelevant. |
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have already been incurred or are committed to be incurred |
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cannot be eliminated w/out reducing the quality, responsiveness, or quantity of the output required by a customer or by an organization |
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incremental (differential) cost |
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Definition
difference in total cost between two decisions; incremental cost never includes fixed costs or sunk costs |
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maximum benefit forgone by using a scarce resource for a given purpose |
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Term
How do variable costs per unit vary in the short-run? How do total variable costs vary? |
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Definition
Var. cost per unit remains constant in the short-run. But variable costs in total vary directly and proportionally with changes in volume. |
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Term
How do fixed costs per unit vary in the short-run? How do total fixed costs vary? |
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Definition
Fixed costs in total remain unchanged in the short run regardless of production level. Accordingly, the amount paid for an assembly line is the same even if production is halted entirely. But fixed cost per unit varies indirectly with the activity level. |
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DM, DL, and mfg. supplies |
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Definition
rent, depreciation, and insurance. |
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mixed (semivariable) costs. How can mixed costs be estimated? |
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Definition
combine fixed and variable elements. Fixed and variable portions of a mixed cost can be estimate using the high-low method. |
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Term
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W/in relevant range, per-unit variable costs and fixed costs do not change. It is synonymous with the short run b/c all costs are variable in the long run. |
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Term
With greater investments in equipment... |
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Definition
FCs rise and lower total and per-unit VCs go down. |
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occurs under normal operating conditions. Essentially uncontrollable in the short run. Treated as a product cost. |
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not expected to occur under normal, efficient operations; it is typically treated as a periodic cost |
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consists of materials left over from the production process
If scrap is sold, it reduces factory overhead. If it is discarded, it is absorbed into the cost of the good output. |
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In decision making, an organization must focus on only relevant revenues and costs. To be relevant, the revenues and costs must Be made in the future. Differ among the possible alternative courses of action. |
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may be saved by not adopting a particular option. Avoidable costs might include variable raw material costs and DL costs. |
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one that cannot be avoided if a particular action is taken |
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Term
incremental (marginal or differential) costs |
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Definition
Through the relevant range, the incremental cost of an additional unit of output is the same. Once a certain output level is reached, however, the current production capacity is insufficient and another increment of fixed costs must be incurred. |
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Definition
opposite of capital budgeting decisions- to terminate an operation, product or product line, business segment, branch, or major customer rather than start one.
In general, if the marginal cost of a project exceeds the marginal revenue, the firm should disinvest. |
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Term
four steps in a disinvestment decision |
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Definition
Identify fixed costs that will be eliminated by the disinvestment decision. Determine the revenue needed to justify continuing operations. In the short run, this amount should at least equal the variable cost of production or continued service. Establish the opportunity cost of funds that will be received upon disinvestment. Determine whether the carrying amount of the assets is equal to their economic value. If not, re-evaluate the decision using current fair value rather than the carrying amount. |
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Term
relevant cost in a disinvestment decision |
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Definition
When a firm disinvests, excess capacity exists unless another project uses this capacity immediately. The cost of idle capacity should be treated as a relevant cost. |
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Term
special orders when excess capacity exists |
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Definition
When a mfg. has excess production capacity, no opportunity cost involved when accepting a special order. Company should accept the order if the minimum price for the product is equal to the variable costs. |
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Term
special orders in the absence of excess capacity |
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Definition
When a mfg. lacks excess production capacity, the differential (marginal or incremental) costs of accepting the order must be considered. B/c variable costs of the production run, the firm must consider the opportunity cost of redirecting productive capacity away from (possibly more profitable) products. |
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Definition
explains the effects of changes in assumptions about cost behavior and the ranges about which those assumptions are valid. These changes may affect their relationships among revenues, variable costs, and fixed costs at various production levels. Thus, CVP analysis allows management to determine the probable effects of changes in sales volume, sales price, product mix, etc. |
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Term
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Definition
Cost and revenue relationships are predictable and linear; these relationships are true over the relevant range of activity and specified time span. Unit selling prices and market conditions are constant. Change in inventory and insignificant in amount, so production = sales. Total var. costs change proportionally w/volume, but unit var. costs are constant over the relevant range. DM and DL are var. costs. Fixed costs remain constant over the relevant range of volume, but unit fixed costs vary indirectly w/volume. Classification of fixed vs. variable can be affected by the time frame being considered. |
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Term
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Definition
level of output at which all fixed costs and cumulative variable costs have been covered. Op. inc. = 0. Each additional unit above the breakeven point generates operating profit. |
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Term
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Definition
breakeven (units) = fixed costs / UCM
unit CM = unit selling price – unit var. cost |
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breakeven (dollars) = fixed costs / CMR
CM ratio = UCM / unit selling price |
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total $ sales – breakeven point in $ |
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target operating/pre-tax income |
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treated as an additional fixed cost sales - var. costs - fixed costs = OI |
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target unit volume for OI |
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Definition
(fixed cost + target OI)/UCM |
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target dollar sales volume for OI |
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Definition
(fixed cost + target OI)/CMR |
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target net/after-tax income |
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Definition
NI = OI- (OI * Tax rate) = OI * (1 - Tax rate) OI = NI / (1 - Tax rate) |
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Term
target unit volume for NI |
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Definition
(fixed costs + [target NI / (1- Tax rate)]) / UCM |
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CVP for multiple products |
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Definition
When adapting CVP analysis to a multiproduct situation w/ var. costing, it is assumed that the product mix is maintained throughout the relevant range. |
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Term
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Definition
weighted average of individual UCMs for individual products |
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Term
target unit volume for multiproduct CVM |
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Definition
(FC + Target OI) / weighted-average UCM |
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