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A202 Chapter 9
Exam 2
19
Accounting
Undergraduate 2
11/12/2011

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Term
Profit margin
Definition
contribution margin less allocated capacity costs
Term
How can we systematically estimate the cost of capacity resources?
Definition
direct estimation and cost allocation
Term
Direct Estimation
Definition
systematically examining each cost account to evaluate whether a decision would change a capacity cost
Term
Allocation Rate
Definition
calculated by dividing the costs in the cost pool by the denominator value
Term
Overhead rate
Definition
another name for the allocation rate
Term
Overhead Cost
Definition
also known as capacity cost
Term
Burden
Definition
term also used to refer to the allocation rate
Term
How do allocations help long term decisions?
Definition
by breaking up capacity cost into pieces attributable to individual products. We can then use the product level estimates to compute expected costs for a new volume of operations or a revised product mix.
Term
The quality of a decision made using allocation depends...
Definition
on how well the allocation estimates the capacity cost associated with the various options
Term
Two methods to improve the accuracy of allocation procedures
Definition
1 use multiple cost pools and drivers
2 Exclude some capacity cost
Term
Plantwide rate
Definition
firms that use a single rate of allocation is often characterized as using a plantwide rate
Term
Departmental Rates
Definition
name for firms that use many different allocation rates
Term
Reasons to allocate cost
Definition
1 for long run decisions, estimate changes in capacity cost
2 calculate income in accordance with GAAP
3 Influence behavior
Term
Absorption Costing
Definition
required by GAAP which separates product costs from period costs, for external reporting purposes
Term
Variable or Direct Costing
Definition
this is the type of costing that splits cost into variable and fixed costs
Term
What is the only difference between absorption and variable costing?
Definition
the way they deal with fixed manufacturing overhead.
Term
Cost allocation can be used to meet goals how?
Definition
They can be used to determine how much cost is allocated during a certain period, effecting overall cost and profit
Term
How can allocation be used to effect behavior?
Definition
It can be used to defer one from using a specific resource or encourage them to use a different one
Term
Full Costing
Definition
Another term for Absorption Costing
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