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CMA Review terms/concepts
General review for managerial accounting certification
25
Accounting
Undergraduate 3
03/28/2007

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Term
What schedules are included in the Cash Budget?
Definition
This is arguably the most important budget and is certainly tested the most frequently on the examination. It consists of three schedules: cash receipts, cash disbursements, and summary balances.
Term
Define Activity-Based Budgeting.
Definition
This is an approach to budgeting in which a budget for each identified activity is developed, each with its separate operational driver identified. Thus, a larger set of cost drivers is included in the budget.
Term
Define Contingency Budgeting.
Definition
As its name implies, this is budgeting to provide resources should possible negative events occur, such as fire, flood, labor action, breakdown of equipment.
Term
Define Throughput time.
Definition
The time required to manufacture a unit of product. Also reffered to as cycle time.
Term
Define Job order process, include an example.
Definition
In a job order process, each unit of output is unique. Examples include a custom home builder and a custom furniture-maker.
Term
Define Batch process.
Definition
In a batch process, identical (or very similar) units of output are produced in groups called batches, but the units in one batch can differ significantly from the units in another batch. The units within each batch usually remain within close physical proximity throughout the production process.
Term
Define Sunk costs.
Definition
These are costs that were incurred in the past. Sunk costs are irrelevant for decisions, because they cannot be changed.
Term
Define Opportunity cost.
Definition
The profit foregone by selecting one alternative over another. It is the net return that could be realized if a resource were put to its next best use. It is “what we give up” from “the road not taken.”
Term
Define Relevant costs.
Definition
These are costs that are relevant with respect to a particular decision. A relevant cost for a particular decision is one that changes if an alternative course of action is taken. Relevant costs are also called differential costs.
Term
Define Variable costs.
Definition
Costs that vary in a linear fashion with the production level. However, when stated on a per unit basis, variable costs remain constant across all production levels within the relevant range
Term
Define Fixed costs.
Definition
Costs that do not vary with the production level. Total fixed costs remain the same, within the relevant range. However, the fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units.
Term
Define what is meant by the "relevant range."
Definition
The range of activity (e.g., production or sales) over which relationships are valid
Term
Define Mixed Costs.
Definition
Costs that include both fixed and variable cost aspects. For example, a cellular phone bill would be mixed cost if you went over your budgeted minutes.
Term
Define Product costs.
Definition
A product cost is any cost that is associated with units of product for a particular purpose. Hence, the identification of product costs depends on the purpose for which it is done.
Term
Define Inventoriable costs.
Definition
These are costs that are debited to inventory for either external or internal reporting purposes. For manufacturing firms, all inventoriable costs are manufacturing costs, but the reverse is not necessarily true.
Term
Define Period costs.
Definition
These are costs that are expensed when incurred, usually because they are not associated with the manufacture of products.
Term
Define Overhead costs.
Definition
Overhead costs (also called indirect costs) are associated with the cost object, but cannot be traced to the cost object in an economically feasible way.
Term
Define Cost driver and decribe its effect on cost as related to managerial accounting.
Definition
A cost driver is any factor that affects costs. A change in the cost driver will cause a change in the total cost of a related cost object. Any one cost object almost always has numerous cost drivers. This term applies to companies in all sectors of the economy and to all types of organizations.
Term
Define Conversion costs and name its two components.
Definition
Conversion costs include all manufacturing costs other than direct materials. So its two components would include Direct Labor and Manufacturing Overhead.
Term
Define Manufacturing overhead rate.
Definition
The overhead rate is the ratio of cost pool overhead dollars in the numerator, and the total quantity of the allocation base in the denominator:

Overhead rate = Overhead costs in the cost pool / Total quantity of the allocation base.
Term
Explain the purpose of a Predetermined overhead rate and how it is calculated. Include what is meant by over and under applied overhead.
Definition
Predetermined overhead is calculated by dividing the estimated total manufacturinf overhead costs by the estimated total units in the allocation base. This allows us to more efficiently account for overhead in the current period, rather than wait till after the period to get the exact numbers. Over and under applied overhead is describing the situation when at the end of the period, your prior estimate will end up being too high or too low.
Term
Explain cost averaging.
Definition
Method to determine the average cost per unit of a product or service by dividing the total cost by the activity base used in defining the cost; often is more relevant to decision making than actual costs. Pricing, performance evaluation, and control depend most often on average costs.
Term
Describe cost behavior.
Definition
How a cost reacts (goes up, down, or remains the same) relative to changes in some measure of activity (e.g., the behavior pattern of the cost of raw materials is to increase as the number of units of product made increases).
Term
Define Finished Goods Inventory.
Definition
Asset account used to accumulate the product costs (direct materials, direct labor, and overhead) associated with completed products that have not yet been sold.
Term
Explain the first-in, first-out (FIFO) method. Compare it to the last in, first out (LIFO) method.
Definition
Method used to determine equivalent units when accuracy is deemed to be important; accounts for the degree of completion of both beginning and ending inventories but is more complicated than the weightedaverage method. When used correctly, can keep inventory costs low. LIFO, keeps costs more up to date, by rotating stock in accounting records.
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