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Accounting Test 2
Accounting
| Term | Definition |
|---|---|
| Mixed Costs | Costs that have both a fixed and variable component. Also known as semivariable cost. |
| The Three Methods Used to Analyze Mixed Costs | 1) scattergraph, 2) high-low method; 3) least-square regression method |
| Linearity Assumption | States that the relationship between Total Cost and Activity Level can be depicted by a straight line. Equation: y = a + b(x) |
| High-Low Method Equation | Variable cost per unit = difference in total cost (y1-y2)/ difference in activity (x1-x2) Find the two most extreme activity levels to plug into the above equation as (x), along with their corresponding costs (y). |
| Limitations of High-Low Method | 1) Uses only 2 data points; 2) The two most extreme activity levels may not be good indicators of normal operations |
| Least-Square Regression Method Definition | A statistical technique that finds the best fitting line for the given data points, using intercept (estimate of the fixed cost), x coefficient (estimate of the variable cost per unit), and R-square. |
| Intercept | Estimate of the fixed cost in the Least-Square Regression Method |
| x coefficient | This is the slope of the line, and it is also an estimate of the variable cost per unit. |
| Least-Square Regression Method Equation | Three ways of saying the equation: y = intercept + x coefficient(number of units) y = fixed cost + variable cost(number of units) y = a + b(x) |
| R-Square | Shows how well the regression model explains the relationship between the two variables. Has a value between 0-1, and the closer to 1 it is, the better the relationship is between the two variables |
| Contribution Margin Income Statement Definition | 1) is not GAAP compatible. Therefore, it's for internal users only. 2) does not differentiate between period and product costs. 3) based on whether the cost is variable or fixed. |
| Contribution Margin Income Statement Layout | Sales Revenue - Less Variable Costs = Contribution margin. Contribution margin -Less fixed costs = Net operating income. Five rows total. |
| Contribution margin ratio | Unit contribution margin/unit sales price |
| Full Absorption Costing Vs. Variable Costing | FAC = GAAP reporting and deals with period vs. product costs. VC = internal report and deals with variable versus fixed costs |
| Full Absorption Costing Income Statement | Sales - Less: Cost of Goods Sold = Gross Margin. Gross Margin - less: Nonmanufacturing expenses = Net Operating Income |
| Activity-Rate Method | Activity Rate = Total activity cost/total cost driver This is where you compute an activity rate for each activity cost pool, and multiply that amount times the number of units. |
| Activity-Proportion Method | Cost driver for each product/total cost driver of all products combined. This gives a %, which is then mutiplied against the total activity cost. Gets you to the same number as Activity Rate. |
| Gross Profit Margin | Does not subtract nonmanufacturing costs. Equation: sale price - total manufacturing cost = gross profit margin |
| Volume-Based Cost System | 1) determine cost driver; 2) calculate the predetermined overhead rate; 3) assign indirect costs to products or services using that rate. ... this cost system is called volume-based because it has only one cost driver, and it's related to volume. |
| Activity-Based Costing | A method that assigns indirect costs to products and services on the basis of the activities they require. |
| High-Low Method Definition | Provides a reasonable estimate of the variable and fixed costs. It is easy to use, however it may not always produce reliable results. The first step is to find the two most extreme activitiy levels. |
| Gross Profit Margin Percentage | Gross profit per unit/total sale price |
| First Stage of ABC | Assign indirect costs to activity pools in two steps: 1) identify and classify activities; 2) form activity cost pools and assign indirect costs to each pool. |
| Second Stage of ABC | Indirect costs are allocated from the activity cost pools to individual products and services. Two steps: 1) select a cost driver for each activity cost pool; 2) assign indirect costs to products or services based on their activity demands |
| Facility-Level Activities | Activities that support the entire company (all products, all customers). Doesn't get reported externally as part of COGS, per GAAP rules. Ex: company-wide advertising, plant supervision, human resources |
| Product-Level Activities | Activities that support a specific product line or service offering. These activities don't need to be repeated on the batch or unit level. Ex: R&D, product testing, designing a sales brochure for a specific product, creating a mold to make a product |
| Batch-Level Activities | Activities performed for a batch (group of units or customers) all at once. Ex: setting up machines, ordering rolls of steel, shipping a truckload of cars |
| Unit-Level Activities | Activities performed for each unit or customer individually. Ex: installing parts, painting final product, serving an individual customer |
| Non-Volume-Based Cost Driver | An allocation base that is not strictly related to number of units produced or customers served. Ex: number of batches or setup time, processing time per unit, number of quality inspections, number of design changes |
| Break-Even Analysis Definition | Determining the level of sales where total revenue = total costs, i.e. zero profits |
| Target Profit Analysis | Determining the level of sales needed to earn a target profit. It is an extension of the break-even analysis. |
| Break-Even Units Equation | Total Fixed Costs/Unit Contribution Margin |
| Break-Even Sales Revenue Equation(s) | 1) break-even units x unit sales price 2) total fixed costs/contribution margin ratio |
| Target Sales Revenue | 1) target units x unit sales price 2)total fixed costs + target profit/contribution margin ratio |
| Margin of Safety | Actual or budgeted sales - Break-Even sales |
| Effect on Profit | % Change in Sales x Degree of Operating Leverage |
| Degree of Operating Leverage Equation | Contribution Margin/Net Operating Income |
| Degree of Operating Leverage Definition | Measures the extent to which fixed costs are used to operate the business. The higher the fixed costs, the more a company is leveraged. For example: if a company has a DOL of 2, a 10% increase in sales will result in a 20% increase in profit. |
| Weighted-Average Unit Contribution Margin Equation | (Unit Contribution Margin x Unit Weight %) + (Unit Contribution Margin x Unit Weight %) <--- for all products |
| Multiproduct CVP Analysis Break-Even Units Equation | Total Fixed Costs/Weighted-Average Unit Contribution Margin |
| Weighted-Average Contribution Margin Ratio | Contribution Margin/Sales Revenue |
| Gross Profit Margin | Gross Profit Per Unit/Unit Selling Cost |
| Activity-Based Management | Uses Activity-Based Costing. Includes all the actions taken to improve a company's operations. One of its goals is to eliminate non-value-added activities in the company. |
| Just-In-Time Management | Requires forming a supply chain. Aims to increase product quality and reduce inventory levels by manufacturing products at "just the right time" and in "just the right quantity." |
| Target Costing | Used to determine what the unit cost of a product should be in order for the company to earn a target profit. Equation: Market Price - Target Profit = Target Cost |
Created by:
bethanyyyy