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Cost Acct Exam 2
Exam 2 Chapters (6,7,8,9)
| Term | Definition |
|---|---|
| Production Departments | Departments that produce goods or services that are sold to consumers |
| Support Departments/service departments | departments that facilitate and support production departments but do not produce goods or services that are sold to consumers |
| Support Services | all services provided by support departments that facilitate and support production departments |
| Single-Rate Method | a cost-allocation method that allocates all support-department costs (both fixed and variable) to cost objects using a single rate |
| Dual-Rate Method | a cost-allocation method that uses two rates (one for fixed costs and one for variable costs) to allocate support-department costs to cost objects |
| Cost Driver | a variable that has a causal relationship with costs, such that more or less of the cost driver will result in more or less cost |
| Direct Method | a method of allocating support-department costs to production departments. Under this method, no support costs are allocated between support departments |
| Step-Down Method | a method of allocating support-department costs to production departments. This method ranks support departments where high-rank SD allocate costs to low-rank SD as well as to production departments. Low-rank SD DO NOT allocate costs to high-rank SD |
| Reciprocal Method | a method of allocating support department costs in which all support departments allocate costs to other departments as well as to production departments |
| Joint Costs | production costs that are shared between multiple production lines |
| Joint Products | products that result from a single production process |
| Split-off Point | the point of production at which joint production processes are complete and subsequent costs can be traced to unique product lines |
| Seperable Costs | any cost incurred after the split-off point in a production process. These costs are assigned to specific products rather than allocated to multiple products |
| By-Products | incidental products that are created during a manufacturing process. have minimal economic value |
| Physical Units Method | a method of allocating joint costs such that all product lines are allocated joint costs on the basis of a consistent physical measurement such as quantity, weight, length, or volume |
| Sales Value at Split-Off Method | a method of allocating joint costs such that joint costs are prorated to product lines based on each product line's sales value at the split-off point |
| Net Realizable Value (NVR) Method | a method of allocating joint costs such that joint costs are prorated to product lines based on each product line's net realizable value, which is calculated as revenue minus reperable costs |
| Constant Gross Margin Method | a method of allocating joint costs such that all product lines are allocated the amount of joint costs necessary to produce the companywide gross margin |
| Gross Profit | profit minus cost of goods sold (which includes both separable and joint costs) |
| Gross Margin | gross profit divided by revenue |
| Job-Costing/Job-Order Costing | a costing system in which all production costs are accumulated by job |
| Process Costing | a costing system in which all production costs are accumulated by process |
| Equivalent Units of Production | the number of completed physical units that are equivalent to a company's partially completed units |
| Weighted-Average Method | a process-costing method that combines costs and units produced in a period with the costs and units in beginning work-in-process inventory |
| First-In, First-Out (FIFO) Method | a process-costing method that does not mx production costs or units between periods. As a result, this method provides very accuate cost information about the costs and units produced in each period |
| Conversion Costs | Direct labor and manufacturing overhead costs incurred to convert raw materials into a finished product |
| Cost Per Equivalent Unit of Production | the assigned value for the cost of materials, labor, and overhead to each equivalent unit of production |
| Transferred-in Costs | total production costs (both direct materials and conversion costs) accumulated in prior production processes |
| Management Control System | a set of rules, activities, and information that an organization uses to make and execute planning and control decisions and to direct employee behavior |
| Formal Controls | the explicit rules, procedure, safeguards, incentive plans, and information systems employed in an organization |
| Cost Accounting System | the system that aggregates, monitors, and reports information about revenues, costs, and profitability through the use of forms, processes, controls, and reports |
| Human Resources Management System | the system that helps the organization manage all aspects of human resources, including compliance with employment laws. Inculdes info about compensation and benefits, time and attendance, and employee training |
| Quality Management System | the system that records and tracks product quality, including production, defects, and customer service data, such as late deliveries and product ratings |
| Informal Controls | an organization's norms, morals, ethical values, and shared culture, which all guide employees' behavior and strategic decision making |
| Behavior Controls | control activities that direct or restrict the way employees carry out their jobs |
| Output Controls | control activities that measure the results of employees' work and evaluate employee performance |
| Decentralized Organization | an organizational structure in which senior management delegates a significant amount of decision-making authority and responsibility to business-unit (sub-unit) managers |
| Autonomy | freedom to make decisions |
| Centralized Organization | an organizational structure in which senior management maintains decision-making and control responisbilities |
| Suboptimal Decision Making | occurs when a decision benefits one business unit at the expense of the overall organization |
| Responsibility Center | a sub-unit of an organization that has its own goals and responsibilities. May be classified as a cost center, revenue center, profit center, or investment center |
| Cost Center | a sub-unit that does not generate revenue but supports the business and incurs costs |
| Revenue Center | a sub-unit responsible for sales, which may be defined by the product line or the geographic region served |
| Profit Center | a sub-unit in which the manager is responsible for revenues and costs |
| Investment Center | a sub-unit in which the manager is responsible for the costs, revenues, and investment decisions |
| Investments | the assets or working capital used to generate income |
| Performance Measurement | the process of collecting and analyzing info about organizational performance and comparing it to expectations and goals |
| Return on Investment (ROI) | a financial performance measure calculated as a measure of profit (or operating income) divided by a measure of investment |
| ROI Formula | operating income / investment operating income / total assets |
| DuPont Method | a method for calculating return on investment developed in 1912 by Donaldson Brown. This method deconstructs ROI into return on sales and asset turnover, which helps determine how each aspect of the business is performing |
| Return on Sales | the profit earned for each dollar of sales |
| Return on Sales Formula | Operating income / sales |
| Asset Turnover | a measure of how effectively assets are used to generate sales |
| Asset Turnover Formula | total sales / average total assets |
| Residual Income (RI) | a measure of sub-unit's (or organization's) financial success. This measures the amount of net income form an investment in assets that remains after the investment has been recovered |
| Residual Income Formula | Operating income - (minimum rate of return*Investment) operating income - (minimum rate of return * total assets) |
| Imputed Investment Cost | the implicit cost of using an asset. used to calculate residual income |
| Minimum Rate of Return / Required Rate of Return / Cost of Capital | the lowest acceptable amount of earnings from an organization's investment in assets. Also known as the required rate of return or cost of capital |
| Economic Value Added (EVA) | a financial performance measure that focuses on the profit generated during a period. This considers the after-tax operating income and the weighted average cost of capital to evaluate performance |
| EVA Formula | after-tax operating income - (Weighted average cost of capital * total assets - current liabilities) |
| Weighted Average Cost of Capital (WACC) | the after-tax average cost of all long-term investments. Used in the calculation for EVA to measure a sub-unit's financial performance |
| WACC Formula | Step 1: interest rate * (1- tax rate) = percentage used in WACC Step 2: (% found * long-term liabilities) + (cost of capital % * Total Equity) / (LT liabilities + total equity) = % used in EVA formula |
| Transfer Price | |
| Market-Based Transfer Price | a transfer price based on the prices that outside suppliers are currently charging |
| Cost-Based Transfer Price | a transfer price that allows a business sub-unit to recover its costs. it can cover the sub-unit's variable production sots, variable and fixed costs, or the full cost of production |
| Hybrid Transfer Price | a transfer price that takes into consideration both the market price and the production costs. Often the price is set through negotiations between the buying and selling sub-units |
| Budget | an estimate of the activities that will be carried out over a specified future period of time |
| Master Budget | the overall budget for the organization as a whole |
| Operating Budget | budget of all the resources needed to execute an organization's operations, including sales, production, purchasing, and marketing |
| Financial Budget | budget describing the sources and uses of funds for planned capital expenditures and the operations anticipated during the period |
| Static Budget | a budget that is set at the beginning of the period and does not change until the budget period is over |
| Budget Period | the period of time that a budget covers |
| Budget Cycle | the process of developing a master budget 1: business units prepare and submit budgets, 2: senior management approves the budgets 3: operations are executed during the budget period 4: performance is evaluated and compared to the budget |
| Sales Budget | budget that identifies expected (or forecasted) sales in units and dollars |
| Sales Forecast | a prediction of the amount of sales that will take place during the budget period |
| Production Budget | a calculation of the total units that must be produced during the budget period to meet expected sales requirements |
| Beginning Finished Goods Inventory | the number of units that have already been produced and are available for sale |
| Ending Finished Goods Inventory | the amount of finished goods that the company would like to have left over after all sales are complete at the end of the period |
| Budget Production ( in units) Formula | Budget sales units + target ending finished goods inventory units - beginning finished goods inventory units |
| Direct Materials Cost Budget | the budget containing each direct material item and its costs |
| Bill of Materials (BOM) | a list of all the raw materials and the quantity of each needed to produce one unit of an item |
| Route Sheet | used to summarize a manufacturing process; identifies the workstation where the work is done, as well as the planned time spent at each station |
| Manufacturing Overhead Budget | indirect costs that are essential to the manufacturing of goods |
| Cost of Goods Sold Budget | the budget used to plan for and track cost of goods sold |
| Pro Forma Financial Statements | financial statements that reflect the organization's performance if it operates as expected |
| Sensitivity Analysis | a financial modeling tool used to examine how changes to the underlying assumptions in the model may affect the outcome |
| Flexible Budget | a tool that reproduces the budget at various levels of unit sales |
| Stretch Target | a challenging but achievable target; a budget tool used to encourage employees to work hard |
| Controllabillity | the extent to which employees have influence over the costs, revenues, and other performance factors that are used to evaluate them |
| Participative Budgeting | bottom-up budgeting that allows employees who are affected by the budget to be involved in developing it |
| Authoritative Budgeting | top-down approach to budgeting in which top management makes all budgeting decisions |
| Negotiated Budgeting Process | a budgeting process in which employees develop initial budgets based on their knowledge of operations and expectations, which they submit for review and approval from top management |
| Budgetary Slack | a built-in budget cushion that increases the chances of meeting or beating expectaitons |
| Myopia | decision making that focuses on the short term, often to the detriment of long-term goals |
| ESG | Environmental, social, and governance; organizations are strongly encouraged to consider these issues when conducting operations |
| Carbon Offsets | an activity that prevents the release of , reduces, or removes carbon emissions from the atmosphere |
Created by:
Tehya.Grode
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