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AC2204
Definetions/Formulas/Theory
| Question | Answer |
|---|---|
| Manufacturing Costs: Three main areas | Direct material, direct labour and manufacturing overheads. |
| Direct materials | |
| Direct labour | labour that can be directly traced to a unit of the finished good. |
| Manufacturing Overheads | all costs that are not attributed to direct labour or direct materials. |
| Conversion Costs | Direct labour + mfg o/h |
| Prime Costs | direct labour + direct material |
| Product Costs | all costs associated with the purchasing or manufacturing of goods. |
| Period Costs | all costs that are not product costs |
| Variable Costs | is a cost that varies, in total, direct proportion to level of activity |
| Fixed Costs | is a cost that remains constant, in total, regardless of activity levels. |
| Cost object | anything for which cost data are desired. |
| Direct costs | A cost that can easily and conveniently be traced to a particular cost object under consideration. |
| Indirect Costs | A cost that cannot easily and conveniently be traced to a cost object. |
| Common Cost | A cost that is common to a number of costing objects and cannot be traced to them individually. |
| Differential Costs | A difference in cost between any two alternatives. |
| Incremental Costs | An increase in cost between two alternatives |
| Opportunity Cost | the potential benefit that is foregone when an alternative is chosen. |
| Sunk Cost | A cost that has already been incurred. it cannot be changed by any decision made now or in the future. |
| Breakeven Point definition | occurs where total revenue equals total cost. |
| Breakeven Point formula | Fixed expenses/Contribution per unit |
| Contribution Ratio | Contribution per unit/Selling price per unit |
| Margin of Safety | (Actual Sales - BEP Sales)/Actual Sales |
| Underlying Assumptions of Breakeven Analysis | -Fixed costs remain constant through all levels of activity. -Variable costs per unit remain constant through all levels of activity. -Selling price remains constant |
| Limitations of CVP Analysis | -can only be applied to one product. -assumptions do not represent reality. -assumes that sales and production are equal. |
| Operating Leverage | a measure of how sensitive net profit is to a percentage change in sales. |
| Operating Leverage (formula) | Contribution Margin/Net Profit. |
| Absorption Costing | external framework |
| Variable Costing | internal framework |
| Advantages of Variable Approach | -easy for management to understand. -consistent with CVP analysis. -Allows for flexible budgeting -Consistent with standard costs -easier to estimate probability -stock changes has no affect on profit. |
| Process costing | |
| Job order costing. | products are manufactured to order. |
Created by:
Asinn98
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