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- The total dolar amount varies directly proportional to the changes in activity
- Variable costs remain constant when expressed on a per unit basis.
- Generally talking about the activity base as being the total volume of good sand servies provided by the organization.
- Ex. Raw Materials and Direct Labor
- Measuer of whatever causes the incurrence of variable cost
- AKA cost driver
- It is what it is varible with respect to
True Variable Costs
- The amount used during a period will vary in direct proportion to the level of productions activity
- Ex. Direct Materials
- Any amounts purchased but not used can be carried over
- Cost of a resource that is obtainable only in large chunks and that increases or decreases only in response to fairly wide changes in activity
- Ex. is maintence workers
- Range of activity within the assumptions made about cost behavior are reasonably valid.
- Where the curve and straight line are the same
- Total fixed cost remains the same even when the activity level changes within the relevant range.
- Fixed cost per unit goes down as activty level goes up
- AKA capacity costs
Commited Fixed Costs
- Investments in facilities, equipment, and the basic organization that can't be significantly reduced even for short periods of time without making fudamental changes
- Even if things cutback, these will remain the same.
- Long term desicsion
- Ex. Depreciation on buildings and equip., real estate taxes, insurance expenses, sallaries ot top dog
- Do become locked into the decison
Discretionaly Fixed Costs
- Arise from annual diecisions by managment to spend on certain fixed cost items.
- AKA managed fixed costs
- Ex. Advertising, research, public relations, management develoment programs, internships for students
- Short term around a year
- Can be cut for short periods of time with minimal damage
- Are not locked into decsions
- Contains both variable and fixed cost elements
- AKA Semivariable costs
- Fixed portion represents the minimum cost of having a service ready and abailabel for use.
- Variable portion represents the cost incurred for actual consumpiton of the service
Mixed Cost Equation
- Y= a + bX
- Y= total mixed cost
- a = Total fixed cost
- b = variable cost per unit of activity (slope)
- X= Level of activity
- The steeper the slope, the higher the variable cost
- Dependent variable: Cost (Y) since the amount of cost incurred during a period depends on the level of activity for the period
- Independent: Activity (X) since it causes variations in the cost.
High Low Method
- Based on Rise over run formula
- Variable cost= Change in cost/Change in activity
- Fixed Cost element= Total cost-Variable cost element
Least squares Regression Method
- Uses all of the data to seperate a mixed cost into a fixed and variable components
- Great because usues all data points and has the goodness of fit.
An analytical method that is used when the dependent variable (i.e. cost) is caused by more than one factor.
Taditional appraoch Income statement
- Is organized in a functional format.
- Emphasizes functions of production, administration and sales.
- No attempt made to distinguish between fixed and variable costs
Seperates costs into fixed and variable.
Amount remaining from sales revenue after variable expenses have been deducted
Quantitative plan for acquiring a using resouces over a specifed time period
Act of Preparing the budget
Use of budgets to control an organizations activity
- Summary of a compnay;s plans including spedific targetsfor sales, production, and finacnicng acitivities.
- Lays out the financial aspects of managment's plans for the future and assits in monitoring actual expenditures relative to those plans.
Developing golas and preparing various budgets to achieve those goals.
Steps taken by management to increase the liklihood that all parts of the organization are working together to achieve the ogoals set down at the planning stage.
Advantages of budgeting
- Define goal and objective
- Communicate plans
- Cordinate activites
- Uncover potential bottle necks
- Allocating resources
- Planning future
A manager sould be held responsible for those items, and only those items, that the mangaer can actually control to a significan textent.
Continuous or perpetual budget
- 12-month buget that rolls forward one month or quarter as the current monthr is completed.
- One month is added to the end of the buget as each month comes to a close
Self-Imposed Budget or Participant
Budgent that is prepared with the fulll cooperaton and participation of managers al all levels
Advantages of Self-Imposed
- More accurate
- More motivation
- no excuses
- Everything depends on this
- Determines how many units need to be produced
- Sales in Units * Unit price = Total sales
- List # of units that must be produced to satisfy sales needs and to provide for desired ending inventory.
- Budgeted unit sales + desired ending inventory = Need
- Needed - Beginnign inventory = Production
- *Beginning inventory is the previous months ending inventory
- This is all done in the finished goods T accout
Direct Materials Budget
- Raw materials that must be purchased to fulfill the production budget and to provide for adequate inventoires
- Ending from production * Pounds + EI =Need
- Need - BI = RM to be purchesed
- RM to be puchases * cost per pound
Direct Labor Budget
- Shows the direct labor-hours required to satisfy the procution budget.
- # from production budget * hours per unit needed = Labor hours needed
- Labor hours needed * rate per hour = Total diret labor costs
Manufacturing O/H budget
- List all costs of production other than direct materials and Labor.
- Direct labor hours * OH rate per hour = Variable MOH
- Take Variable MOH + Fixed= Total MOH
- Total MOH - depreciation (noncash charge) = Cash disbursements for MOH
Ending Finished Goods Inventory
- This caculates the carrying cost of the unsold units.
- Direct materials (pounded needed per unit * cost per unit)
- Direct Labor (hours needed per product * labor rate per hour)
- MOH (hours per unit times predetermined OHR)
- Add these together to get the unit product cost
- Then Ending finished inventory units times this cost is ending finished inventory in dollars
Total MOH/ Total direct labor hours
Selling and Administrative Budget
- Units sold from beginning * Variable rate= Variable part
- Add Fixed = total expenses selling..
- Total - depreciation = Cash disbursement for selling and administrative expenses.
- Detailed play showing how cash resources will be used.
- Takes all cash disbursements for each month and finds how they move
Specify how much of an input should be used to make a product or provide a service
Cost (price) standards
Specify how much should be paid for each unit of input
Managment by exception
Deviations from standards deemed significant are brought to the attention of management
Attained only under best circumstances. 100%
Tight but attainable
Standard Pricer per unit
For direct material should reflect the final, delivered cost of materials, net of an discounts taken.
Difference between standard and actual
Standard Quantity/Hours allowed
Means the amount of an input that should have been used to produce actual output of the period
What is acutally used in production.
What was allowed for the period
- More of product was used than standards allowed
- Actual is less than standard Quantity
Advantages of standard costs
- Managment by exception
- Promotes economy and efficiency
- Simplified bookeeping
- Enhances responsiblibliy accounting
Problems with Standard Costs
- Standard cost reports may not be times
- Emphasis on negative
- FAvorable variences my be misinterpreted
Consits of integreated set of perfomances measures that are derived from and support the companies strategy throughout the organization
Delivery Cycle time
The amount of time from when a customer order is recieved to when the completed order is shipped
- The amount of time required to turn raw materials into completed products
- AKA. Manufacturing cycle time
- Made up of Pricess time, inspection time, move time and queue time
The amount of time work is actually done on the product
THe amount of itme spent ensuring that the product is not defective.
Time required to move materials or partially completed product form workstation to workstation
Amount of time a product spends waiting to be worked on, to be moved, to be inspected or to be shipped.
Manufacturing Cycle efficiency (MCE)
Value-added time(proccess time)/Throuput(manufacturing cycle) time
Delivery cycle time
Wait time + Throughput time