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This comprehensive study guide covers essential topics in financial and cost accounting, including strategic cost management, value chain analysis, budgeting, and cost allocation methods. it provides definitions and explanations of key terms such as cost objects, direct and indirect costs, variable and fixed costs, and different costing methods like job costing and process costing. The guide is valuable for students preparing for exams in accounting and related fields.
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FINANCIAL ACCOUNTING - ANSWER focuses on reporting financial information toexternal parties such as investors, governmental agencies, banks, and suppliers, based on GAAP COST ACCOUNTING - ANSWER measures, analyzes and reports financial andnonfinancial information related to the costs of acquiring or using resources in an organization STRATEGY - ANSWER specifies how an organization matches its own capabilities withthe opportunities in the marketplace -2 types: (1) cost leadership(2) product differentiation STRATEGIC COST MANAGEMENT - ANSWER describes cost management thatspecifically focuses on strategic issues VALUE - ANSWER usefulness a customer gains from a company's product or service. -entire customer experience determines VALUE CHAIN - ANSWER sequence of business functions by which a product is madeprogressively more useful to customers consists of:-R&D -designs of products and processes -production-marketing (incl. sales) -distribution -customer servicePRODUCTION & DISTRIBUTION - ANSWER parts of the value chain associated with producing and delivering a product or service -2 functions together known as the VALUE CHAINSUPPY CHAIN - ANSWER describes the flow of goods, services and information from the
initial sources of materials, services and information to their delivery regardless ofwhether the activities occur in one organization or in multiple organizations PLANNING - ANSWER consists of:1. selecting an organization's goals and strategies
WORK-IN-PROCESS (OR PROGRESS) - ANSWER goods partially worked on but not yetcompleted, often abbreviated as WIP
FINISHED GOODS - ANSWER goods completed but not yet sold INVENTORIABLE COSTS - ANSWER all costs of a product that are considered assetswhen incurred and expensed as cost of goods sold only when the product is sold
-direct materials, direct labor, indirect manufacturing cost ("overhead") DIRECT LABOR - ANSWER compensation of all manufacturing labor that can be tracedto the cost object
INDIRECT MANUFACTURING COST ("OVERHEAD") - ANSWER all manufacturing costsrelated to the cost object that can't be traced to it in an economically feasible way
PERIOD COSTS - ANSWER all costs in the income statement other than cost of goodssold. They are treated as expenses of the accounting period in which they are incurred
PRIME COST - ANSWER handy, shortcut term referring to materials and labor CONVERSION COST - ANSWER direct labor and indirect manufacturing costs OVERTIME PREMIUM - ANSWER labor costs are usually considered part of indirectoverhead costs
IDLE TIME - ANSWER refers to the wages paid for unproductive time caused by lack oforders, machine or computer breakdown, work delays, poor scheduling, etc
MARGIN OF SAFETY (MOS) - ANSWER measures the distance between budgeted salesand breakeven (BE) sales
budgeted sales - BE sales = MOS RATIO - ANSWER removes the firm's size from the output and expresses itself inthe form of a percentage
-MOS/budgeted sales COST STRUCTURE - ANSWER relative mix of fixed costs and variable costs OPERATING LEVERAGE - ANSWER describes changes to Operating Income that willresult from a percentage change in sales
SALES MIX - ANSWER quantity or proportion of various products or services thatconstitute a company's total unit sales
COST POOL - ANSWER a grouping of individual indirect cost items. Cost pools simplifythe allocation of indirect costs because the costing system does not have to allocate each cost individually COST ALLOCATION BASE - ANSWER a systematic way to link an indirect cost or groupof indirect costs to cost objects
JOB COSTING - ANSWER the cost object is a single unit or multiple units of a distinctproduct or service which we call a job
-jobs tracked separately, generally use different amounts of resources
be traced to individual products or services VARIABLE & ABSORPTION - ANSWER 2 most common methods of costing inventory inmanufacturing companies
VARIABLE COSTING - ANSWER all variable manufacturing costs (direct and indirect)are included as inventoriable costs
ABSORPTION COSTING - ANSWER all variable and fixed manufacturing costs areincluded as inventoriable costs. The inventory "absorbs" all manufacturing costs
-required inventory method for external financial reporting in most countries THROUGHPUT COSTING - ANSWER ("super-variable costing") only direct materials areincluded as inventoriable costs. All other costs are expensed
-maximize it to maximize profit THROUGHPUT MARGIN[OR CONTRIBUTION] - ANSWER = revenues - direct material COGS
THEORETICAL CAPACITY - ANSWER level of capacity based on producing at fullefficiency all the time
PRACTICAL CAPACITY - ANSWER level of capacity that reduces theoretical capacity byconsidering unavoidable operating interruptions like scheduled maintenance time and shutdowns for holidays NORMAL CAPACITY UTILIZATION - ANSWER level of capacity utilization that satisfiesaverage customer demand over a period that is long enough to consider seasonal, cyclical, and trend factors
MASTER-BUDGET CAPACITY UTILIZATION - ANSWER level of capacity utilization thatmanagers expect for the current budget period, typically one year
VARIANCE - ANSWER the difference between actual results and expected (budgeted)performance
MANAGEMENT BY EXCEPTION - ANSWER the practice of focusing attention on areasnot operating as expected (budgeted)
FAVORABLE VARIANCE (F) - ANSWER has the effect, when considered in isolation, ofincreasing operating income relative to the budget amount
UNFAVORABLE VARIANCE (U) - ANSWER has the effect, when viewed in isolation, ofdecreasing operating income relative to the budget amount.
FLEXIBLE BUDGET - ANSWER the hypothetical budget that would have been preparedoriginally if the company had correctly forecast the actual output for the period
-prepared at end of period after managers know actual output SALES-VOLUME VARIANCE - ANSWER difference between the static-budget and theflexible-budget amounts
-reflects difference between actual volume and static budget volume (the OG targetvolume)
STANDARD - ANSWER carefully determined price, cost, or quantity that is used as abenchmark for judging performance
BENCHMARKING - ANSWER continuous process of comparing your firm's performance
"work-measurement method" CONFERENCE METHOD - ANSWER Estimates cost functions on the basis of analysisand opinions about costs and their drivers gathered from various departments of a company -pools expert knowledge, increasing credibility -b/c opinions being used, accuracy of estimates depends largely on care and skill of pplproviding inputs
ACCOUNT ANALYSIS METHOD - ANSWER Estimates cost functions by classifyingvarious cost accounts as variable, fixed, or mixed in respect to the identified level of activity -managers use qualitative rather than quantitative analysis when makingcost-classification decisions -widely used b/c reasonably accurate, cost-effective, easy to use-accuracy of method depends on accuracy of judgments
SIMPLE REGRESSION - ANSWER estimates the relationship between the dependentvariable and ONE independent variable
MULTIPLE REGRESSION - ANSWER estimates the relationship between the dependentvariable and TWO OR MORE independent variables
ECONOMIC PLAUSIBILITY, GOODNESS OF FIT, SIGNIFICANCE OF INDEPENDENTVARIABLE - ANSWER 3 criteria used to determine best cost driver for cost function...
QUANTITY DISCOUNTS - ANSWER direct material costs rise but not in direct proportionto increases in quantity due to the nonlinear relationship caused by the quantity discounts
STEP COST FUNCTIONS - ANSWER resources increase in "lot-sizes", not individualunits
LEARNING CURVE - ANSWER a function that measures how labor-hours per unit declineas units of production increase because workers are learning and becoming better at their jobs EXPERIENCE CURVE - ANSWER Like the LC, but at an institutional level; measures the decline in the cost per unit of various business functions as the amount ofthese activities increases. It is a broader application of the learning curve that extends to other business functions in the value chain such as marketing, distribution andcustomer service
CUMULATIVE AVERAGE-TIME LEARNING MODEL - ANSWER assumes cumulativeaverage time per unit declines by a constant percentage each time the cumulative quantity of units produced doubles INCREMENTAL UNIT-TIME LEARNING MODEL - ANSWER incrementaltime needed toproduce the last unit declines by a constant percentage each time the cumulative quantity of units produced doubles RELEVANT COSTS - ANSWER expected future costs RELEVANT REVENUES - ANSWER expected future revenues PAST COSTS (HISTORICAL COSTS) - ANSWER never relevant; "sunk costs"
-time value of money is key --> $ received today is worth > than $ received at future date -use RRR TIME VALUE OF MONEY - ANSWER opportunity cost from not having the money today REQUIRED RATE OF RETURN (RRR) - ANSWER minimum acceptable annual rate of
return on an investment; internally set, usually by upper management, and typically represents the return that anorganization could expect to receive elsewhere for an investment of comparable risk
-also called discount rate, hurdle rate, cost of capital, or opportunity cost of capital NET PRESENT VALUE (NPV) METHOD - ANSWER calculates the expected monetarygain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time, using the Required Rate of Return (RRR) -only w/ >=0 NPV acceptable INTERNAL RATE OF RETURN (IRR) METHOD - ANSWER calculates the discount rate atwhich the present value of all expected cash inflows equals the present value of its expected cash outflows -discount rate that makes NPV = 0 -good only if IRR >= RRR PAYBACK METHOD - ANSWER measures the time it will take to recoup, in the form ofexpected future cash flows, the net initial investment in a project
-does not distinguish among sources of CF -highlights liquidity-mgmt wants projects w/ shorter payback periods
ACCRUAL ACCOUNTING RATE OF RETURN METHOD (AARR) - ANSWER divides theaverage annual [accrual accounting] income of a project by a measure of the investment in it
DUPONT METHOD - ANSWER recognizes the two basic ingredients in profit making:increasing income per dollar of revenue and using assets to generate more revenues. An improvement to either with no change in the other will increase ROI RESIDUAL INCOME - ANSWER an accounting measure of income minus a dollar amountfor required return on an accounting measure of investment
income - RRR * investment = RI IMPUTED COST - ANSWER (of the investment) cost recognized in particular situationsbut not recorded in financial accounting systems b/c it is an opportunity cost
ECONOMIC VALUE ADDED (EVA) - ANSWER variation of RI used by many companies
Current Liabilities)}= After-tax Operating Income - {Weighted-Average Cost of Capital X (Total Assets - TOTAL ASSETS AVAILABLE - ANSWER all assets (1 of 4 common alternative definitions of investment) TOTAL ASSETS EMPLOYED - ANSWER all assets less idle assets and assets purchasedfor future expansion
(1 of 4 common alternative definitions of investment) TOTAL ASSETS EMPLOYED MINUS CURRENT LIABILITIES - ANSWER total assetsemployed less assets financed by short-term creditors
(1 of 4 common alternative definitions of investment)
STOCKHOLDER'S EQUITY - ANSWER assign liabilities to subunits and deduct from totalassets
CURRENT COST - ANSWER cost of purchasing an asset today identical to the onecurrently held
HISTORICAL COSTS - ANSWER a. gross value of fixed assetsb. net book value (NBV) of fixed assets
AGENCY THEORY - ANSWER theory US corporations use when designing rewardsystem;
idea is that managers are (entirely?) self-interested so a good incentive system is one inwhich a manager acting with self interest will also do what's best for the organization (goal congruence) PRINCIPAL-AGENT RELATIONSHIPS - ANSWER agent has decision-making authoritythat affects the well-being of the principal
AGENCY PROBLEM - ANSWER arises when there is a conflict of interest between theagents and the principals
-also arise from asymmetric information STOCKHOLDER-MANAGER CONFLICTS - ANSWER Created by the separation ofownership and control of the corporation
-SH elec BOD, who in turn appoint mgmt.