Operations Management (Cost Measurement,Methods & Techniques)

Question 1

Prime Costs (Direct Costs)

Answer 1

Direct Materials + Direct Labor

Prime Conversion
Costs Costs
———————————— —————————————–
Direct Materials + Direct Labor + Overhead Applied
____________________________________________
Total Work In Process
to
Finished Goods
to
COGS

Question 2

Conversion Costs

Answer 2

Direct Labor + Overhead Applied

Question 3

DM, DL & Factory O/H
Work In Progress
Finished Goods

Answer 3

All Assets on the Balance Sheet

(Inventory)

Question 4

Product Costs

Answer 4

Not Expensed Until Product is SOLD (Matching Principle)

DM + DL + MFG OH Applied

Direct Materials, Direct Labor, Mfg. Overhead Applied

Question 5

Components of Product Costs

Answer 5

Direct Materials, Direct Labor and Manufacturing O/H applied

Question 6

Period Costs

Answer 6

Are expensed in the period when they are incurred NOT INVENTORIABLE. Examples:
Selling, General and Administrative expenses & interest (financing) expense.

Question 7

Component of Mfg Costs - “Direct Costs”

Answer 7

Direct materials & Direct Labor

Question 8

Component of Mfg Costs - “Indirect Costs”

Answer 8

Overhead=Indirect Materials + Indirect Labor + Factory Costs

Question 9

Nonmanufacturing Costs - Expensed in the Period Incurred Are NOT capitalized!

Answer 9

S,G & A Costs (Selling, General and Administrative Costs)

and

Interest

Question 10

Cost Accounting (“PIE”)

Answer 10

Measuring Cost Objects or Objectives for:

Product Costing
Income
Efficiency

Question 11

Cost Accumulation Systems

Answer 11

Assign costs to products

Question 12

If item produced is Custom Order

Answer 12

Use “Job Costing” to assign costs

Question 13

If item is mass-produced homogeneous product

ex. - steel

Answer 13

Use “Process Costing” to assign costs

Question 14

If item is essentially worthless until it is complete

Answer 14

Use “Backflush Costing” assigns costs when item is complete. There would be no “work in process” inventory.

Question 15

Another variation of assigning costs - combines job-order and process-costing

Answer 15

This is called “Operations Costing” has some of both.

Question 16

To Compute Direct Materials Used (if not given)

Answer 16

Beginning Raw Materials
\+ Purchased Raw Materials
=Raw Materials Availabile
-Ending Inv. of Raw Materials
=Raw Materials Used

Question 17

To Compute Cost of Goods Manufactured

Answer 17

Work in Process Inventory "Beginning"
\+ Direct Materials Used
\+ Direct Labor
\+Manufacturing Overhead APPLIED
=  Total Manufacturing Costs Incurred
-- Work In Process Inventory "Ending"
= Cost Of Goods Manufactured (Completed this Period)

Question 18

Overhead Allocation Using Cost Drivers
(Assign factory Overhead to Individual Products)
Allocation basis can be direct labor $ or direct labor hrs
or machine hours.

Answer 18

Budgeted Overhead Costs/Budgeted Dir Labor(cost driver)

Budgeted Overhead Costs=Variable + Fixed Overhead

Question 19

Job Order Costing - Each Unit is Unique/Easily Identifiable

Usually customized production environment such as: construction, aircraft assembly, printing, etc.

Answer 19

Cost is allocated to a specific job as it moves sequentially through the manufacturing process.

Use Materials Requisitions, Labor Time Tickets

Question 20

Process Costing - Have a large # of Homogeneous items.

Answer 20

Method of product costing that AVERAGES costs & applies them to a large group of homogeneous items.

Question 21

Product Costing Five Steps to Compute Cost of Goods Remaining in WIP(Inv) and Cost of Goods Transferred Out

Answer 21

1. Summarize the flow of physical units (beginning with the Product Report.
2. Calculate “equivalent unit” output.
3. Accumulate the total costs to be accounted for (Production Report)
4. Calculate the unit costs based on total costs and equivalent units.
5. Apply the average costs to the units completed and the units remaining in ending WIP.

Question 22

Production Report (for Product Costing of Mass Produced Homogeneous Units)

Answer 22

Keeps Track of NUMBER of Units & COSTS

Quantities (Need to Balance)

Charged to Department:
Beginning # in Process 5,000
+ # Transferred In 20,000
Total # Charged to Dept. 25,000

Units Accounted For:
# Transferred Out 15,000
+ Ending # in Process 10,000
Total # Accounted for 25,000
———————————————————————————–
Costs (Need to Balance)

Charged to Department:
Beginning $ in Process
+ Costs During the Period
Total $ Charged to Dept.

Costs Accounted For:
$ Transferred Out
+ Ending $ in Process
Total $ Costs Accounted For

Question 23

Equivalent Units (Express Partially Completed Items In Equivalent Units)

Answer 23

Example: At the end of the period you have 10,000 units that are 75% complete with respect to conversion costs. That is equivalent to 7,500 equivalent units.

Question 24

Costing Issues - Cost FLOW Assumptions

Answer 24

Are you using FIFO or Weighted Average

Question 25

FIFO Equivalent Units Components (3)

Answer 25

1. Amt NEEDED TO COMPLETE Beginning Units on Hand
2. Units Started AND Completed during the period
   (without including Beginning WIP)
3. Units Partially complete at the END of the Period.

Question 26

Weighted Average Equivalent Units Components (2)

Answer 26

1. Units Completed during the month

2. Units Partially completed at the End of the Period

Question 27

Example of FIFO & Weighted Average Equivalent Units Computation

Answer 27

Beginning WIP 100 Units, 25% complete
Units Completed & Transferred Out 600 Units
Ending WIP 200 Units, 40% complete

FIFO (3 Steps)
1. Amount needed to complete Beg WIP 75
(100-25%=75% x 100 units)
2. Units completed during Period - Beg Units
(600-100 beginning=500) 500
3. Ending WIP Units (40% x 200 units) 80
____________________________________________
Total Equivalent Units of Production (FIFO) 655

Weighted Avg. (2 Steps)
1. Units completed during the month 600
2. Ending Work in Process (200 x 40%) 80
____________________________________________
Total Equivalent Units of Production (Wt Avg)

Question 28

Cost Per Equivalent Units

Answer 28

FIFO = Current Costs Only
_______________
Equivalent Units

Weighted Avg = Beginning Cost + Current Cost
________________________
Equivalent Units

Question 29

Spoilage (Shrinkage) Normal vs. Abnormal

Answer 29

Normal Spoilage - INCLUDED in part of your Inventory Cost on the Balance Sheet.

Abnormal Spoilage - NOT Included in Inventory Cost on the Balance Sheet. It’s not normal and therefore it is a PERIOD COST.

Question 30

Activity Based Cost Drivers - 2 types

Answer 30

1. Volume Based (Traditional Costing System) Uses a SINGLE cost pool, with a Single plant-wide application rate, Use VOLUME based cost drivers such as:
   direct labor hrs. or machine hrs. Can distort the amount of costs assigned to various product lines (since all overhead costs do not fluctuate with volume).
2. Activity-Based (ABC) Uses MULTIPLE O/H rates by DEPARTMENT. Assumes the best way to assign costs to products (cost objects) is based on the product’s demand for resource-consuming activities.

Question 31

Cost Drivers (The thing that causes the cost to Change)

Answer 31

Traditional Costing - One Driver - Usually volume
vs.
Activity Based Costing - Multiple - Ex. machine hrs. & labor hrs.

Question 32

Pass Key from Book Re: Cost Drivers

Answer 32

A cost driver is a factor that has the ability to CHANGE total costs. Cost drivers (including nonfinancial, statistical measurements of activities such as sales or production volume) are identified by Activity Based Costing and are related to one of multiple cost pools for cost allocation.

For Ex.-If a production item is totally automated, then labor hrs. has NOTHING to do with the cost of producing that item. A better driver would be machine hrs.

Question 33

Activity Centers (Cost “Pools”)

Answer 33

Traditional - One Cost Pool for the entire factory

ABC - Multiple Cost Pools by department

Question 34

In Job Order Costing (Keep Cost Sheets or Job Orders of Total Costs per Job - use when relatively few units & each unit is unique)

Answer 34

The Denominator (bottom of the fraction) is always Whatever is Identified as the”Cost Driver”.

Consider Dir Mat+Dir Labor+OH

MFG Overhead T Account is also referred to as “CONTROL ACCT”.

Question 35

Job Order T Account for MANUFACTURING OVERHEAD

Answer 35

Dr. Side of T Acct = ACTUAL Costs Incurred:

Indirect Labor
Indirect Materials
Utilities
Deprec. on Bldg. & Eq.
Taxes (payroll & property)
Fire Ins.
Other Indirect Costs

Cr. Side of T Acct = Overhead Applied:

1. Budgeted Overhead/Budgeted Cost Driver = Rate
2. Rate x Actual = Overhead Applied

If you end up with a Dr. balance on left side of T Acct. - This is BAD. It means your actual overhead was MORE than what was budgeted.

If you end up with a Cr. bal. on right side of T Acct. -
This is GOOD. It means your actual overhead was LESS than what was budgeted.

Question 36

Remember “BASE” mnemonic for determining the components of inventory costs. (PASS KEY)

Answer 36

INVENTORY-RAW Materials
B.  Beginning inv. of raw materials
A. Add Purchases of raw materials
    (subtotal) Raw Materials Inv. available for use
S. Subtract raw materials used
E. Ending inv. of raw materials

INVENTORY-WIP
B. Beginning inv. of WIP
A. Add Raw Mat.+Direct Labor+Overhead Used
(subtotal) WIP Inv. available to be finished
S. Subtract Inventory Transferred to Finished Goods
E. Ending inv. of WIP

INVENTORY FINISHED GOODS
B. Beginning Inv. of Finished Goods
A. Inventory transferred from WIP
     (subtotal) FG Inv. avail. for sale
S. Subtract COGS
E. Ending Inv. of Finished Goods