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Test 2 Review
Chapter 4, 5, and 6
77
Accounting
10/17/2011
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Term
Process Costing
 Definition
*Used when a single product is produced on a continuing basis or for a long period of time.
*Accumulate costs by department.
*Compute unit costs by department.
Term
Job-Order Costing
 Definition
*Used when many different jobs are worked on each period.
*Accumulate costs by individual jobs.
*Compute unit costs by job on the job cost sheet.
Term
Processing Department
 Definition
Any location in an organization where resources--materials, labor, or overhead-- are added to the product. Overhead is allocated to departments before being applied to units of product.
Term
Costs are traced and applied to departments in a _______ ____ ______.
 Definition
process cost system.
Term
Equivalent Units
 Definition
the product of the number of partially completed units and the percentage of completion of those units.
Term
Why do we need to calculate equivalent units?
 Definition
Department usually has some partially completed units in its beginning and ending inventory.
Term
Two half completed products are equivalent
 Definition
to one completed product.
Term
Equivalent units can be calculated two ways:
 Definition
*The First-In, First-Out Method.
*The Weighted-Average Method
Term
The FIFO method (generally considered more accurate that the weighted-average method) differs from the weighted-average method in two ways:
 Definition
*The computation of equivalent units.
*The way in which the costs of beginning inventory are treated.
Term
The FIFO method removes
 Definition
the equivalent units that were already in beginning inventory from the equivalent units as defined using the weighted-average method.
Term
The FIFO method isolates
Definition
the equivalent units due to work performed during the current period.
Term
When will the cost per equivalent unit always be the same under both the FIFO and under the weighted-average methods?
 Definition
if there is no beginning work in process inventory.
Term
Cost Per Equivalent Unit
 Definition
Cost added during the period/Equivalent Units of production
Term
The weighted-average method . . .
 Definition
*Makes no distinction between work done in prior or current periods.
*Blends together units and costs from prior and current periods.
Term
The equivalent units of production for a department
 Definition
number of units transferred to the next department (or Finished Goods) + the equivalent units in the department’s ending Work in Process inventory.
Term
Cost Per Equivalent Unit
 Definition
(Cost of beginning work in process inventory+Cost added during the period)/Equivalent Units of Production
Term
True Or False? Variable costs are constant if expressed on a per unit basis.
 Definition
True
Term
True or False
Total variable costs increase as the level of activity increases.
 Definition
True
Term
True or False
The average per unit increases as the level of activity increases
 Definition
False
Term
True or False
Total fixed costs decrease as the level of activity decreases.
 Definition
False
Term
True or False
Common Cost is one type of direct cost?
 Definition
False
Term
True or False
A sunk cost is usually a differential cost.
 Definition
False
Term
True Or False
Opportunity Costs are not usually recorded in teh accounts of an organization.
 Definition
True
Term
True or False
A particular cost may be direct or indirect depending on the cost object.
 Definition
True
Term
Total Variable Cost
 Definition
is proportional to the activity level within the relevant range.
Term
Variable Cost Per Unit
 Definition
variable cost per unit remains the same over wide ranges of activity.
Term
Total Fixed Cost
 Definition
Remains the same even when the activity level changes within the relevent range.
Term
Fixed Cost Per Unit
 Definition
goes down as activity level goes up.
Term
Direct materials is a true or proportionately variable cost because
 Definition
the amount used during a period will vary in direct proportion to the level of production activity.
Term
Small changes in the level of production will not likely have what effect on the number of maintenance workers employed?
 Definition
Small changes in the level of production are not likely to have any effect on the number of maintenance workers employed.
Term
Committed Fixed Cost
 Definition
Long-term which cannot be significantly reduced in the short-term.
Term
Discretionary Fixed Cost
 Definition
May be altered in the short-term by current managerial decisions
Term
Example of Committed Fixed Cost
 Definition
Depreciation on Buildings and Equipment and Real Estate Taxes
Term
Example of Discretionary Fixed Cost
 Definition
Advertising and Research and Development and
Training
Term
Cost Volume Profit Equation
 Definition
Y=a+bX
Term
Y=a+bX Y=?
 Definition
Total mixed cost
Term
Y=a+bX a=?
 Definition
Total fixed cost (veritcal intercept of the line)
Term
Y=a+bX b=?
 Definition
Variable cost per unit of activity (slop of line)
Term
Y=a+bX x=?
 Definition
Level of activity.
Term
The variable cost per hour of maintenance is equal
 Definition
to the change in cost divided by the change in hours.
Term
Total Fixed Cost
 Definition
Total Cost-Total Variable Cost
Term
Least-Squares Regression Method for Diagnosing Cost Behaviors
 Definition
A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the X and Y variables.
Term
Goal of Least-Squares Regression Method?
 Definition
to fit a straight line to the data that minimizes the sum of the squared errors.
Term
Least-Squares Regression Method uses how many data points to estimate the fixed and variabel cost components of mixed cost?
 Definition
All
Term
Least-Squares Regression Method Equation
 Definition
Y=a+bX
Term
The output from the regression analysis can be used to create an equation that enables you to
Definition
estimate total costs at any activity level.
Term
What provides the most accurate estimate?
 Definition
Least-Squares Regression because it uses ALL data points.
Term

Contribution Format

 Definition

                                  Total   Unit

Sales Revenue..............

Less:Variabel Costs.......____   ____

Contribution Margin.......          ____

Less:Fixed Costs...........____  

Net Operating Income....____
Term
The contribution margin format emphasizes cost behavior, by
 Definition
separating costs into fixed and variable categories.
Term
Contribution margin covers
 Definition
fixed costs and provides for income.
Term
Traditional Approach
 Definition

Sales...............................

Less:Cost of Goods Sold.....

Gross Margin.....................

Less:Operating Expenses....

Net Operating Income........
Term
Traditional Approach used primarily for ......?
 Definition
External Reporting
Term
Contribution Approach is used primarily for ....?
 Definition
Used primarily by management
Term
In traditional approach, costs are organized by .....?
 Definition
Function
Term
In Contribution Approach, costs are organized by ...?
 Definition
Cost organized by behavior
Term
Absorbtion Costing
 Definition
Treats ALL manufacturing costs as product costs, regardless of whether they are variable or fixed.
Term
The cost of a unit of product under the absorption costing method consists of?
 Definition

*direct materials

*direct labor

*both variable and fixed manufacturing overhead
Term
Variable Costing
 Definition
Only those manufacturing costs that vary with output are treated as product costs.
Term
Variable Costing Contribution Format Income Statement
 Definition

Sales.......................

Less: Variable Exp...... _____

Contribution Margin....

Less: Fixed Expenses.. _____

Net Operating Income. _____
Term
Contribution Margin (CM)
 Definition
is the amount remaining from sales revenue after variable expenses have been deducted.
Term
The contribution income statement is helpful to
Definition
managers in judging the impact on profits of changes in selling price, cost, or volume.
Term
The CM ratio
 Definition
dividing the total contribution margin by total sales.
Term
Equation Method to Break-Even
 Definition
Unit CM * Quantity - Fixed Expenses
Term
Unit Sales to Break Even
 Definition
Fixed Expenses/CM per unit
Term
Dollar Sales to Break Even
 Definition
Fixed Expenses/CM Ratio
Term
An advantage of a high fixed cost structure
Definition
is that income will be higher in good years compared to companies with lower proportion of fixed costs
Term
A disadvantage of a high fixed cost structure
Definition
is that income will be lower in bad years compared to companies with lower proportion of fixed costs.
Term
Companies with low fixed cost structures
 Definition
enjoy greater stability in income across good and bad years.
Term
Sales mix
 Definition
relative proportion in which a company’s products are sold.
Term
Different products have different
Definition
selling prices, cost structures, and contribution margins.
Term
When a company sells more than one product, break-even analysis
Definition
becomes more complex as the following example illustrates.
Term
Key Assumptions of CVP Analysis
 Definition
*Selling price is constant.
*Costs are linear and can be accurately divided into variable (constant per unit) and fixed (constant in total) elements.
*In multiproduct companies, the sales mix is constant.
*In manufacturing companies, inventories do not change (units produced = units sold).
Term
Dollar Sales to attain a target profit
 Definition
Target Profit + Fixed Expenses/CM Ratio
Term
Unit Sales to Attain a Target Profit
 Definition
Target Profit + Fixed Expenses/Unit CM
Term
Margin of safety in $'s
 Definition
Total budgeted (or actual) sales - BE sales
Term
Margin of Safety %
 Definition
Margin of Safety in Dollars/Total Budgeted (or actual sales)
Term
Degree of Operating Leverage
 Definition
Contribution Margin/Net Operating Income