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Flashcards in Cost Accounting Deck (65):

What is job order costing?

Allocating costs according to particular job orders (i.e. when a customer orders a job to be done) -- as distinct from process costing

Used for building construction, airplane manufacturing, service industries, etc.


How are manufacturing costs ordinarily assigned in job order costing?

Direct materials and direct labor are allocated specifically to the jobs in which they occur, and costs that aren't traceable to such jobs (e.g. fixed MOH) are applied according to a particular % rate


What are different ways that non-traceable costs might be applied in job process costing?

According to some common base

E.g. the rate might be (direct labor hours for job) / (total direct labor hours)
-can also be machine hours used, direct labor cost, or other things


What causes a complication for job process costing?

The rate to allocate fixed costs to different jobs must be based on estimates

Due to this, the difference between overhead applied to fix costs and actual overhead incurred has to be reconciled at the end of the period -- practically speaking, it is often closed to COGS


What is process costing?

Allocating costs according to the phase of production (process) in which goods are manufactured

Used for manufacturers of homogeneous goods, e.g. foods, chemicals, textiles


How does process costing assign unit costs?

The total cost of a given process is divided by that cost center's output in units


What is a cost of production report (CPR)?

A report showing all the costs charged to a particular cost center, including how it is distributed among ending WIP, FG, or completed units transferred to the next stage of production


What are equivalent units, and how do they relate to process costing?

Since process costing involves assigning costs to processes, it can assign costs for units that are not yet complete -- thus, to measure total units completed, partial units need to be added up to determine total equivalent units

E.g. 500 20%-completed units would be 100 equivalent units


When costs are calculated for a particular cost center, to what must they be applied?

(a) transferred-out units (i.e. all units that have exited the cost center) -- which is not necessarily finished goods
(b) ending WIP (i.e. all units that have not yet exited the cost center)


Which cost flow assumption is ordinarily used for process costing?

Either (1) FIFO or (2) weighted average


What is spoilage?

Any stuff produced in the manufacturing process besides finished goods


What are different kinds of spoilage?

(i) waste -- material lost in the process; has no salvage value
(ii) scrap -- residual material from the process; has salvage value
(iii) defective goods -- can be sold at a discount or reworked
(iv) spoiled goods -- can be disposed or sold at salvage value; no reworking available


What is the difference between normal and abnormal spoilage?

Normal = expected as part of the manufacturing process and unavoidable (in the short run) -- leads to management's determining an acceptable rate for normal spoilage

Abnormal = spoilage that could have been avoided if not for inefficiency or errors -- in practice, this is any spoilage beyond the determined normal spoilage rate


How are normal and abnormal spoilage accounted for differently?

Normal = treated as an ordinary cost of production, included in the cost of inventory

Abnormal = treated as a loss for the period in which it was incurred


How is the salvage value from scrap material accounted for?

Generally applied against manufacturing overhead, though it can also be applied against particular jobs (under job order accounting)


How is the cost for reworking goods accounted for?

Ordinarily charged to manufacturing overhead


What is the difference between joint products and byproducts?

Joint products = created from the same process used to make another unit

Byproducts = also created from the same process used to make another unit, but far less significant in sales value; also can be unintended


What is a split-off point?

A point in the production process where joint products or byproducts no longer undergo the same processes, but become separately identifiable units

Costs prior to this point are joint costs; costs after it are separable costs


What are different ways to apportion products' joint costs?

(1) relative market value method (also called relative sales value method)
(2) net realizable value method
(3) physical measures method


What is the relative market value method for allocating joint costs?

Apportions joint costs according to the products' relative market value at the split-off point


What is the net realizable value method for allocating joint costs?

Often applies when joint products have zero market value at the split-off point -- thus allocates joint costs according to the products' NRV, where NRV = later sales value minus additional processing costs

Generally, this uses the first point of additional processing at which a product acquires sales value, not necessarily the very end of the chain of production


What is the physical measures method?

Any method which uses the physical characteristics of a product (e.g. volume or weight) to apportion joint costs

Inferior to the other methods, which better relate the joint costs to revenues


How are the revenues from byproducts accounted for?

Two ways:
(1) the net revenue from byproducts sold is deducted from the cost for the main products sold
(2) the NRV from byproducts produced is deducted from the cost for the main products produced


How should service department costs for manufacturers be allocated?

They must be allocated to the applicable production departments (which then allocate the costs to inventory) using some objective method


As regards the allocation of service department costs to production departments, what is the direct method?

Assigns the costs of each service department to all production departments

This can occur either (ideally) by taking each individual service and charging it to that production department, or (more practically) by allocating them according to some objective measure
-e.g., a cafeteria's costs can be allocated according to the number of workers from each production dep't that eats there


As regards the allocation of service department costs to production departments, what is the step method?

A method which allocates costs from the most-used service department down to all other production departments AND service departments, then allocates costs from the second-most-used service department, and so on, until costs are allocated only to production departments

This method would not take into account any reciprocal services offered back to the more commonly used service departments, which would make the calculations much more complicated


What is an example of service department cost allocation using the direct method?

Overhead for widget production = $80k
Overhead for doodad production = $60k
Total cafeteria costs (allocated by workers) = $25k
Total administration costs (allocated by DL hours) = $30k
Total widget workers = 65
Total doodad workers = 35
DL hrs on widget administration = 12k
DL hrs on doodad administration = 18k

Total widget costs = $80k + (65/100)*$25k + (12k/30k)*$30k = $108,250
Total doodad costs = $60k + (35/100)*$25k + (18k/30k)*$30k = $86,750


What is an example of service department cost allocation using the step method?

Overhead for widget production = $80k
Overhead for doodad production = $60k
Total cafeteria costs (allocated by workers) = $25k
Total administration costs (allocated by DL hours) = $30k
Total widget workers = 65
Total doodad workers = 35
DL hrs on widget admin. = 12k
DL hrs on doodad admin. = 18k
DL hrs on cafeteria admin. = 10k

Distribute admin costs:
Widgets = $80k + (12k/40k)*$30k = $89k
Doodads = $60k + (18k/40k)*$30k = $73.5k
Cafeteria = $25k + (10k/40k)*$30k = $32.5k

Distribute cafeteria costs:
Widgets = $89k + (65/100)*$32.5k = $110,125
Doodads = $73.5k + (35/100)*32.5k = $84,875


What is activity-based costing (ABC)?

Seeks to assign costs to particular activities and then to products insofar as they utilize those activities -- holds that "products consume activities" and that activities consume resources

This is as opposed to more traditional (and labor-intensive) cost allocation, which would allocate costs more according to the total volume of products produced


For ABC, how big or small should activities be classified?

This will be a matter of judgment depending on the size of the firm, cost-benefit considerations, materiality, and so on

E.g. some businesses might have a single A/R activity, while others might have several activities for A/R


As regards ABC, what is a cost driver?

The main factor/measure influencing an activity's cost

E.g. for some manufacturing activity, the cost driver could be machine operating hours


As regards ABC, what is an occupancy group?

The most reasonable cost driver by which to allocate fixed costs among some activities, e.g. square footage for security services


As regards ABC, what is a cost center?

The lowest level of detail according to which costs can be assigned -- can involve a single activity or a group of activities


What are different kinds of diversity which can affect the allocation of costs in ABC?

(1) product diversity = when products consume activities differently
(2) volume diversity = when different quantities of units are produced by different product lines
(3) material diversity = when products' materials take longer or shorter to process per unit than other products


What are the general steps of ABC?

(i) identify relevant activities
(ii) organize activities within cost centers
(iii) identify major elements of indirect costs
(iv) identify cost drivers
(v) assign costs to activities and activities to products
(vi) create a cost-flow chart
(vii) create proper cost conversion tools
(viii) gather data
(ix) develop costing rates using the model


What is standard cost (SC) accounting?

Accounting which first calculates "standards" or estimates for various costs, against which actual costs are compared


As regards standard cost (SC) accounting, what are variances?

Differences between standard costs and actual costs

There are different kinds of variances, but all variances where actual costs < standard costs are favorable, whereas the opposite are unfavorable


How does management by exception relate to SC accounting?

Because SC accounting seeks to identify variances from the standards, management's focus will necessarily be on the costs which deviate from budgeted results, not on what is functioning as planned -- thus management will look at the exceptional things


How are various standard costs calculated?

The amounts of different physical standards for materials, labor, and overhead needed to produce one unit can be determined -- and these amounts can be multiplied by price factors to arrive at standard costs


What are different kinds of predicted cost standards?

(1) perfect/ideal = assumes perfect conditions -- almost always results in unfavorable variances, which can hurt morale
(2) basic = unchanging from year to year, thus used as a benchmark
(3) currently attainable = assumes efficiency but not perfection, overall the most useful


What are the two kinds of overhead in SC accounting?

(1) variable (VOH) = applied to production using some measure, e.g. direct labor hours
(2) fixed (FOH) = applied to production uniformly regardless of output


How does fixed overhead (FOH) provide a complication in SC accounting?

The total amount of fixed overhead is constant, but the avg. amount per unit decreases as production increases

Thus the unit FOH cost cannot be determined unless a specific level of activity (e.g. machine operating hours) is determined in advance


What must be understood to see how different kinds of variances arise in SC accounting?

The different factors which go into calculating the standard costs themselves

(1) direct materials
(2) direct labor
(3) VOH
(4) FOH

Standards/budgeted amounts are determined for these factors, and thus we can measure different kinds of variances by swapping actual amounts for standard amounts


In SC accounting, what is the disposition of variances?

At period end, variances have to be accounted for by being disposed to some account

(i) can be an independent income/expense item
(ii) can be closed to COGS
(iii) can be allocated to inventory (or inv. and COGS)

(iii) is most common


What are the two kinds of prime variances?

Prime variances deal with the prime costs: direct materials and direct labor

(1) price variances
(2) efficiency variances


How are price variances measured?

The difference between actual and standard unit prices, multiplied by the actual quantity used

Vp = (AP - SP) x AQ

Can also be calculated as (SP - AP) x AQ -- the important part is keeping track of whether it's favorable or unfavorable


What are some factors that can cause unfavorable prime cost variances?

(i) DM prices fluctuate
(ii) a better deal for DM might have been missed
(iii) overqualified or overpaid people are paid for their labor


How are efficiency variances measured?

The difference between actual and standard quantities used, multiplied by the STANDARD price

Ve = (AQ - SQ) x SP


What are the two different kinds of variable overhead (VOH) variances?

(1) efficiency variance = differences between actual and standard VOH due to inefficiency in using DL hours or machine hours
(2) spending variance = differences arising due to price changes from indirect materials/labor


What is the formula for VOH efficiency variance?

Ve = (AQ - SQ) x SP

Same as efficiency variance for prime costs, but uses different inputs


What is the formula for VOH spending variance?

Vs = (AP - SP) x AQ

Same as cost variance for prime costs, but uses different inputs


How does a predetermined rate factor fit into fixed overhead (FOH)?

Because fixed overhead costs still must be absorbed into products, it is important for a FOH unit cost to be established -- usually done by taking some relevant standard input (e.g. DL hours) and dividing the budgeted FOH costs for the upcoming year by that quantity

Predetermined rate = budgeted FOH / std. qty. of relevant input


What are the three main numbers to remember when dealing with FOH variances?

(1) applied FOH = (predetermined rate) x (actual qty. of input)
(2) budgeted FOH = the amount budgeted = (predetermined rate) x (standard qty. of input)
(3) actual FOH incurred = the actual amount


How do the three main numbers for FOH variance relate to the variances?

There are three total variances based on how each one differs from another


What is the total FOH variance?

Total FOH variance = actual FOH incurred - applied FOH
= actual FOH - (predetermined rate x AQ)


What is the FOH volume variance?

Results when the quantity of inputs needed to apply the predetermined rate to reach the budgeted amount differs from the standard quantity

FOH volume variance = budgeted FOH - FOH applied
= (predetermined rate x AQ) - (predetermined rate x SQ)
= predetermined rate x (AQ - SQ)


When is the FOH volume variance favorable or unfavorable?

Since the predetermined rate is calculated by allocating the budgeted FOH to individual units, the goal is to make enough units to apply the whole FOH

Thus any actual qty. amount below the standard qty. is unfavorable, whereas any amount above it is favorable


What is the FOH budget/spending variance?

The difference between the actual and budgeted overhead

FOH budget variance
= actual FOH - budgeted FOH
= actual FOH - (predetermined rate x SQ)


How does the total FOH variance relate to the other two FOH variances?

It is the sum of the other two: FOH volume variance + FOH budget variance = total FOH variance


What is the purpose of calculating variances?

They can be used as an initial stage to drill down further and determine the causes of any variances, including whether they are recurring or systematic defects


What are different kinds of variance analysis?

(1) two-way prime cost variance analysis
(2) two-way overhead variance analysis
(3) three-way overhead variance analysis
(4) four-way overhead variance analysis


What is calculated in two-way prime cost variance analysis?

Both the price and efficiency variances for DM and DL


What is calculated in two-way overhead variance analysis?

(1) FOH volume variance
(2) VOH efficiency variance + VOH spending variance + FOH budget variance

(2) comprises one total budget variance


What is calculated in three-way overhead analysis?

(1) FOH volume variance
(2) VOH efficiency variance
(3) VOH spending variance + FOH budget variance

Very similar to two-way; (3) comprises one total spending variance


What is calculated in four-way overhead analysis?

(1) FOH volume variance
(2) VOH efficiency variance
(3) VOH spending variance
(4) FOH budget variance