Ch.

18
Cost leadership: high-volume production, undifferentiated products (commodities). Lost cost providers. Walmart, SW Air,
Scottrade.
Product differentiation: premium price, unique features. Large margins. Luxury: BMW.
Focused competitors (niche/segmentation): narrow segment of customers, uses cost leadership and product dif. Local
companies, small towns. Whole foods.
Single vs Multiple measures: single- branch manager more knowledgeable than corp. staff about what customers prefer. Multicorp. office has better knowledge.
Performance level examples: employee satisfaction, customer satisfaction, branch profitability
Balance scorecard: performance measurement report based on a broad set of financial & non financial measures. Crucial to
understanding and creating a strategy. A strategy map is a picture of the balance scorecard.
4 Perspectives: Financial (financial measures increased revenue), customer (customer satisfaction - relationships),
internal business process (productivity managing projects), learning & growth (training career development)
Continuous improvement: reevaluation and improvement of efficiency of the companys activities
Benchmarking: process of measuring a companys products/services against competitors
Nonfinancial performance measures: productivity, functionality, cycle times, customer service
Manufacturing cycle efficiency (MCE): a non-financial measurement. = processing time/MCT
ex. MCE = 1.5/5 = .3 =
30%
Manufacturing cycle time (MCT): transportation time + manufacturing (processing time) + inspection time +
storage/warehouse time= MCT.
Ch. 1
Value chain: the set of activities that transforms raw resources into the goods & services end users purchase and consume.
Includes treatment/disposal of any waste generated by the end user.
Steps: 1. Identify value chain activities 2. Identify the cost driver @ each value step 3. Develop a competitive
advantage by reducing cost or adding value (differentiation)
Cost driver: any factor that changes the level of total cost
Financial accounting: field of accounting that reports financial position and income according to accounting rules
differential costs: change in response to a particular course of action.
Differential revenue- revenues that change in response to a particular course of action.
Changes/trends in cost accounting: manual bookkeeping nearly eliminated. Emphasis on cost control increasing in banks and
hospitals. Cost accounting a necessity in every organization. Managers and cost accountants must work together to increase
firms value.
IMA Code of ethics: DISCUSS the conflict, CLARIFY the relevant issues and concepts, CONSULT your attorney about rights and
obligations
Ch. 2
Cost: a sacrifice of resources
Operating profit: excess of operating revenues over the operating costs necessary to generate those revenues.
Manufacturing costs: PRODUCT costs- related to inventory. PERIOD costs: non manu. Costs related to the firm.
Direct costs: directly traced to the product.
Manufacturing overhead: all production costs except direct materials and direct labor. (indirect materials, indirect
labor, & other indirect costs).
Prime costs: primary costs of the product (direct materials & labor)
Conversion costs: costs necessary to convert materials into a product (direct labor & manufacturing overhead)
Non-manufacturing (period) costs: recognized as expenses when the costs are incurred.
Marketing: costs necessary to sell the products (advertising, sales commission, shipping costs)
Administrative: costs necessary to operate the business (executive salaries, data processing, legal costs)
Cost allocation: process of assigning indirect costs to products, services, business units, etc.
1. Define the costs pool: the collection of costs to be assigned to cost objects.
2. Determine cost allocation rule: the method used to assign costs in the cost pool to cost objects
3. Assign the costs in the cost pool to the cost object: any end to which a cost is assigned- product, product-line,
department, etc.
Ex: Rockford company has two divisions (east & west), both supported by IS group.
East = $80 mil. West = $20 mil. Total = $100 mil.
1. ISs department costs of $100 mil.
2. IS costs are allocated based on divisional revenue (% of revenue)
3. East = 80% of cost, West = 20% of cost
Manufacturing costs flows: product costs are recorded in inventory when costs are incurred. A manufacturing company has 3
inventory accounts: raw materials, work-in-progress, and finished goods inventory.

Cost behavior: how costs respond to a change in activity level within the relevant range
Relevant range: activity levels within which a given total fixed cost or unit variable cost will be uncharged.
Fixed costs: remain unchanged as volume changes within the relevant range. Fixed costs per unit varies inversely to a change
in activity. Fixed in total as activity changes.
Variable costs: change in direct proportion with a change in the volume within the relevant range. Varies in total as activity
changes. Costs per unit stays constant when activity changes within the relevant range.
Semivariable (mixed) costs: has both fixed and variable componenets.
Step costs (semifixed costs): increase in total with steps when the volume changes to a particular level.
Components of product costs:
Full costs: sum of all costs of manufacturing & selling unit of the product.
Full absorption cost: sum of all variable and fixed costs of manufacturing a unit of the product. Used to compete
inventory value (GAAP)
Variable costs: sum of all variable costs of manufacturing and selling a unit of the product.
Opportunity costs: lost benefit from the best forgone alternative.
Expense: charged against revenue in a particulate acct. period
Indirect costs: connect be directly related to a cost object Direct costs: directly related to a cost object
Product costs: part of inventory Outlay cost: past, present, or near-future cash flow
Ch. 3
Cost-Volume-Profit (CVP): helps managers evaluate the impact of alternative product pricing strategies on profits.
P = price, F = Total fixed costs, V = Variable cost per unit, N = profit target (before tax).
P-V = UCM (Unit contribution margin)UCM/P = CM ratio (percentage)
Profit= CMratio x
sales fixed expenses Breakeven point (# of units) = F+N/(UCM)
BEP($)=
F+N/CMRATIO
Breakeven: N = 0
Total sales = sales price (unit) x # of units sold
*** if says: $30,000 after tax .4.. to get pretax 1-.4
= .6 -> 30,000/.6= $50,000 before tax.
Margin of safety (MOS): The excess of projected or actual sales over the break-even volume.
Expected Sales volume Break-even sales volume = Margin of safety
Margin of
safety ratio (MOS-R): MOS/Sales
Operating Leverage: Extent to which an organizations cost structure is made up of fixed costs. High in firms with a high
proportion of fixed costs and a low proportion of variable costs. Results in a high contribution margin per unit.
Ch. 5
Cost estimation: estimates the relation between costs and the variable affecting costs (cost drivers). Three methods:
1. Engineering estimates: based on measurement and pricing of the work involved in a task.
2. Account Analysis: calls for a review of each account making up the total cost being analyzed.
3. Statistical methods (regression analysis).
Relevant range in cost estimation: level of activity for which a cost estimate may be valid. Usually between the upper and
lower limits of past activity levels.
Scatterplot: plots costs against activity levels
Hi-low cost estimation: estimates costs based on two cost observations, usually at the highest and lowest activity levels. Y =
a + (bx)
Y= the value of the est. cost x = the cost driver
a = a fixed quantit that represents Y when x = 0
b = the
slope of the line (unit var. cost)
1. (cost @ highest activity level cost @ lowest activity level)/ (highest activity level lowest activity
level) = variable cost/unit (b in equation)
2. Total cost @ highest activity level (variable cost x highest activity level) = fixed cost (a in equation)
Regression: statistical procedure to determine the relationship between variables. Y = a + (bx)
A = intercept. B = variable cost (kilowatts, units, system hours, etc)
*R-square: the higher the # the better (when comparing)
*t-statistic for the B coefficient. T-stats 2 or
greater = valid, stable relationship
Nonlinearity: overcome this problem by defining a relevant range of activity and then use the range for one of cost-estimating
regression equations.
Outliers: Examine the data in advance and eliminate highly unusual observations before running the regression.