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IU / Marketing / BUS 202 / What are direct costs?

What are direct costs?

What are direct costs?


School: Indiana University
Department: Marketing
Course: Managerial Accounting
Professor: Diane biagioni
Term: Spring 2015
Tags: Accounting, Managerial, Math, and Acctg
Cost: 50
Name: A202 Final Exam study guide
Description: EVERYTHING you need to know for the final exam, including conceptual questions and formulas
Uploaded: 04/30/2017
7 Pages 24 Views 8 Unlocks

A202 Final Exam Study Guide  

What are direct costs?

Chapter 1: Managerial vs. Financial  

∙ Financial:  

o External


o normally annually

o Objective financial measures  

o Emphasizes precision and consequences

o Historic Data  

∙ Managerial  

o Internal  

o Any form  

o As requested I(ad hoc)

o Emphasizes timeliness and decisions for the future

o All data  

Chapter 2: Managerial Accounting and Cost Concepts  

∙ Direct Costs

o Easily traceable to the product

What are indirect costs?

o Measureable  

o Teacher’s salary is a direct cost to a202

∙ Indirect costs

o Cannot be easily traced to the project

o Often referred to as common (shared) costs  

o Difficult to measure  

o Ex: electricity in the room is an indirect cost to A202

∙ Manufacturing Overhead

o Al costs except for DM and DL

o Utilities, rent maintenance, deprecation, indirect materials and labor ∙ Prime Costs: If you want to learn more check out What are the three benefits that wetlands provide to society?

o DM and DL

∙ Conversion Costs

o DL and Overhead

∙ High/Low Method: Total cost of highest activity – Total cost of lowest  activity 

What is manufacturing overhead?

High activity level – Low activity level  

∙ Relevant: costs or benefits differ between alternatives  

∙ Sunk Costs: costs that have been occurred in the past  

o Not differential  

o Not relevant

o Should be ignored

∙ Product: DL, DM, VMOH, FMOH

∙ Period: Selling and admin

∙ All product costs are direct?: FALSE  

∙ Costs on the financial statement are organized by product and period?: TRUE

∙ Traditional Income statement (GAAP)

o Revenues  

Less COGS (Product Costs) 

Gross Margin We also discuss several other topics like What is gametes?

Less Selling and Admin (Period Costs) 


∙ Contribution Margin Statement  Don't forget about the age old question of What are the differences between needs, wants, and demands?

o Revenues

Less Variable Csosts

Contribution Margin

Less Fixed Costs  



o The cost of goods sold is recorded on the income statement for the  period

o Contribution Margin = Sales – Variable Costs  

o Absorption Cost = DM, DL, VMOH, FMOH

o Variable Cost = DM, DL, VMOH, Variable selling and admin  

o FMOH under variable costing is period cost  

o UVC= ALL VARIABLE COSTS (selling and admin included)

o Unit Product Cost (or inventorial) under variable: DM, DL, VMOH o Unit Product Cost (or inventorial) under absorption: DM, DL, VMOH,  FMOH

Chapter 3: Cost-Volume-Profit Relationships  

∙ Traditional (GAAP) income Statement is for external reporting purposes  and organized by Product Costs and Period Costs  

∙ The CM Statement is for internal use only and organized by variable and  fixed costs  

∙ Cost Volume Profit Analysis

o Is a model based on the CM stmt  

o Relates profit to selling price, sales volume, UVC, FC, and product mix  o Uses cost behavior (variability of cost) to determine how revenues,  expenses, and profits will react to change in volume  Don't forget about the age old question of How does the fed change monetary base?

∙ What is the change to net operating profit if one more unit is sold? o Answer: UCM  

∙ If you sell more units, total cost per unit will decrease  

∙ Contribution Margin: Rev- VC

∙ Contribution Margin Per Unit: (Rev-VC)/# of Units

∙ Contribution Margin Ratio: CM/Revenues

∙ Variable Expense Ratio: Variable Costs/Sales

∙ Units to BE = FC/UCM  

∙ Dollar Sales to BE = FC/CM Ratio

∙ Unit Sales to attain Target Profit = Target Profit + FC 


∙    Dollar Sales to Attain Target Profit = TP + FC

 CM Ratio

∙ Margin of Safety %: Actual (or budgeted) sales – Breakeven sales Actual (or budgeted) sales  

∙ Degree of Operation Leverage = CM/NOI  

Chapter 4: Product Cost Flow (Job Order Costing)

∙ Three major Categories

o Service  

o Merchandising  

o Manufacturing

∙ Service Firms If you want to learn more check out What will be the dimension and area of the largest garden that can be enclosed with $320 worth of fencing?

o Products are not tangible or stored (no products are bought) o Ex: consulting, hotels, gyms, airlines, hair salon, universities, law firms ∙ Merchandising Firms

o Carry inventory

o Sell the same product they pruchase  

o Ex: TJ Maxx, Wal Mart, Target

∙ Manufacturing Firms

o Use labor and equipment to transform raw materials into finished  goods

o Carry inventory in multiple categories: raw materials, Work in process,  finished goods

o Ex: P&G, Ford, Apple

∙ Two Primary Methods to accumulate Costs:

o Job Order costing

o Process Costing  

∙ COGS = BI+Purch-EI

 ∙     DM WIP FG 

Beg Bal Beg Bal Beg bal + DM purch +DM used +COG mfg  -DM Used +DL -COG sold Don't forget about the age old question of What is ferdinand de saussure known for?

End Bal + MOH End Bal -COG mfg.  

End Bal

∙ Allocation Rate = Total MOH/Total Allocation Base  

∙ Allocation Amount = Allocation Rate x # of driver units for the cost object  ∙ The costs of production are accumulated is in the finished goods account

Chapter 5: Variable Costing and Segment Reporting  

∙ Absorption Costing: GAAP: Product Costs (COGS: DM, DL, VMOH, FMOH)  Period Costs (Var and Fixed sell & admin)

∙ Variable Costing: Contrib. Margin: VCOGS (DM, DL, VMOH), Period Costs  (FMOH, Var and Fix sell & admin)

o Absorption Cost = DM, DL, VMOH, FMOH

o Variable Cost = DM, DL, VMOH, Variable selling and admin  o FMOH under variable costing is period cost  

o UVC= ALL VARIABLE COSTS (selling and admin included)

o Unit Product Cost (or inventorial) under variable: DM, DL, VMOH o Unit Product Cost (or inventorial) under absorption: DM, DL,  VMOH, FMOH

o Absorption Cost = DM, DL, VMOH, FMOH

o Variable Cost = DM, DL, VMOH, Variable selling and admin  

o FMOH under variable costing is period cost  

o UVC= ALL VARIABLE COSTS (selling and admin included)

o Unit Product Cost (or inventorial) under variable: DM, DL, VMOH o Unit Product Cost (or inventorial) under absorption: DM, DL, VMOH,  FMOH

∙ If production > sales  FG increases  Absorption cost profit >  Variable Cost profit  

∙ If production = sales  No change to FG invent  Absorption cost  profit = Variable cost profit

∙ If production < sales -> FG inventory decreases  Absorption cost  profit < Variable cost profit

∙ Segment Margin  

o Two Keys to building segmented income statements:  

 Contribution margin statement  

 FC need to be separated into traceable and common (allocated) to calculate segment margin

o Segment margin is the best gauge of long-run profitability  

o Contribution margin is the best gauge of short-term profitability  o Segment Margin Calculation  

 Revenues  

Less VC  


Less Traceable Cost  

=Segment Margin

Chapter 7: Differential Analysis  

∙ Capacity: is the maximum volume of activity that a company can sustain  with the available resources  

∙ Special Orders: to mitigate excess capacity  

o Determine all relevant costs/benefits

o Determine the value of these costs/benefits

o Determine if there is an opportunity cost  

o Cost of Special Order: (DM+DL+VMOH+Opp Cost)/ Units on Spec.  Order= Minimum price/unit Opp Cost = (Excess Capacity – Spec.  Order) x UCM  

o When should special order be accepted?: Potentially when there is excess capacity

o If units of idle capacity are > units in the special order: NO opportunity  cost  

o If units of idle capacity are < units in special order, then there is an  opportunity cost

Chapter 9: Master Budgeting  

∙ Budget Advantages

o Communicate plans  

o Coordinate activities  

o Uncover potential bottlenecks  

o Define goals and objectives  

o Think about and plan for the future  

o Means of allocating resources  

∙ Budgeted Selling Price = Budgt. Rev/Units Sold

∙ Budgeted Production = Sales + EI – BI  

∙ Master Budget (MB): Budg. Quantity x Budg. Price

∙ Flex Budget (FB): Actual Quantity x Budg. Price

∙ Actual Results (AB): Actual Quantity x Actual Price  

∙ Cash Budget: Multiple the following and/or previous months by the credit %  along with the other % listed  

∙ Cash Flows: never include depreciation

Chapter 10: Flexible Budgets and Performance Analysis  

∙ Revenue and Spending Variance: FB-AB (actual results) on PBT line  ∙ Activity Volume Variance: MB-FB on PBT line

∙ Sales Price Variance: FB-AB on Rev line

∙ Profit Variance: MB-AB on PBT line  

∙ Sales Volume Variance: MB-FB on PBT line

∙ Fixed Cost Spending Variance: FB-AB on fixed costs  

Chapter 11: Standard Costs and Variances  

SQA: AQ @ Bud. Assump. x BP As If: AQ @ Act. Parameter x BP

Actual: AQ @ Act. Parameter x AP

DM or DL


cy Variance

DM or DL



Chapter 8: Capital Budgeting Decisions  

∙ Capital Budgeting:  

o Set of tools companies use to evaluate large expenditures with long  term impacts  

o May be evaluated using NPV and IRR which consider the time value of  money

o Links strategic and operating budgets

∙ Approaches to evaluate Projects:

o Non-discounting methods: do NOT consider the time value of money o Discounting methods: do consider the time value of money  ∙ Taxes: affect both the amount and timing of cash flows in the capital  budgeting process

∙ Cost of capital, RRR, Discount rate: all mean the same thing  Opportunity cost of money

∙ Internal Rate of Return (IRR)  

o Int. inv = Net Cash flows * PV Annuity factor  

o Look up on PV annuity table that = IRR  

o MUST BE > Cost of Capital AND Hurdle Rate (if given)

∙ Payback Period = Int. Investment / Net. Opp. Cash Flows  

∙ Net Present Value (NPV): analyze cash flows, considers time value of  money  

How to Solve:

1.) Initial Investment (always given) * PV Factor (always 1 for initl inv.)  2.) Year 1-5 = Net Cash Flows (Rev- Oper. Exp)  

3.) Net Cash Flows * PV Factor (Look up on Table based on Cost of Capital %)  = PV

4.) Add up Year 1-5 and Subtract from Int. Inv. = NPV

IF Positive  Accept  

 IF Zero  Accept  

IF Negative  Do NOT accept

∙ Net Opp. Cash Flows w/ Tax Rate  

1.) Net Cash Flows – Operations  

2.) x (1-Tax Rate)  

3.) = After Tax Net Cash Flows (A)

4.) Depreciation

5.) x Tax Rate

6.) = Depreciation Tax Shield (B)

7.) Total Net Cash Flows A + B

Chapter 12: Performance Measurement in Decentralized Orgs  

∙ Decentralizing:

o Decisions are made by lower level managers  

o Allows top mgt to focus on overall corp strategy  

o Empowers employees and leads to job satisfaction

o Authority requires costly coordination of decisions

∙ Responsibility Centers

o Cost Center

 SA segment whose manger has control over costs, but not over  revenues and investment funds  

 Examples: machining, HR, legal, accounting, packaging, admin

o Profit Centers: a segment whose manager has control over both  costs and revenues ut not over investment funds  

 Ex: regional centers, product line managers  

o Investment Center:  

 As control over everything: costs, revues, and investment in  operating assets

 Examples: Large independent divisions in orgs: Song Pictures  Entertainment Inc, P &G’s Fabric Care and Home Care Segment  ∙ Return on Investment (ROI): Calculated TWO ways  

o NOI / Avg. Oper. Assets  

o Profit margin * Investment turnover  

 OR NOI x Revenues  

Revenues Aveg, opp Assets

∙ Investment Turnover = Revenues / Avg. Opp. Assets

∙ Residual Income = NOI – (AOA x RRR)

o The more RI the better

∙ Balanced Scorecard Components

o Financial perspective

i. Objectives: What are the financial goals

ii. Measures: ROI, RI, Sales growth, Net Inc, Earnings per share,  current stock price  

o Customer Perspective  

i. Objectives: What customers do we serve? How do we win and  retain them?

ii. Measures: market share, customer complaints, sales on top 10  customers

o Innovation and Learning Perspective  

i. Objective: are we maintaining our ability to change and  


ii. Measures: Innovations to reduce cost and stay ahead of the  competition, employee suggestions, training hr. per executive  

o Internal business perspective

i. Objective: Have we improved business processes to deliver more value to customers  

ii. Measures: Defective output, delivery delays, development tome, employee turnover, cost per transaction  

Appendix 12A: Transfer Pricing  

o Transfer Price: an internal price for transactions b/w divisions  o Goal: set transfer prices to motivate managers to act in the best interests of  the overall company  

o Transfer Price per Unit = (VC + FC) x T%

Appendix A: Target Costing  

o What are customers willing to pay us? What do we want our profit? o Target Cost= Sales – Desired profit (ROI*investment)

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