*1. Cost Foundations*
- *Cost Object*: Anything you want to measure cost of. Product, service, dept, customer
- *Direct Costs*: Traceable economically. DM + DL = *Prime Cost*
- *Indirect Costs*: Cannot trace economically. OH = Indirect material + Indirect labor + Other OH
- *Prime Cost = DM + DL*. *Conversion Cost = DL + MOH*
- *Product Costs*: Inventoriable. DM, DL, MOH. On BS until sold → COGS
- *Period Costs*: Expensed immediately. Selling, Admin. Not in inventory
- *Relevant Range*: Activity range where fixed/variable cost assumptions valid. Outside = behavior changes
- *Fixed Cost*: Total constant, per-unit ↓ as volume ↑. Ex: Rent
- *Variable Cost*: Total changes, per-unit constant. Ex: DM
- *Mixed Cost*: Y = a + bX. Use *High-Low Method* to separate: b = (High$ - Low$)/(High Units - Low Units)
- *Step Costs*: Fixed over small range, jumps. Ex: 1 supervisor per 10 workers
- *Explicit Cost*: Out-of-pocket, accounting record. *Implicit Cost*: Opportunity cost, no cash. *Economic Cost = Explicit + Implicit*
- *Opportunity Cost*: Benefit forgone from next best alternative. Not recorded, but relevant for decisions
- *Sunk Cost*: Past, irrelevant for decisions
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*2. Overhead: Allocation & Disposition*
- *Cost Pool*: Group of costs with same driver. Homogeneous = similar cause
- *Cost Driver*: Activity that causes cost. Allocation base. Ex: Machine hrs, DL hrs, # setups
- *Blanket/Plantwide Rate*: 1 OH rate for entire plant. Total OH / Total base. Simple, but inaccurate if products diverse
- *Departmental Rates*: Separate rate per dept. Better if depts use resources differently
- *Predetermined OH Rate = Estimated OH / Estimated Base*. Used to apply OH during period
- *Applied OH = Pred. Rate × Actual Base*. Actual OH = real incurred
- *Overapplied OH*: Applied > Actual. COGS overstated. *Underapplied*: Applied < Actual. COGS understated
- *Disposition*: 1. Immaterial → adjust COGS. 2. Material → Prorate to WIP, FG, COGS based on balances
- *Apportionment*: Distribute service dept costs to production depts
- *Reapportionment Methods*:
1. *Direct*: Service to production only. Simplest
2. *Step-Down*: One-way recognition of service-to-service. Start with dept serving most others
3. *Reciprocal*: Full recognition via simultaneous equations. Most accurate
- *Supplementary Rate*: Adjust OH rate mid-year if estimates way off. Avoids large year-end variance
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*3. Costing Systems: Absorption vs Variable vs Others*
- *Absorption/Full Costing*: US GAAP + IRS required. Product cost = DM + DL + Var MOH + Fixed MOH
- *Variable/Direct Costing*: For internal only. Product cost = DM + DL + Var MOH. Fixed MOH = period expense
- *Income Difference*: If Production > Sales, Absorption NI > Variable NI because Fixed OH deferred in inventory
- *Super-variable/Throughput Costing*: Product cost = DM only. DL + OH = period. Extremely lean. TOC aligned
- *Throughput = Sales – Totally Variable Costs DM*. Goal: Maximize throughput/unit of constraint
- *Theory of Constraints TOC*: 5 steps: 1. Identify constraint/bottleneck, 2. Exploit it, 3. Subordinate, 4. Elevate, 5. Repeat
- *Bottleneck*: Resource with capacity ≤ demand. Dictates system throughput
- *Operation Excellence*: 3 E’s: Economy = cheap inputs. Efficiency = input/output ratio. Effectiveness = meet goal
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*4. Joint & By-Product Costing*
- *Joint Costs*: Costs up to splitoff point for multiple products from same process
- *Splitoff Point*: Where products become identifiable
- *Allocation Methods*:
1. *Sales Value at Splitoff*: Joint cost × (Product Sales / Total Sales). Best if sell at splitoff
2. *NRV*: Final Sales – Separable Costs. Use if process further
3. *Constant GP%*: Back into costs to get same GP% for all
4. *Physical Units*: Weight, volume. Weak if values differ
- *By-Products*: Low value. Methods: 1. NRV reduces joint cost. 2. Misc income
- *Decision*: Process further if Incremental Revenue > Incremental Cost
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*5. Spoilage, Capacity, Variance*
- *Normal Spoilage*: Expected, inherent. Product cost. Spread over good units
- *Abnormal Spoilage*: Unexpected. Period loss, separate line
- *Job Costing*: Normal spoilage to specific job if due to job specs, else to MOH
- *Process Costing*: Normal spoilage = EUP calculation
- *Theoretical/Idle Capacity*: Max with no downtime. Not realistic
- *Practical Capacity*: Theoretical – unavoidable downtime. Used for denominator in fixed OH rate
- *Normal Capacity*: Average over long period
- *Budgeted Capacity*: Expected next year. Causes most variance if actual ≠ budgeted
- *Volume Variance*: Fixed OH only. = Budgeted Fixed OH – Fixed OH Applied. Due to capacity use
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*6. Inventory Valuation & Inflation Effects*
- *COGS Available for Sale = Beg FG + COGM*. COGS = Avail – End FG
- *Inflation + FIFO*: Ending Inv higher, COGS lower, NI higher, Tax higher. LIFO opposite
- *LIFO Liquidation*: Old low costs go to COGS → inflated NI in inflation
- *LIFO Reserve = FIFO Inv – LIFO Inv*. Used to convert LIFO to FIFO
- *LCM*: Lower of Cost or Market. Market = Replacement cost, ceiling NRV, floor NRV – Normal Profit
- *US GAAP*: No LIFO to IFRS. Once write-down, no reversal for inventory
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*7. Cost Control vs Cost Reduction*
- *Cost Control*: Keeping costs to standards/budget. Variance analysis. Prevention
- *Cost Reduction*: Permanent lowering of unit cost via process improvement. Value analysis, kaizen
- *Standard Costing*: Benchmark. Variances = Actual – Standard. Mgt by exception
- *Variance Disposition*: Same as over/underapplied OH
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*8. Cross-Subsidization & Costing Accuracy*
- *Overcosting*: Product charged too much OH. Price too high → lose sales
- *Undercosting*: Product charged too little. Hidden loss, subsidized by others
- *Cross-Subsidization*: Simple costing = one pool, volume base. High-volume simple products overcosted, low-volume complex undercosted
- *Fix*: ABC = multiple pools + multiple drivers. Better tracing, reduces cross-subsidy
- *ABC Hierarchy*: Unit, Batch, Product, Facility. Facility costs not traced to units
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*9. Factors of Production & Time Horizons*
- *4 Factors*: Land, Labor, Capital, Entrepreneurship
- *Short Run*: At least 1 fixed factor. Ex: Plant size fixed. Law of diminishing returns applies
- *Long Run*: All factors variable. Economies of scale possible
- *Economies of Scale*: Avg cost ↓ as volume ↑ due to fixed spread
- *Diseconomies*: Avg cost ↑ due to complexity
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*10. Key CMA Formulas to Memorize*
- *Prime Cost* = DM + DL
- *Conversion Cost* = DL + MOH
- *Applied OH* = Pred. Rate × Actual Activity
- *COGM* = Beg WIP + DM + DL + MOH – End WIP
- *COGS* = Beg FG + COGM – End FG
- *Contribution Margin* = Sales – Var Costs
- *Throughput* = Sales – DM
- *High-Low Var Cost/Unit* = (High Cost – Low Cost) / (High Units – Low Units)
- *EUP*: Units Completed + End WIP × %Complete – Beg WIP × %Complete if weighted avg
- *NRV* = Final Sales Price – Separable Costs
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*Exam Traps – CMA Loves These*
1. *“Fixed OH is product cost”* → True for absorption, false for variable
2. *“Underapplied OH means efficiency”* → No. Could be spending or volume variance
3. *“ABC eliminates all distortions”* → Reduces, not eliminates. Facility costs still arbitrary
4. *“Normal spoilage = period cost”* → No. Product cost under both job/process
5. *“TOC says balance capacity”* → Wrong. TOC says balance flow, not capacity. Exploit bottleneck
6. *“Opportunity cost is recorded”* → No. Relevant for decision, not in GL
7. *“LIFO = lower NI in inflation”* → Yes, because COGS higher
*Bottom Line*: CMA tests difference between GAAP absorption vs internal variable/throughput. Know why income differs. Know OH allocation impact on product costs → cross-subsidy → pricing decisions. Know TOC = throughput first.
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