CHAPTER 4
Physical units: Actual units to be accounted for during a period regardless of their state of
completion
Total units accounted for: consists of units completed and transferred out during the
period and any units in process at the end of the period
Chapter 8
Absorp costing: Job is assigned the costs of DM, DL, and both VOH,
and FOH, AKA full costing, Required for external reporting , All
manufacturing costs are charged to or absorbed by the product Var
Costing: Only DM, DL, VOH are considered product costs, Companies
using variable costing recognie FMOH as the period costs when
incurred Companies may NOT use var costing for external financial
reports bc GAAP require the FOH to be accounted for as a product cost
Throughput costing: AKA super-variable costing, Based on lean
manufacturing principles → reduces buildup of excess inventories,
Treats all costs as period expenses except for DM, Modified form of a
variable costing system that treats DL and VMOH as period expenses,
According to lean manufacturing principles, cost can be reduced and
profitability increased by improvements in the manufacturing workflow
Normal-Absorption Costing: Uses actual direct manufacturing costs and
actual production units within a prefermined overhead rate → More
practical for assigning FMOH costs to production
Throughput costing criteria:
1)Only suitable for companies engaged in a manufacturing process in
which conv costs such as DL and MOH are fixed and do not vary 2)
Management must favour cost accounting information that is helpful for
short-term incremental analysis such as whether the company should
accept or reject a special offer at a reduced sales price. Choice of
throughput costing is a logical extension of its choice of variable over
absorption costing, Product costs are only DM costs, Inventory is valued
using DM costs and all other manuf costs are treated as expenses in the
accounting period they occur
Equiv Units of prod DM costs:
𝑈𝑛𝑖𝑡𝑠 𝑐𝑜𝑚𝑝𝑙 & 𝑡𝑟𝑎𝑛𝑠𝑓 + 𝐸𝑞 𝑢 𝑒𝑛𝑑 𝑊𝐼𝑃
Equiv units of prod Conv cost:
𝑈 𝑐𝑜𝑚𝑝𝑙&𝑡𝑟𝑎𝑛𝑠𝑓 + 𝐸𝑞𝑢𝑖𝑣 𝑢 𝑒𝑛𝑑 𝑊𝐼𝑃
𝑇𝑜𝑡𝑎𝑙 𝐷𝑀 𝑐𝑜𝑠𝑡
DM cost per unit:
𝐸𝑞𝑢𝑖𝑣 𝑢 𝑝𝑟𝑜𝑑 𝐷𝑀
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑛𝑣 𝐶𝑜𝑠𝑡
Unit Conv Cost:
𝐸𝑞𝑢𝑖𝑣 𝑢𝑛𝑖𝑡𝑠 𝐶𝑜𝑛𝑣 𝑐𝑜𝑠𝑡
Total Manuf. Cost per unit:
𝐷𝑀 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 + 𝑈𝑛𝑖𝑡 𝐶𝑜𝑛𝑣 𝐶𝑜𝑠𝑡
Transaction Debit
Accumulate RM RM
Accumulate FL Factory Labour
Incur MOH MOH
Potential advantages of Variable Costing:
1) The use of variable costing is consistent with CVP and
Incremental Analysis
2) Net income calculated under VC is NOT affected by
changes in production levels → much easier to
understand the impact of fixed and VC on the
calculation of NI when using variable costing
3) Net income calculated under VC is greatly affected by
changes in sales levels and therefore provides a more
realistic assessment of the company’s success or failure
during a period
4) Because fixed cost and variable cost components are
shown in the variable costing income statement, it is
easier to identify these costs and understand their effect
on the business
Advantages of Throughput Costing:
- Reduces incentive for management to build up excess
inventories in order to spread fixed manufacturing
costs over a larger number of units produced
- Encourages managers to reduce operating such as DL
and VMOH which are treated as period costs NOT
product costs
CHAPTER 5
Benefits of ABC: employs more cost pools and therefore 𝐸𝑠𝑡 𝑂𝐻 𝑝𝑒𝑟 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
Actvty based OH rate:
results in more accurate product costing, leads to enhanced 𝐸𝑠𝑡 𝑢𝑠𝑒 𝑜𝑓 𝑐𝑜𝑠𝑡 𝑑𝑟𝑖𝑣𝑒𝑟𝑠 𝑝𝑒𝑟 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
control over OH costs, supports better management
decisions Unit-level activities: Performed for each unit of
production Batch-level activities: Performed every time a ABC Steps:
1) Identify & classify the major activities involved in the
company produces another batch of product, amt of time
manufacture of specific products, and assign OH to cost
spent setting up machines increases with the number of pools
batches produced, not with the number of units produced 2) Identify the cost driver that has a strong correlation with
Product-level activities: Performed every time a company the costs accumulated in each pool and the total amount
produces a new type of product, amt of time spent on testing of cost driver usage
activities increases with the number of products a company 3) Calc the activity based OH rate for each cost pool (Amts
in step 1 divided by Amts in step 2
produces Facility-level activities: Required to support or
4) Assign OH to products using the OH rates determined
sustain an entire production process, do not vary as a for each cost pool and each products use of each cot
function of the number of units, batches, or products driver
Decision tool: The activity analysis flowchart is extended to
identify each activity as value-added or non value-added Limitations of ABC:
Expensive to use, more complex than traditional systems,
Value Added Activities: Essential activities of a company’s
operations that increase the perceived value of a product or arbitrary allocations remain
service to customers, Supervision of value-added activities
is in itself a value-added activity Non Value Added
Activities: Non-essential activities, that if eliminated would
not reduce the perceived value of a company’s product or
service, add cost to, or increase the time spent on a product
or service without increasing its perceived value
CHAPTER 9
Target cost: Cost that will provide the desired profit on a product when Target Cost: 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 − 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
the seller does not have control over the product’s price Absorption Target Selling price: 𝐶𝑜𝑠𝑡 + (𝑀𝑎𝑟𝑘𝑢𝑝 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 × 𝐶𝑜𝑠𝑡)
cost-plus pricing: Defines the cost base as the manufacturing cost 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑅𝑂𝐼 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 × 𝑎𝑚𝑜𝑢𝑛𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑
Markup:
Variable cost-plus pricing: much more useful for making short term 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
decisions because it considers variable cost and fixed cost behaviour 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑅𝑂𝐼 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
patterns separately Markup %:
𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
Specific reasons for using the variable cost approach: 𝑇𝑜𝑎𝑙 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
1) VC pricing, being based on VCs is more consistent with the Target selling P/unit:
(𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡 × 𝑀𝑎𝑟𝑘𝑢𝑝 %)
CVP analysis that managers use to measure the profit
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑅𝑂𝐼/ 𝑢𝑛𝑖𝑡 + 𝑆&𝐴 𝑒𝑥𝑝/𝑢𝑛𝑖𝑡
implications of changes in P and volume Abs Cost + markup %:
𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
2) VC pricing provides the type of data that managers need for
priving special orders→ shows incremental costs of Var Cost+ markup %:
accepting one more order (𝐷𝑒𝑠 𝑅𝑂𝐼/𝑢𝑛𝑖𝑡 + 𝐹𝑀𝑂𝐻 + 𝑆&𝐴 𝑒𝑥𝑝/𝑢𝑛𝑖𝑡) × 𝑉𝐶/ 𝑢𝑛𝑖𝑡
3) VC pricing avoids arbitrary allocation of common FCs such Transfer P: 𝑉𝐶 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 + 𝑂𝑝𝑝 𝐶𝑜𝑠𝑡
as exec salary to individual product lines Transfer P no excess cap: 𝑉𝑎𝑟 𝐶𝑜𝑠𝑡𝑠
HIGH transfer price results in HIGH revenue for the SELLING (𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 − 𝑉𝐶) × 𝑈𝑛𝑖𝑡𝑠 𝑓𝑜𝑟𝑒𝑔𝑜𝑛𝑒
division and HIGH costs for the BUYING division, LOW transfer Opp Cost:
𝑈𝑛𝑖𝑡𝑠 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑛𝑎𝑙𝑙𝑦
price has the reverse outcome and therefore affects the selling
Total CM w no excess cap: 𝐶𝑀/𝑈𝑛𝑖𝑡 + 𝑉𝐶
division’s performance Cost-Based Transfer Prices: Based on the costs
incurred by the division producing the g/s Market based transfer 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑙𝑜𝑎𝑑𝑖𝑛𝑔 𝑐ℎ𝑎𝑟𝑔𝑒
Materials Loading %:
prices: Based on actual market Ps of competing g/s 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑜𝑖𝑐𝑒 𝑐𝑜𝑠𝑡, 𝑝𝑎𝑟𝑡𝑠, 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠

Budget: Formal written statement in financial terms of
mgmt’s plans for a specified future time period
Participative budgeting: Lower level managers have more
detailed knowledge of their specifc areas and thus should
be able to provide more accurate budgetary estimates
Budgetary slack: occurs when managers intentionally
underest revs or overest exps in order to achieve
budgetary goals for their division Op budgets: Indiv
budgets that are used to prepare the budgeted income
statements , Establish goals for the company’s sales and
prod personnel Fin budgets: Capital expenditure budget,
cash budget, budgeted bal sheet, focus on the cash
resources needed to fund exp ops and planned capital
exps Sales Budget: Derived from sales forecast,
Represents management’s best estimate of sales revenue
for th budget period Prod budget: Shows the units that
must be produced to meet expected sales Direct
Materials budget: Shows both the quantity & the cost of
DM that need to be purchased, Desired ending inventory
is a key component int the budgeting process DL
Budget: Contains the quality and cost of DL that will be
needed to meet prod reqs MOH Budget: Shows the exp
MOH costs for the budget period, Distinguishes between
VMOH/FMOH S&A exp budget: Where the operating
expenses are combined, Projects SA exps for the budget
per Cash Budget: Shows exp CFs, Often considered the
mot important output in preparing fin budgets, typically
prepared at least once a month, Contains 3 secs: Cash
recs, Cash disbs, Financing Budgeted bal sheet: Proj of
company’s fin position at the end of the budget period,
Developed from budgeted bal sheet of the preceding year,
budgets for current yr 2 major diffs between master
budgets of merch and a manuf: Merch uses a merch
purchases budget instead of a prod budget, Merchdoes
not use manuf budgets (DM, DL, MOH) Service Ents:
Critical factor is coord staff needs w exp services
CHAPTER 12
Standard costs: Predet unit costs that are used as measures
of perf Ideal Standards: Reps optimal levels of perf
under perfect op conds Normal standards: Reps efficient
levels of perf that are attainable under exp op conds
Variances: Diffs between total costs and total standard
costs, When actual costs are HIGHER than standard costs,
variance is unfavourable, When actual costs are LOWER
than standard costs, variance is favourable Total OH Var:
Diff between the actual OH costs and OH costs applied
based on standard h allowed for the amt of goods prod
Total Standard Hours Allowed: Hs that should have been
worked for the units produced Total Fixed OH Variance:
Diff between the actual fixed OH and the total standard h
allowed multiplied by FMOH rate Bal Scorecard:broad
approach to perf measurement Fin persp: Most tradl
view of org Customer persp: Evals how well company is
performing from viewpoint of people who buy/use its p&s
Internal process persp: Evals the internal op processes that
are critical to success Learning and growth persp: Evals
how well the company develops and retains its employees
CHAPTER 10: CHAPTER 11
Req prod units: 𝐸𝑥𝑝 𝑠𝑎𝑙𝑒𝑠 𝑢 + 𝐷𝑒𝑠 𝐸𝑛𝑑 𝐹𝐺 𝑢𝑛𝑖𝑡𝑠 − 𝐵𝑒𝑔 𝐹𝐺 𝑢𝑛𝑖𝑡𝑠 Budgetary control: One of management’s major responsibilities Total budgeted costs: 𝐹𝐶 + 𝑉𝐶
DM units req for prod: 𝑈𝑛𝑖𝑡𝑠 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑 × 𝐷𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝𝑟𝑜𝑑 is to control company ops Static Budget Reports: Projection of 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑎𝑏𝑙𝑒 𝑚𝑎𝑟𝑔𝑖𝑛 𝑂𝑝 𝑖𝑛𝑐𝑜𝑚𝑒 𝑆𝑎𝑙𝑒𝑠
budget data at 1 level of activity, Do not consider data for diff
ROI: = × 𝑂𝑝 𝐴𝑠𝑠𝑒𝑡𝑠
DM units to purh: 𝐷𝑀 𝑢 𝑟𝑒𝑞 𝑓𝑜𝑟 𝑝𝑟𝑜𝑑 + 𝐷𝑒𝑠 𝑒𝑛𝑑 𝐷𝑀 𝑢 − 𝐵𝑒𝑔 𝐷𝑀 𝑢 𝐴𝑣𝑔 𝑜𝑝 𝑎𝑠𝑠𝑒𝑡𝑠 𝑆𝑎𝑙𝑒𝑠
levels of activity Flexible budgets: Series of different levels of Resid. Income: 𝑐𝑜𝑛𝑡. 𝑚𝑎𝑟𝑔𝑖𝑛 − (𝑚𝑖𝑛 𝑅𝑜𝑅 × 𝐴𝑣𝑔 𝑂𝐴)
Cost of DM purchase:𝐷𝑀 𝑢 𝑡𝑜 𝑏𝑒 𝑝𝑢𝑟𝑐ℎ × 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝐷𝑀 𝑢
activity, recognizes that the budgetary process is more useful if EVA: 𝐼𝑛𝑣 𝑐𝑒𝑛𝑡𝑟𝑒 𝑜𝑝 𝑖𝑛𝑐 𝑎𝑓𝑡 𝑡𝑎𝑥 − 𝑊𝐴𝐶𝐶 × 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝 𝑢𝑠𝑒𝑑
Total DL cost: 𝑈 𝑡𝑜 𝑏𝑒 𝑝𝑟𝑜𝑑 × 𝐷𝐿𝐻/ 𝑢 × 𝐷𝐿 𝑐𝑜𝑠𝑡/ℎ it can be adapted to changes in operating conditions Behavioural Principles:
Req Merch purchs:𝐵𝑢𝑑𝑔 𝐶𝑂𝐺 + 𝐷𝑒𝑠 𝐸𝑛𝑑 𝑀𝑒𝑟𝑐ℎ 𝐼𝑛𝑣 − 𝐵𝑒𝑔 𝑀𝑒𝑟𝑐ℎ 𝐼𝑛𝑣 Responsibility Accounting: Accumulating and reporting costs 1) Managers of responsibility centres should be directly involved
and revs that involve the manager who has the authority to in setting budget goals for their areas of resp
make the day-to-day decisions about cost items 2) Eval of performance should be based entirely on matters that
Decentralization: Control of ops is given to many managers can be controlled by the manager being evaluated
throughout organization Segment: Used to identify an area of 3) Top management should support the evaluation process
responsibility in decentralized ops Cost centre: Incur costs and 4) Eval process must allow managers to respond to their evals
expenses but do not directly generate rev, Managers have 5) The eval should identify both good and poor performance
authority to incur costs, Evaluated on ability to control costs Reporting Principles:
Profit centre: Incurs costs and expenses and generates revs, 1) Contain only data that are controllable by the manager of the
Managers are judged on the profitability of their centres resp centre
Investment centre: Incurs costs and expenses, generates revs, 2) Provide accurate & reliable budget data to measure perf
and has control over the investment funds available for use 3) Highlight signif diff between actual results& budget goals
Residual income: Income that remains after subtracting from 4) Be tailor made for the intended evaluation
the controll margin the min RoR on a company’s av op assets 5) Be prepared at reasonable intervals
Total Var: 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑉𝑎𝑟 + 𝐿𝑎𝑏𝑜𝑢𝑟 𝑉𝑎𝑟 + 𝑂𝐻 𝑉𝑎𝑟
Total DM Budget Var: (𝑇𝑜𝑡𝑎𝑙 𝐴𝑐𝑐 𝑄 × 𝐴𝑐𝑐 𝑃) − (𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛 𝑄 × 𝑆𝑃)
Total Mat Var: 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑃 𝑉𝑎𝑟 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝑄 𝑉𝑎𝑟
Mat P Var: 𝑇𝑜𝑡𝑎𝑙 𝐴𝑐𝑐 𝑄 × 𝐴𝑐𝑐 𝑃) − (𝑇𝑜𝑡𝑎𝑙 𝐴𝑐𝑐 𝑄 × 𝑆𝑡𝑎𝑛 𝑃)
If Q of mats purch ≠ acc mats used, P var: 𝑇𝐴𝑄 × (𝐴𝑃 − 𝑆𝑃) = 𝑀𝑃𝑉
Mat Q Var: (𝑇𝐴𝑄 × 𝑆𝑃) − (𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛 𝑄 𝐴𝑙𝑙𝑜𝑤𝑒𝑑 × 𝑆𝑃)
Total DL Budget Var: (𝑇𝐴𝐻 × 𝐴𝑐𝑐 𝑟) − (𝑇𝑆𝐻 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 × 𝑆𝑡𝑎𝑛 𝑟)
Total labour V: 𝐿𝑎𝑏𝑜𝑢𝑟 𝑃 𝑣𝑎𝑟 + 𝐿𝑎𝑏𝑜𝑢𝑟 𝑄 𝑉𝑎𝑟
Labour P Var: 𝑇𝐴𝐻 × 𝐴𝑐𝑐 𝑅𝑎𝑡𝑒) − (𝑇𝑜𝑡𝑎𝑙 𝐴𝑐𝑐𝐻 × 𝑆𝑡𝑎𝑛 𝑅𝑎𝑡𝑒)
Labour Q Var: 𝑇𝐴𝐻 × 𝑆𝑅) − (𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛 𝐻 𝐴𝑙𝑙𝑜𝑤𝑒𝑑 × 𝑆𝑅)
Total OH var: 𝐴𝑐𝑐 𝑂𝐻 − 𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛 𝐻 𝐴𝑙𝑙𝑜𝑤𝑒𝑑 × 𝑆𝑅
Total Var OH budget Var: 𝐴𝑉𝑂𝐻 − 𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛 𝐻 𝑎𝑙𝑙𝑜𝑤 × 𝑆𝑅
Var OH Spend Var: 𝐴𝑐𝑐 𝑉𝑂𝐻 − 𝑇𝐴𝐻 𝑎𝑡 𝑆𝑡𝑎𝑛 𝑉𝑂𝐻 𝑅𝑎𝑡𝑒 × 𝑆𝑅
VOH Effic Var: 𝑇𝐴𝐻 𝑎𝑡 𝑆𝑉𝑂𝐻 𝑅𝑎𝑡𝑒 × 𝑆𝑅 − 𝑇𝑆𝐻𝐻 𝐴𝑙𝑙𝑜𝑤𝑒𝑑
𝑎𝑡 𝑆𝑉𝑂𝐻 𝑅 × 𝑆R Total FMOHVar𝐴𝑐𝑐 𝐹𝑀𝑂𝐻 − 𝑇𝑆𝐻 𝐴𝑙𝑙𝑤𝑑 𝑎𝑡 𝑆𝑅
FMOH Spend Var: 𝐴𝑐𝑐 𝐹𝑀𝑂𝐻 − (𝑁𝑜𝑟𝑚 𝑐𝑎𝑝 𝐻 𝑎𝑡 𝑆𝐹𝑀𝑂𝐻 𝑅 × 𝑆𝑅)
FMOH Vol Var:(𝑁𝑜𝑟𝑚 𝑐𝑎𝑝 𝐻 𝑎𝑡 𝑆𝐹𝑀𝑂𝐻 𝑅 × 𝑆𝑅) − 𝑇𝑆𝐻 𝐴𝑙𝑙𝑤𝑑
𝑎𝑡 𝑆𝐹𝑀𝑂𝐻 𝑅 × 𝑆𝑅 FMOH Vol Var: 𝐹𝑀𝑂𝐻 𝑅(𝑁𝑜𝑟𝑚 𝐶𝑎𝑝 𝐻 − 𝑇𝑆𝐻 𝐴𝑙𝑙𝑤𝑑