Chapter 2/6 (Jmbalvo)

Question 1

To determine the cost of manufactured products, what do companies use?

Answer 1

> companies use a product costing system, an integrated set of documents, ledgers, accounts, and accounting procedures used to measure and record the cost of manufactured products.

Question 2

The cost of the items is:

Answer 2

> The cost of the items is the purchase price plus shipping charges.

Question 3

Give an overview of the manufacturing firms (manufacturing process)

Answer 3

1) Buy raw materials from suppliers
2) Manufacture product in factory - costs considered: direct labour costs, direct material cost, manufacturing overhead cost (production processes)
3) Stock completed items in a warehouse or store
4) Sell items to customers

Question 4

Give an overview of the merchandising firms (manufacturing process)

Answer 4

1) Buy completed items from suppliers
2) Stock completed items in a warehouse or store
3) Sell items to customers

Question 5

What are manufacturing costs?

Answer 5

> (also known as product costs) are all the costs associated with the production of goods. They include three cost categories: direct material, direct labor, and manufacturing overhead.

Question 6

What is a direct material cost?

Answer 6

> is the cost of all materials and parts that are directly traced to items produced.

Question 7

Direct material cost often does not include what cost? As a result, what are those costs called?

Answer 7

> Direct material cost often does not include the cost of minor materials, such as screws and glue.

> Materials that are not directly traced to a product are referred to as indirect materials.

Question 8

What is a direct labour cost? Provide an example.

Answer 8

> Direct labor cost is the cost of labor that is directly traced to items produced.

> The Eastlake Motorboat Company’s direct labor includes the labor cost of the workers directly involved in constructing each motorboat.

Question 9

What are indirect labour costs? Provide an example.

Answer 9

> Labor costs that are not traced directly to products produced are referred to as indirect labor costs.

> It probably does not include the cost of production supervisors, such as the salary of Carl Jensen, the master builder.

Question 10

What is manufacturing overhead? Provide an example.

Answer 10

> Manufacturing overhead is the cost of all manufacturing activities other than direct material and direct labor. It includes indirect material and indirect labor, which were explained earlier, as well as a wide variety of other cost items.

Question 11

What are common manufacturing overhead costs?

Answer 11

> Indirect factory labor
Indirect material
Overtime premium
Nightshift premium
Vacation and holiday pay for factory workers
Social Security and Medicare taxes for factory workers
Health insurance for factory workers
Power, heat, and light in the factory
Depreciation of factory equipment
Depreciation of plant
Insurance on plant and factory equipment
Repair of factory equipment
Maintenance of factory building and grounds
Property taxes related to the factory

Question 12

What are nonmanufacturing costs?

Answer 12

> Nonmanufacturing costs (also known as period costs) can be defined simply as all costs that are not associated with the production of goods. These costs typically include selling and general and administrative costs.

Question 13

What are selling costs?

Answer 13

> Selling costs include all the costs associated with securing and filling customer orders. Thus, selling costs include advertising costs, sales personnel salaries, depreciation of automobiles and office equipment used by the salesforce, and costs of storing and shipping finished goods.

Question 14

What are General and Administrative Costs?

Answer 14

> General and Administrative Costs are all the costs associated with the firm’s general management. These costs include the salaries of the company president and accounting personnel, depreciation of the general office building, depreciation of office equipment used by general managers, and the cost of supplies used by clerical employees.

Question 15

In many cases, a cost is classified by what?

Answer 15

> In many cases, a cost is classified by its use rather than by its specific nature.

Question 16

costs that are classified as manufacturing and nonmanufacturing costs can also be classified as what?

Answer 16

> costs that are classified as manufacturing and nonmanufacturing costs can also be classified as product and period costs.

Question 17

What is the difference between product costs and period costs?

Answer 17

> Product costs are identified with goods produced and expensed when goods are sold. Period costs are identified with accounting periods and expensed in the period incurred.

Question 18

What are product costs and what are they interchangeable with?

Answer 18

> Product costs are those costs assigned to goods produced. Thus, the terms product costs and manufacturing costs are used interchangeably. Both include direct material, direct labor, and manufacturing overhead. Product costs are considered an asset (inventory) until the finished goods are sold.

Question 19

What are period costs?

Answer 19

> Period costs are identified with accounting periods rather than with goods produced. Selling and general and administrative costs (nonmanufacturing costs) are period costs.
We recognize period costs as expenses in the period incurred.

Question 20

For manufacturing costs, what are the type of costs and when are they expensed?

Answer 20

> Product costs
- Direct material
- Direct Labour
- Manufacturing overhead

> expensed when goods are sold

Question 21

For nonmanufacturing costs, what are the type of costs and when are they expensed?

Answer 21

> Period costs
- Selling cost
- General and administrative costs

> Expensed in period in which they are incurred.

Question 22

What does GAAP require for product costs when reporting?

Answer 22

> Manufacturing companies need product cost information in order to prepare financial statements in accordance with generally accepted accounting principles (GAAP).

> GAAP requires that inventory on the balance sheet and cost of goods sold on the income statement be presented using full cost information.

Question 23

What is full cost?

Answer 23

> Full cost means that product cost includes both variable and fixed manufacturing overhead as well as direct material and direct labor, which are generally variable costs.

Question 24

In most cases, in order to perform incremental analysis, you need to separate what costs components?

Answer 24

> you need to separate fixed and variable cost components.

Question 25

How are production costs treated in the recording process? Provide examples of the names that would be listed.

Answer 25

> product costs are treated as an asset until the finished goods are sold. > Raw Materials, Work in Process, and Finished Goods.

Question 26

What is raw material inventory?

Answer 26

> The Raw Materials Inventory account includes the cost of materials on hand that are used to produce a company’s products. For the Eastlake Motorboat Company, steering assemblies, motors, wood, screws, varnish, and glue are included in Raw Materials Inventory.

Question 27

What is the work in process inventory?

Answer 27

> Work in Process Inventory is the inventory account for the cost of goods that are only partially completed. > For example, suppose that at the end of the year, the Eastlake Motorboat Company has 10 partially completed boats. The cost of direct material, direct labor, and manufacturing overhead incurred to bring the boats to their current state of partial completion is included in Work in Process.

Question 28

What is the finished goods inventory?

Answer 28

> Finished Goods Inventory is the account for the cost of all items that are complete and ready to sell.

Question 29

In an accounting system, product costs flow from what?

Answer 29

> In an accounting system, product costs flow from one inventory account to another

Question 30

The cost of direct material used reduces what and increases what?

Answer 30

> reduces the Raw Material Inventory account and increases Work in Process Inventory

Question 31

Indirect material used is not added to what accounted but accumulated in what account instead?

Answer 31

> , however, is not added directly to Work in Process; instead, it is accumulated in Manufacturing Overhead.

Question 32

The amount of direct labor used increases what and is added to what?

Answer 32

> The amount of direct labor used increases Work in Process, but indirect labor is not added directly to Work in Process.

Question 33

Like indirect material, indirect labor is accumulated in what?

Answer 33

> Manufacturing overhead

Question 34

Once items are finished, the cost of the completed items is transferred from what into what?

Answer 34

> Once items are finished, the cost of the completed items is transferred from

Question 35

The cost of items completed is referred to as:

Answer 35

> Cost of goods manufactured.

Question 36

When the completed items are sold, the cost of the items sold is transferred from what into what?

Answer 36

> When the completed items are sold, the cost of the items sold is transferred from Finished Goods into Cost of Goods Sold.

Question 37

When finished goods are sold, the cost of the inventory sold is considered what?

Answer 37

> When finished goods are sold, the cost of the inventory sold is considered an expense and must be removed from Finished Goods Inventory and charged to Cost of Goods Sold. This provides a matching of revenue (sales dollars) with the cost of producing the revenue (the cost of goods sold).

Question 38

Before cost of goods sold can be calculated, however, we must calculate cost of what?

Answer 38

> we must calculate cost of goods manufactured.

Question 39

What is the formula for the cost of goods?

Answer 39

beginning balance in work in process + current manufacturing costs - ending balance in work in process = cost of goods manufactured.

Question 40

What is the formula for the cost of goods?

Answer 40

beginning balance in finished goods + costs of goods manufactured - ending balance in finished goods = cost og goods

Question 41

What is referred to as cost of goods available for sale?

Answer 41

> Note that in the income statement, the sum of the beginning balance in Finished Goods plus the cost of goods manufactured is referred to as the cost of goods available for sale.

Question 42

What is a product costing system?

Answer 42

> companies use product costing systems (an integrated set of documents, ledgers, accounts, and accounting procedures) to measure and record the cost of manufactured products.

Question 43

There are two major product costing systems:

Answer 43

> ob-order costing systems and process costing systems. The best system to use depends on the type of manufacturing.

Question 44

Companies that produce individual products or batches of products that are unique use what kind of system?

Answer 44

> Companies that produce individual products or batches of products that are unique use a job-order costing system.

Question 45

What companies use job-order costing systems?

Answer 45

> Companies using job-order systems include construction companies, producers of equipment and tools, shipbuilding companies, and printing companies.

Question 46

In the context of job-order costing, a job is what?

Answer 46

> In the context of job-order costing, a job is an individual product or batch for which a company needs cost information.

Question 47

Companies that use a process costing system generally produce what?

Answer 47

> Companies that use a process costing system generally produce large quantities of identical items. Such companies include metal producers, chemical producers, and producers of paints and plastics.

Question 48

How is the unit cost of items produced calculated in process costing?

Answer 48

unit cost of items produced = ( total cost of production / total number of units produced )

Question 49

In a process costing system, there is no need to trace costs... why?

Answer 49

> In a process costing system, there is no need to trace costs to specific items produced, since all items are identical. It is sufficient to assign each item its average unit cost of production.

Question 50

Firms that produce more than one product or that provide more than one type of service invariably have what kind of costs? How about various departments?

Answer 50

> Firms that produce more than one product or that provide more than one type of service invariably have indirect costs because resources are shared by the products or services (e.g., two different products may be manufactured using the same piece of equipment). > Various departments may also have common or shared resources (e.g., the marketing and human resources departments may share a high-speed copy machine). Because indirect costs associated with shared resources cannot be directly traced to products or services, some means of assigning them must be developed.

Question 51

What is cost allocation?

Answer 51

> The process of assigning indirect costs is referred to as cost allocation

Question 52

Companies allocate costs to products, services, and departments for four major reasons:

Answer 52

(1) to provide information needed to make appropriate decisions, (2) to reduce the frivolous use of common resources, (3) to encourage managers to evaluate the efficiency of internally provided services, and (4) to calculate the “full cost” of products for financial reporting purposes and for determining cost-based prices

Question 53

When managers use a company resource and receive an allocation of its cost, they are, in essence, receiving what?

Answer 53

> When managers use a company resource and receive an allocation of its cost, they are, in essence, receiving a charge for use.

Question 54

From a decision-making standpoint, the allocated cost should measure what kind of cost?

Answer 54

> From a decision-making standpoint, the allocated cost should measure the opportunity cost of using a company resource

Question 55

Although allocated costs should measure the opportunity cost of using a company resource, in practice this is what?

Answer 55

Although allocated costs should measure the opportunity cost of using a company resource, in practice this is difficult to operationalize.

Question 56

What is an opportunity cost useful for?

Answer 56

> Still, the opportunity cost idea is a useful benchmark. Whenever you are discussing allocations of cost, you should ask yourself, “How close is this allocation to the opportunity cost of use?” The closer it is, the better the allocation.

Question 57

As already noted, allocated costs serve as what in the accounting process?

Answer 57

> allocated costs serve as charges, or fees, for use of internal resources or services

Question 58

If frivolous use does not create additional costs, why discourage it?

Answer 58

> The reason is that frivolous use may have hidden costs.

Question 59

One way to eliminate frivolous use is to do what? How is it charged?

Answer 59

> One way to eliminate frivolous use is to charge for the use of centrally provided services. > And one of the most common ways to charge for use is to allocate the cost of the service.

Question 60

Cost allocation is also useful because:

Answer 60

> Cost allocation is also useful because it encourages managers to evaluate the services for which they are being charged.

Question 61

As we have mentioned, GAAP requires full costing for external reporting purposes. How do indirect costs meet this requirement? How about costs incurred?

Answer 61

> As we have mentioned, GAAP requires full costing for external reporting purposes. Indirect production costs must be allocated to goods produced to meet this requirement. > In addition, full cost information is required when a company has an agreement whereby the amount of revenue received depends on the amount of cost incurred.

Question 62

Government contracts issued by the Department of Defense are often called what?

Answer 62

> Government contracts issued by the Department of Defense are often so-called cost-plus contracts.

Question 63

What happens under so-called cost-plus contracts?

Answer 63

> Under such contracts, companies that supply the Department of Defense are reimbursed for their direct costs as well as reasonable overhead, and they also receive an amount for profit (the “plus” part of the cost-plus contract).

Question 64

A major problem with cost-plus contracts is that they:

Answer 64

> A major problem with cost-plus contracts is that they create an incentive to allocate as much cost as possible to the goods produced on a cost-plus basis and little cost to goods that are not produced on a cost-plus basis.

Question 65

In spite of this limitation, cost-plus contracts serve a useful purpose:

Answer 65

> Without the assurance that they will be reimbursed for their costs and that they will earn some profit, many manufacturers would not be willing to bear the financial risks associated with producing state-of-the-art products for the government, using untried technologies.

Question 66

The cost allocation process has three steps:

Answer 66

(1) identify the cost objectives, (2) form cost pools, and (3) select an allocation base to relate the cost pools to the cost objectives.

Question 67

The object of the allocation is referred to as:

Answer 67

> referred to as the cost objective.

Question 68

The second step in the cost allocation process is to form what?

Answer 68

> is to form cost pools. > A cost pool is a grouping of individual costs whose total is allocated using one allocation base. > For example, all of the costs in the maintenance department could be treated as a cost pool.

Question 69

The overriding concern in forming a cost pool is :

Answer 69

> is to ensure that the costs in the pool are homogeneous, or similar.

Question 70

The third step in the allocation process is to:

Answer 70

> is to select an allocation base that relates the cost pool to the cost objectives.

Question 71

Deciding which of the possible allocation bases to use is not an easy matter. Ideally, the allocation base selected should do what? What is the relationship?

Answer 71

> Ideally, the allocation base selected should relate costs to cost objectives that caused the costs to be incurred. > In this case, the allocation is based on a cause-and-effect relationship.

Question 72

When indirect costs are fixed, establishing cause-and-effect relationships between costs and cost objectives is what?

Answer 72

> not feasible.

Question 73

The relative benefits approach to allocation suggests:

Answer 73

> The relative benefits approach to allocation suggests that the base should result in more costs being allocated to the cost objectives that benefit most from incurring the cost.

Question 74

The ability to bear costs notion suggests:

Answer 74

> The ability to bear costs notion suggests that the allocation base should result in more costs being allocated to products, services, or departments that are more profitable. > Because they are more profitable, they can bear the increased costs from the higher allocations.

Question 75

The equity approach to allocation suggests:

Answer 75

> uggests that the base should result in allocations that are perceived to be fair or equitable. > Obviously, this is a difficult criterion to apply, because different individuals have different perceptions of what is equitable.

Question 76

The organizational units in most manufacturing firms can be classified as either:

Answer 76

> production departments or service departments. > Production departments engage in direct manufacturing activity, whereas service departments provide indirect support

Question 77

The method of allocating service department costs that we cover is called:

Answer 77

> The method of allocating service department costs that we cover is called the direct method. > In the direct method of allocating cost, service department costs are allocated to production departments but not to other service departments

Question 78

Cost pools are often formed by service departments:

Answer 78

> and these costs are allocated to production departments—the cost objectives. Ultimately, production departments allocate their costs to specific products.

Question 79

It is generally a good idea to allocate in what way?

Answer 79

> It is generally a good idea to allocate budgeted rather than actual service department costs. > If budgeted costs are allocated, service departments cannot pass on the cost of inefficiencies and waste.

Question 80

In practice, when costs are allocated, a number of problems may arise. Here we discuss problems brought about by:

Answer 80

(1) allocations of costs that are not controllable, (2) arbitrary allocations, (3) allocations of fixed costs that make the fixed costs appear to be variable costs, (4) allocations of manufacturing overhead to products using too few overhead cost pools, and (5) use of only volume-related allocation bases.

Question 81

Performance evaluation is facilitated by a system of accounting that: (what is this system called?)

Answer 81

> that traces revenues and costs to organizational units (e.g., departments and divisions) and individuals (e.g., plant manager, supervisor of assembly workers, vice president of operation), with related responsibility for generating revenue and controlling costs. > such a system is referred to as a responsibility accounting system.

Question 82

Cost allocation is generally required in a responsibility accounting system because:

Answer 82

> because one organizational unit often is responsible for the costs incurred by another organizational unit.

Question 83

Some allocations of costs, however, are not consistent with a responsibility accounting system. Most accountants believe that managers should be held responsible only for costs they can control. Therefore, what are these costs?

Answer 83

> These costs, called controllable costs, are affected by the manager’s decisions.

Question 84

In some cases, managers are allocated costs beyond their control simply to make them aware that the costs exist and must be covered by the firm’s revenue. In such situations, the costs should be:

Answer 84

> costs should be clearly labeled noncontrollable, indicating to the manager that company officials are aware that the items are not affected by his or her decisions.

Question 85

One of the most significant problems associated with cost allocation is:

Answer 85

> is due to the fact that the allocation process may make fixed costs appear to be variable costs. > This happens when fixed costs are unitized—that is, stated on a per unit basis.

Question 86

allocations of fixed costs must be made in such a way that they appear fixed to the managers whose departments receive the allocations. This is achieved by:

Answer 86

> This is achieved by lump-sum allocations of fixed costs.

Question 87

How does the lump-sum allocation of fixed costs work?

Answer 87

> A lump-sum allocation is an allocation of a predetermined amount that is not affected by changes in the activity level of the organizational unit receiving the allocation. Resources are acquired taking into account the long-run needs of users. Thus, allocations of fixed costs should be based on the projected long-run needs that lead managers to incur the costs.

Question 88

It follows that, with lump-sum allocations, the allocations of a division do not depend on what?

Answer 88

> It follows that, with lump-sum allocations, the allocations of a division do not depend on the activity level of other divisions.

Question 89

Some companies assign overhead to products using only one or two overhead cost pools. Although the approach has the benefit of being simple and easy to use, product costs may be seriously distorted when what is used?

Answer 89

> when only a small number of cost pools are used.

Question 90

What is ABC costing?

Answer 90

> Activity-based costing (ABC) is a relatively recent development in managerial accounting, and it has received a tremendous amount of attention from both academics and practitioners interested in improving managerial accounting information.