AYB225 Lecture Notes - Cost Driver, European Cooperation In Science And Technology, Greeting Card

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lemonotter502

20 Jan 2017

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Lecture 1 role of management accounting, cost concepts. The item that the firm is costing is called the cost object or cost objective . It may be: a whole process, a department, or a product (a motor car)/service (a hair cut)/job (laying mr smith"s new carpet). Costing principles are identical whether we are referring to a product, a service, or a job. A cost driver (or activity measure/activity level) is something which causes a cost to vary (increase or decrease), and which is measurable and able to be linked to the product, service or job which the firm is costing. No method is mandated therefore firms will make a decision frequently on cost-benefit grounds: there is no obvious cost driver. The full costs of a manufacturer are associated with the functional activities of the firm listed below (called the value chain because all of these functions add value to the product):

Related Questions

1. Total assets turnover measures the ability of a firm to:

a. Generate profits on sales

b. Generates sales through the use of assets

C. Buy new Assets

D. Move inventory

E. Cover long term debt.

2.Managerial accounting :

a. focuses only on historical data

b. is govern by GAAP

c. focuses primarily on the needs of personnel within theorganization.

d. provides information for parties external to theorganization

e. focuses on the financial statement and other financialreports.

3. which of the following statement about similarities betweenprocess costing and job costing are true.

I. Both systems assign production costs to unit of output.

II. Both system require extensive knowledge of financialaccounting.

III. The flow of costs through the manaufacturing accopunts isessentially the same.

A. I only

B. I and III

C. II and III

D. III only

E. I,II, and III

4. The comprehensive set of budget that serves as a companyoverall financial plan si commonly known as:

A. Integrated budget

B. a Pro-forma budget

C. Master budget

D. a master budget

E. a rolling budget

5. A flexible budget:

A. classifies budget request by activity and estimates thebenefits arising from each activity.

B. presents a statement of expectations for a period of time butdoes not present a firm committment.

C. presents the plan for only one level of activity and does notadjust to changes in the level of activity.

D presents the plan for a range of activity so that the plan canbe adjust for changes in the activity level.

6. Which of the following is the correct method to calculate apredetermined overhead rate?

A. Budgeted total manufacturing cost budgeted amount of costdriver.

B. Budgeted overhead cost budgeted amount of cost driver

C. Budgeted amount of cost driver budgeted overhead cost

D. Actual overhead cost budgeted amount of cost driver

E. Actual overhead cost actual amount of cost driver.

7.Which of the following statements about joint-cost allocationis FALSE?

A. Joint cost allocation is useful in deciding whether tofurther process a product after split-off

B. Joint cost allocation is useful in making a profitdetermination about individual joint products

C. Joint cost allocation is helpful in inventory valuation

D. Joint cost allocation can be based on the number of unitsproduced.

E. Joint cost allocation can be accompanied by using differentmethods that focus on sale value and product worth.

8.The total production cost of a job is composed of:

A. Direct material and direct labor

B. direct material, direct labor, manufacturing overhead, andoutlays for selling costs.

C. direct material. direct labor, manufacturing overhead,andoutlays for both selling and administration costs.

D. direct materiaL, direct labor,and applied manufacturingoverhead

E. direct material, direct labor, and selling expenses.

9.What will cause the variable overhead efficiency variance?

A. Efficient or inefficient use of a specific component ofvariable overhead(e.g. electricity)

B. Full or partial utilization of major equipment resources

C. Production of unit in excess of the number of units sold.

D. Efficient or inefficient use of cost driver(e.g. machinehours) for variable overhead

E. Changes in the salary cost of manufacturing supervisors.

10. Which of the following is classified as an inventoryshortage cost?

A. Purchase order preparation

B. Production disruption

C. Lost sales and lost customers.

D. Spoilage

E. Production disruption, lost sales and lost customers.

taupespider661

1. A cost pool is :

A. a collection of homogeneous cost to be assigned.

B. almost always the combined result of decision made bydifferent responsibility center manager.

C. The primary function of a responsibility accountingsystem.

D. the amount of cost that has been allocated say, 10% to a userdepartment.

E. The tool used to allocate cost dollars to userdepartments.

2.Variable costs are those costs that:

A. vary (in total ) inversely with changes in activity.

B. vary (in totals) directly with in activity.

C. remain constant (in total) as activity changes.

D. Decrease on a per unit basis as activity increase.

E. Increase on a per unit basis as activity increases.

3. When comparing EOQ and JIT inventory system, which of thefollowing statement is false?

A. The EOQ approach takes the viewpoint that some inventory isnecessary.

B. The EOQ system assumes a constant order quantity.

C. JIT argues that inventory investments should beminimized.

D. The EOQ system focuse on acquistion and holding costs.

E. JIT argues that safety stocks are necessary to reduce theprobability of a stock shortage.

4. Procust costing in manufacturing firm is the process of:

A. Accumulating the company 's period costs

B. Allocating costs among the firm departments.

C. Placing a value on the company's fixed assets.

D. Assigning cost to the firm's inventory.

E. Assinging costs to the comapny's managers.

5.Decentralized firms can delegate authority by structuring anorganization into responsibility centers. Which of the followingorganizational segments is most like a totally independent,standalone business where managers are expected to "make it on theown?

A. Cost center

B. Revenue Center

C. Profit Center

D. Investment center

E. Contribution center

6. Costs that are expensed when incurred are called:

A. Product costs

B. Direct Costs

C. Inventoriable Cost

D. Period Cost

E. Indirect costs

7. A budget serves as a benchmark against which:

A. Actual result can be compared

B. Allocated results can be compared

C. actual result be inconsequential

D. Alloated results become inconsequential.

E. Cash balances can be compared to expense totals.

8. Activity based costing system.

A. use a single volume based cost driver.

B. Assign overhead to product based on the products' relativeusage of direct labor.

C. often reveal products that were under or over costed bytraditional costing.

D. Typically use fewer cost driver than more traditional costingsystem.

E . Have a tendency to distort product costs/

9.The point in a joint production process where each individualproduct becomes separately identifiable is commonly called the:

A. Decision point

B. Separation point

C. Individual product point

D. Split-off point

E. Joint product point.

10.The RIO calculation will indicate:

A. the percentage of each sale dollar that is invested inassets.

B. The sale dollars generated from each dollar of income.

C.How effectively a company used its invested capital

D. the invested capital generated from each dollar of income

E. the overall quality of the company's earnings.

burgundyrhinoceros92

Cost-Based Pricing

Companies use various strategies to set price. Since cost is animportant determinant of supply and is known to the producer, manycompanies base price on cost. Still other companies use atarget-costing strategy, or strategies based on the initialconditions in the market.

A cost-based pricing approach starts with product cost and thendesired profit is added. Usually, there is some cost base and amarkup. The markup is a percentage applied to base cost; itincludes desired profit and any costs not included in the basecost. Companies that bid for jobs routinely base bid price oncost.

Example: Linder Company makes and sells vitaminsupplements. The following information from last year's accountingrecords showed:


Cost of Goods Sold	$254,000
Selling and administrativeexpense	86,360
Operating income	111,760

The markup percentage must include all costs that are not a partof cost of goods sold plus the desired profit. For Linder Company,the markup on COGS is found as follows:

Markup on COGS	= (Selling and administrativeexpenses + Operating income)/COGS
	= ($86,360 + $111,760)/$254,000 =0.78 or 78%

Now, if Linder Company produces a new product with manufacturingcost of $2 per unit, the unit price at this markup is:

Price = $2 + (0.78 Ã $2) = $2.00 +$1.56 = $3.56

A Company does not have to use Cost of Goods Sold as the basisof the markup. For example, a job-order firm might decide to usethe markup on prime costs (direct materials and direct labor) tocost jobs. Suppose that Carl's Custom Cabinetry wants to price jobsbased on prime costs plus a markup on prime cost. Last year'sincome statement revealed the following information:


Prime costs	$134,000
Overhead	73,700
Selling and administrativeexpense	38,860
Operating income	50,920

Markup on Prime Cost	= (Overhead + Selling andadministrative expenses + Operating income)/Prime cost
	= ($73,700 + $38,860 +$50,920)/$134,000 = 1.22 or 122%

Carl is pricing a new job with estimated direct materials of$4,300 and direct labor of $1,800. The estimated price is:

Price = ($4,300 + $1,800) + (1.22 Ã$6,100) = $6,100 + $7,442 = $13,542

Neither Linder Company nor Carl's Custom Cabinets must use theprice figured according to the markup. This is just a firstapproximation. Carl, for example, may want to set a lower price inhopes of getting more business from this particular customer.Linder Company may want to charge a higher price based on marketconsiderations.

Target Costing

Another approach to pricing a product or service is targetcosting. The target cost is based on the price (target price) thatcustomers are willing to pay. The Marketing Department determineswhat characteristics and price for a product are most acceptable toconsumers. Then, it is the job of the company's engineers to designand develop the product such that cost and profit can be covered bythat price. Japanese firms have been doing this for years; Americancompanies are beginning to use target costing. So first the targetprice is set. Then the desired profit is deducted, and theremaining amount is the target cost.

Target cost = Target price -Desired profit

Determining the target cost is relatively easy. Actuallydesigning and manufacturing a product that will achieve the targetcost and sell for the target price is more difficult. As a result,target costing is an iterative process as the firm works to refinethe proposed product to meet the cost and price targets.

Price Discrimination

Price discrimination refers to the charging of different pricesto different customers for essentially the same product. TheRobinson-Patman Act was passed in 1936 as a means of outlawingprice discrimination by manufacturers or suppliers; services andintangibles are not included under the act.

The Robinson-Patman Act does allow price discrimination undercertain specified conditions: (1) if the competitive situationdemands it and (2) if costs (including costs of manufacture, sale,or delivery) can justify the lower price. According to the secondcondition, a lower price offered to one customer must be justifiedby identifiable cost savings and the amount of the discount must beat least equaled by the amount of cost saved.

To compute a cost differential, the company creates classes ofcustomers based on the average costs of selling to those customers.Then all customers in each group are charged a cost-justifiableprice.

Example: Raul Company manufactures specializedelastic bandages used to reinforce athletes' wrists or ankles. Raulsells to a number of individual physical therapists and athletictrainers as well as to Medallion Gym, a national chain of physicalfitness facilities. The average manufacturing cost is $169 per case(a case contains 100 plastic-wrapped elastic bandages). RaulCompany sold 350,000 cases last year to the following two classesof customer.

	Price	Quantity
Medallion Gym	$235	175,000
Individual trainers and physicaltherapists	$241	175,000

Medallion Gym requires that the bandages be individuallypackaged in boxes with the Medallion name on the label. This boxand special labelling costs $0.34 per unit. Raul also pays allshipping costs, which amounted to $1,400,000 last year.

The individual trainers and physical therapists order in smalllots that require special picking and packing in the factory; thespecial handling adds $20 to the cost of each case sold. Salescommissions to the independent jobbers who sell Raul products tothe trainers and physical therapists average 10 percent of sales.Bad debts expense amounts to 1 percent of sales.

The cost per case for each customer category can be computed asfollows:

Medallion Gym:
Manufacturing cost per case	$169.00
Box and special labelling ($0.34 Ã100)	34.00
Shipping ($1,400,000/175,000cases)	8.00
Total cost per case	$211.00

Individual Trainers and PhysicalTherapists:
Manufacturing cost per case	$169.00
Special handling	20.00
Sales commission ($241 x 0.10)	24.10
Bad debts expense ($241 x0.01)	2.41
Total cost per case	$215.51

Profit and profit percentages are as follows:

	Medallion Gym	Trainers and Physical Therapists
Price per case	$235.00	$241.00
Less: cost per case	211.00	215.51
Profit per case	$24.00	$25.49
Profit percentage	10.21%	10.58%

The company will need to see if the profit percentages range areclose to one another; if so, there would be a cost justificationfor the price differential. If not, the company may need toconsider potential price discrimination and change its price forthe customer group that it considers to be "out of line."

For each of the following situations, determine whether or notthere is price discrimination according to the Robinson-PatmanAct.

1.	Dr. Jeffrey Lowman, M.D., chargesless to patients who he feels cannot afford his usual fee.- Selectyour answer -YesNoItem 1

2.	Damian Company manufacturesspecialty jams and jellies. Damian is located in Amarillo, Texas,and sells only to stores in the Amarillo area. Sometimes Damianoffers a price break to store owners whose children attend the sameschools as Damian's children. - Select your answer -YesNoItem2

3.	A national manufacturer of hairproducts charges a significantly lower price to large chain storesthan to smaller stores. The price differential is not supported bycost differences. - Select your answer -YesNo

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AYB225 Lecture Notes - Cost Driver, European Cooperation In Science And Technology, Greeting Card

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