Characteristics of Normal Volume

        Many accountants reject the normal-volume notion and maintain that each year must .stand by itself; that is, each year's overhead must be applied to each year's production, written off as a loss, or both. This attitude arises from (a) the widespread conviction that the year is the key time period, and (b) adherence to the idea that overhead costs for a given year generally must cling or attach to the units produced during that year regardless of the relationship of that year's activity to average long-run activity.  ...

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Characteristics of Capacity

The choice of a capacity size is usually the result of capital-budgeting decisions, which are reached after studying the expected impact of these capital outlays on operations over a number of years. The choice may be influenced by a combination of two major factors, each involving trade-off decisions and each heavily depending on long-range forecasts of demand, material costs, and labor costs:Provision for seasonal and cyclical fuctuations in demand. The trade-off is between (a) additional costs of physical capacity and (b) the costs of inventory...

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Standards for Control:Presence of Expected Variances

Currently attainable standards may be used simultaneously for product costing, master budgets, and motivation. Throughout the illustrations and problems in this book, unless otherwise stated, currently attainable standards are assumed to be in use. If standards are not cunently attainable because they are perfection standards, the amount budgeted for financial (cash) planning purposes has to differ from the standard. Otherwise, projected income and cash disbursements will be forecast incorrectly. In such cases, perfection standards may be used...

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Standards for Control:Current Attainability

How demanding should standards be? Should they express perfection, or should they allow for the various factors that prevent perfect performance? Perfection, ideal, maximum, efficiency, or theoretical standard costs reflect industrial engineers' dreams of a "factory heaven." perfection standard costs are the absolute minimum costs that are possible under the best conceivable operating conditions, using existing specifications and equipment. Ideal standards, like other standards, are used where the management feels that they provide psychologically...

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Advantages of Budgets

Budgets are a major feature of most control systems. When administered intelligently, budgets (a) compel planning, (b) provide performance criteria, and (c) promote communication and coordination. Compelled planning "Plan ahead" is a redundant watchword for business managers and for any individual as well. Yet too often, everyday problems interfere with such planning; operations drift along until the passage of time catches the firms or individuals in undesirable situations that should have been anticipated and avoided. Budgets formulate expected...

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Major Features of Budgets:Definition and Role of Budgets

Evolution of systems Reflect on the evolution of control systems. As small organizations begin, there is usually a dominant means of control physical observation. A manager sees, touches and hears the relationships between inputs and outputs; he or she oversees the behavior of various personnel. Major features of budgets: definition and role of budgets A budget is a quantitative expression of a plan of action and an aid to coordination and implementation. Budgets may be lormulated for the organization as a whole or for any subunits. The master...

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Product-Costing and Control Purposes

All costs are accumulated to facilitate someone's decisions. But all these decisions cannot be foreseen, so systems are designed to fulfill predetermined general desires that are commonplace among managers. We will frequently distinguish between the product-costing purpose of a system and all other purposes. For convenience, we will sometimes refer to all other purposes as planning and control purposes, budgetary-control purposes, or, for brevity, as the control purpose. Aside from meeting the obvious external reporting demands for inventory valuation...

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Job Order Costing

Job-order (or job-cost or production-order or job) costing systems are used by organizations whose products or services are readily identified by individual units or batches, each of which receives varying inputs of direct materiais, direct labor, and factory overhead. Industriesthat commonly use job-order methods include construction, printing, aircraft, furniture, and machinery. Although a manufacturing situation is illustrated in this posting. Exampled include auto repair, auditing and consulting engagements, hospital cases, social-welfare...

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Cost-Volume-Profit Assumptions:Relevant Range

The modified chart highlights the fact that tenuous, static assumptions underlie a graph of cost-volume-profit relationships. The sales and expense relationships may be valid only within a band of activity called the relevant range. The relevant range is usually u a range in which the firrn has had some recent experience. But the same relationships are unlikely to persist if volume falls outside the limits of the relevant range. some fixed costs may be avoided at low-volume levels. Two principal differences between the accountant's and the economist's...

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The breakeven Point

          We obtain an overview of decision models by examining the interrelationships of changes in costs, volume, and profits-sometimes too narrowly described as breakeven analysis. The breakeven point is often only incidental in these studies. Instead, the focus is on the impact upon operating income or net income of various decisions that affect sales and costs. the breakeven point is that Point of activity (sales volume) where total revenues and total expenses are equal; that is, there is neither...

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Costs in General:Cost System

Cost accumulation is the collection of cost data in an organized way via an accounting system. The word system implies regularity-for example, the routine compilation of historical data in an orderly fashion. Other cost data may be gathered on occasion as desired (for example, replacement costs of certain equipment). Of course, continuous compilation is more expensive than occasional compilation; the relative elaborateness of systems is fundamentally a cost-benefit decision as to what data to "buy" on a regular basis. Cost objectives are chosen...

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Costs in general:Cost objectives

          Accountants usually define costs as resources sacrificed or foregone to achieve a specific objective. For now, consider costs as being measured in the conventional accounting way, as monetary units (for example, dollars) that must be paid for goods and services. To guide decisions, the manager wants data pertaining to a variety of purposes. He or she wants the cost of something. This something may be a product, a group of products, a service rendered to a hospital patient or a bank customer,...

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Purposes Of Management Accounting And Financial Accounting:Boundaries of Cost Accounting

          Where does "cost accounting" fit within the above framework? In its broadest sense,cost accounting has the same three major purposes as those deScribed above. However, its third purpose, costing products for inventory valuation and income determination, simultaneousiy fulfills the demands of outsiders and those of management for such information. so, when viewed in this way, cost accounting is management accounting, plus a small part of financial accounting to the extent that its product costing...

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Purposes Of Management Accounting and Financial Accounting:Basic Distinctions

The accounting system is the major quantitative information system in almost every organization. It should provide information for three broad purposes:Internal reporting to managers, for use in planning and controlling routine operations Internal reporting to managers, for use in making nonroutine decisions and in formulating major plans and-policies Externai reporting to stockholders, government, and other outside parties Both management and external parties share an interest in all three important purposes, but the emphasis differs. External...

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