Summary Samenvatting FIDM

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Summary - Samenvatting FIDM

  • 2 An introduction to cost terms and concepts

  • Cost object
    Any activity for which a separate measurement of cost is desired
  • Which types of inventory has a manufacturing company?
    Raw materials, work in process and finished goods
  • What type of inventory has a merchandising company?
    Finished goods inventories
  • What type of inventory has a service company?
    Work in process
  • Direct material costs
    Direct material costs represent those material costs that can be specifically and exclusively identified with a particular cost object. In a merchandizing organization the equivalent term is the purchase cost of the items that are for sale.
  • Direct labor costs
    Direct labor costs are those labor costs that can be specifically and exclusively identified with a particular cost object.
  • Indirect costs
    Indirects costs cannot be identified specifically and exclusively to a given cost object. They consist of indirect labor, materials and expenses. We often use the term overhead instead of indirect costs.
  • In a manufacturing company, how are overhead costs categorized?
    - Manufacturing
    - Administration
    -Marketing (sor selling) costs
  • How are manufacturing costs sometimes classified?
    - Prime costs (ale direct manufacturing costs: direct materials and direct labour)
    - Conversion costs (direct labour and manufacturing overhead)
  • Why are direct costs sometimes classified as indirect costs?
    Because the cost of assigning them to a cost object is higher than the benefit --> nails in a chair
  • Cost allocation
    The process of assigning costs when a direct measure does nog exist for the quantity of resources consumed by a particular cost object.
  • Product costs
    Costs that ar identified whit goods purchased or produced for resale. In a manufacturing organization, they are attached to the product and include in the inventory valuations until they are sold, they are then recognized as expenses.
  • Period costs
    Costs that are not included in the inventory valuation and as a result are treated as expenses in the period in which they incurred. Hence no attempt is made to attach periode costs to products for inventory valuation purposes.
  • In a manufacturing organization, alle manufacturing costs are regarded as product costs and non-manufacturing costs are period costs.
  • In merchandizing firms, the costs of the goods purchases is regarded as a product costs and all other costs are period costs.
  • In a service firm, direct materials + direct labor + assigned overhead = product costs. All other costs = period costs
  • Total variable costs are linear and unit variable costs is constant
  • Fixed costs remain constant over wide ranges of activity for a specified time period. Total fixed costs are constant for all unit of activity (within the given range) whereas unit fixed costs decrease with the level of activity
  • Over longer periods however, fixed costs are also variable.
  • Step-fixed costs
    Costs that are fixed within specified activity levels. They are subject to step increases/decreases by a constant amount at various critical activity levels
  • Semi variable costs
    Semi variable costs have both a fixed and a variable amount
  • Relevant costs
    Relevant costs and revenue asre those future costs and revenues that will be changed by a particular decision
  • Irrelevant costs
    Irrelevant costs and revenues will nog be affected by a decision.
  • Un-avoidable costs
    Avoidable costs are those costs that my be saved by not adopting a given alternative, whereas unavoidable costs cannot be saved. Only avoidable costs are relevant for decision making, the decision rul is to accept those alternatives that greet revenue in excess of the avoidable costs.
  • Sunk costs
    These costs are the costs of resources already acquired where the total will be unaffected by the choice between various alternatives. The have been created by a recession made in the past an that cannot be  changed by any decision that will be made in the future. They are irrelevant for decision making, but nog all irrelevant costs are sunk costs
  • Opportunity costs
    Opportunity costs are costs that measure the opportunity that is lost or sacrificed when the noise of one cours of action requires that an alternative cours of action is given up.
  • Incremental costs
    Incremental costs are the difference between the costs of each alternative action that is being considered. The are similar in concept to marginal costs.
  • What's the difference between marginal costs and incremental costs?
    The difference is that marginal cost represent the addition cost of one extra uni of output, whereas incremental cost represent the addition cost resulting from a group of additional units of output.
  • Requirements management accounting information system
    - Allocate costs for internal en external profit measurement and inventory valuation
    - Be relevant for decision making
    - Be relevant for planning, control and performance measurement
  • Which costs are required for decision making?
    Future costs
  • What is required for cost control and performance measurement, costs and revenues?
    That the costs must be traced to the individuals who are responsible for incurring them. This requires the creation of responsibility centers: an organization unit or part of a business for whose performance a manager is held accountable.
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Mix variance
Arises when the mis of inputs used differs from the predetermined mix of inputs included in the calculation of a standard cost of an operation
Yield variance
Arises because there is a difference between the standard output for a given level of inputs and the actual output attained
Overhead variance analysis formulas:
- Variable: AVOH - (VOHR x AV)
- Fixed: AFOH - FOH
- Variable: VOHR x (AV - SV)
- Fixed: no 
- Variable: no
- Fixed: FOHR x (SV - BV)
pitfalls volume variance
- management may have maintained some extra capacity to meet uncertain demand increases that are important to satisfy customer demands.
- production volume variance focuses only on costs. It does not measure the opportunity cost of unused capacity.
- measuring and rewarding performance using the production volume variance induces managers to build inventories.
Volume variance
arises when actual volume differs from the denominator-level used to calculate the budgeted fixed OH rate.
Production volume variance is an estimation of unused or over-used capacity of the facility.
Spending variance
measures the difference between how much overhead was actually incurred versus how much overhead should have been incurred for the actual volume worked.
Spending variance is a ‘catchall’ variance that captures everything not explained by the efficiency and volume variances
Advantages flexible budgets
- Shows revenues and expenses that should have occurred at the actual level of activity
- May be prepared for any activity level in the relevant range
- Reveal variances due to good cost control or lack of cost control
- Improve performance evaluation
Difference between static budget and flexible budget
The output level upon which the budget is based
Flexible budget
Is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period
Static budget variance
The difference between an actual result and a budgeted amount in the static budget