-Cost Accounting

Question 1

What is Cost Accounting?

Answer 1

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for:

• Direct Materials
• Direct Labor
• Work in Process
• Finished Goods

Cost Accounting also records for the Income Statement.

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Question 2

What is the difference between Cost Accounting and Managerial Accounting?

Answer 2

Cost Accounting - External Focus - GAAP

Managerial Accounting - Internal Focus - Not GAAP

Question 3

What are Product Costs (aka Inventory Costs)?

Answer 3

Product Costs are:

• Prime Costs
• Conversion Costs

Question 4

What is included in Prime Costs?

Answer 4

Prime Costs include:

• Direct Material used - Have become part of the product or had a direct impact on the product.
• Direct Labor used - Employees who worked on product and had a direct impact.

Question 5

What is Factory Overhead?

Answer 5

Factory Overhead refers to all factory costs except for DM and DL used in production.

This includes Spoilage, except for abnormal spoilage, which is a period cost and not included in OH).

Question 6

What is included in Fixed Factory Overhead?

Answer 6

FFO: Estimated Costs / Normal Capacity

FFO uses normal activity.

Examples of Fixed Factory OH: Depreciation (SL) - Utilities - Taxes

Under/Over-applied Fixed OH always goes to COGS.

Question 7

What is included in Variable Overhead?

Answer 7

VO: Estimated Activity / Actual Activity

VO uses actual activity.

Examples of Variable Factory OH:

• Depreciation (Units of Prod)
• Indirect materials (supplies & insignificant items)
• Indirect labor (factory foreman, janitors, machine maintenance)

Question 8

Where is Under/Over-applied Variable OH recorded?

Answer 8

If Immaterial - Goes to COGS

If Material - Goes to WIP - Finished Goods - or COGS - based on their Ending Balance

Question 9

Where is Under/Over-applied Fixed OH recorded?

Answer 9

It always goes to COGS.

Question 10

What is indicated by a debit balance in Actual Factory Overhead? How is it corrected?

Answer 10

A debit balance indicates under-applied overhead.

• If it’s Fixed OH - under-applied goes to COGS.
• If it’s Variable OH - under-applied goes to COGS
• if immaterial - but is allocated to WIP - FG or COGS based on ending balances.

Question 11

What is indicated by a credit balance in Applied Factory Overhead? How is it corrected?

Answer 11

A credit balance indicates over-applied overhead.

• If Fixed overhead - it is corrected from COGS.
• If Variable overhead - it is corrected through COGS
• If immaterial - but if material overage is allocated to WIP - FG or COGS based on ending balances.

Question 12

Which variables are used to calculate Direct Material balances?

Answer 12

The following variables are used to calculate Direct Material balances:

• Beginning Balance
• DR Net purchases (plus freight-in)
• CR Direct Materials Used
• = Ending balance (goes to BS)

Question 13

What variables are used to calculated Work in Process (WIP)?

Answer 13

Beginning Balance (End Bal of Previous WIP)

DR Direct Materials Used

DR Direct Labor Used (Conversion Cost)

CR COGM

DR Factory Overhead Applied (Conversion Cost)

= Ending Balance (Goes to BS)

Question 14

What variables are included in Finished Goods calculations?

Answer 14

Beginning Balance

DR COGM

= COGAS (Cost of Goods Avail for Sale)

CR COGS

= Ending Balance (Goes to BS)

Question 15

How does Freight-In affect Cost Accounting calculations?

Answer 15

Inventory (Product) Cost

Part of DM Purchases

Question 16

How does Freight-Out affect Cost Accounting?

Answer 16

Selling (Period) Cost

Not part of inventory

Question 17

When is Job-Order Costing used?

Answer 17

Job-Order Costing is used when costs are easily connected to a specific product or product line. It can also be applied to services.

The calculation is the same as normal cost accounting.

• Just use your T Accounts - DM to WIP to FG to COGS.
• You’re likely going to be solving for the last job in the queue.

Question 18

What is the Direct Method for allocating service department costs?

Answer 18

NO services allocated between service departments even if they serve each other.

They are only allocated to product(s).

Question 19

What is the Step Method for allocating service department costs?

Answer 19

Services can be allocated to both other service departments and the product(s).

Question 20

Under process costing, how are the number of units shipped calculated?

Answer 20

Beginning Inventory

+ Units Started

- Ending Inventory

= Number of Units Shipped

Question 21

Which two inventory methods are used under Process Costing?

Answer 21

The inventory methods used under Process Costing are:

• FIFO
• Weighted Average

Question 22

What is another name for Process Costing?

Answer 22

Process Costing is also called Equivalent Units of Production.

Question 23

How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?

Answer 23

EFU FIFO will always be LESS than EFU Weighted Average (unless Beginning Inventory is Zero).

Question 24

How are Direct Materials calculated under the Weighted Average Method?

Answer 24

(Beginning Inventory + Current Costs) / EFU WA

Question 25

How are Conversion Costs calculated under the Weighted Average Method?

Answer 25

(Beginning Inventory + Current Costs) / EFU WA

Question 26

How are Equivalent Finished Units calculated for Direct Materials?

Answer 26

Units Shipped + EI x % Complete DM = EFU (Weighted Average Method)

Beginning Inventory x % Complete = EFU (FIFO)

Question 27

How are Equivalent Finished Units calculated for Conversion Costs?

Answer 27

Units Shipped+ EI x % Complete CC : EFU (Weighted Average)

Beginning Inventory x % Complete : EFU (FIFO)

Question 28

How are Direct Materials calculated under the FIFO method?

Answer 28

Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory.

Question 29

How are Conversion Costs calculated under the FIFO method?

Answer 29

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory.

Question 30

How is WIP calculated?

Answer 30

Beginning balance (DM - DL - OH)

+ Current Costs (DM - DL - OH)

- COGM (Goes to Finished Goods)

+ DM EFU x Cost per DM EFU

+ CC EFU x Cost per CC EFU

= Ending WIP

Question 31

How do period costs and product costs relate to net sales, gross margin and operating income?

Answer 31

Net Sales

- Product Costs

= Gross Margin

- Period Costs

= Operating Income

Question 32

What is the focus of Activity Based Costing (ABC)?

Answer 32

ABC focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about.

Inventory is expensive to store and storing something is not a value-added expenditure.

• Uses Cost Pools - Different departments can have different OH rates.
• Uses Several OH rates based on Activity - Cost Pool / Cost Driver

Question 33

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

Answer 33

Cost Pools and Allocations increase compared to a traditional costing system.

Question 34

What is Backflush Costing?

Answer 34

• Connected to Just-in-Time Production, which is part of Activity-Based Costing and Total Quality Management (TQM)
• Works backward to flush out COGS
• Mostly GAAP

Question 35

What are the characteristics of By-Products?

Answer 35

• Usually immaterial and common costs aren’t allocated to them
• Low Market Value
• Can be valued at NRV
• Can be treated as a contra expense and netted against COGS
• Can be treated as a contra sale and netted against Sales
• Recognition rules are very flexible with valuing and classifying by-products

Question 36

What are Cost Functions?

Answer 36

• Measure how costs change relative to activity levels
• High-Low Method
• Change in Cost (High-Low pts) / Change in Activity (High-Low pts)