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AC2204

Definetions/Formulas/Theory

QuestionAnswer
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