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Flashcards in Cost Measurement and Assignment Deck (56):
1

What is marginal cost or revenue?

Additional cost or revenue resulting from one more unit of output.

2

Variability is defined in terms of what?

Volume, activity or output

3

How do average fixed cost and average variable cost behave?

Average fixed cost decreases as volume increases, while average variable cost increases as volume increases (subject to the relevant range).

4

Define "product costs."

Cost that can be associated with making or acquiring goods for sale; product costs are held in inventory until the products are sold; also known as inventoriable costs.

5

Define "conversion costs."

Costs necessary to convert raw materials into a finished product: comprised of direct labor costs plus factory overhead costs.

6

Define "prime costs."

Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs; also known as direct costs.

7

List the three factors of production.

1. Direct Material;
2. Direct Labor;
3. Factory Overhead.

8

Define "normal spoilage."

Unavoidable as part of the manufacturing process. Normal spoilage is included with other costs as an inventoriable product cost.

9

Define "abnormal spoilage."

Unplanned but considered controllable, for example, spoilage due to natural disaster, carelessness, inefficiency, or accidents. Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.

10

Describe the differences between retail inventories and manufacturing inventories.

Retail = merchandising inventory; Manufacturing = raw materials, work-in-process and finished goods.

11

Describe the accounting treatment of proceeds from sale of scrap.

If the amount of scrap in immaterial, any monies received from the sale of scrap can be used to reduce factory overhead, and thereby reduce Cost of Goods Sold. Alternatively, if the value of scrap is significant and is saleable, it can be treated as "other sales" in the revenue

12

Describe the accounting treatment of normal spoilage.

Included with other costs as an inventoriable product cost.

13

What is the difference between "mixed costs" and "step-variable costs"?

Mixed costs have a fixed component and a variable component, while step-variable costs remain constant in total over a small range of procuction levels, but vary with larger changes in production volume.

14

Define "relevant range."

(1) the range of activity for which the assumptions of cost behavior reasonably hold true; AND (2) the range of activity over which the company plans to operate.

15

Define "shared services".

An arrangement where one part of an organization provides an essential business process where previously it had been provided by multiple parts of that same organization.

16

Describe the differences between off-shoring and outsourcing.

Outsourcing is always outside of the company (but may or may not be outside the country). Off-shoring is always outside of the country (but may or may not be outside the company).

17

What is usually the main reason for outsourcing?

Outsourcing is often used to lower cost and increase quality by utilizing a vendor's specialization.

18

How is Business Process Reengineering (BPR) different from incrementally reducing non-value activities?

BPR often involves an extreme transformation by analyzing and making sweeping improvements to an entire process.

19

What does process management do that activity-based costing (ABC) alone does not do?

Increase manager understanding of the cause-and-effect relationships involved between processes and the resources they consume, and promote the elimination of waste.

20

Compared to traditional costing, how does ABC treat high-volume simple products compared to lower-volume complex products?

With ABC, costs tend to shift away from high-volume, simple products to lower-volume, complex products.

21

When can activity-based costing be used?

With job order and process costing systems; standard costing and variance analysis, and service businesses as well as manufacturers.

22

When does absorption costing income equal direct costing income?

When the number of units sold equals the number of units produced, absorption costing and direct costing produce identical incomes. (Note: This assumes that fixed cost per unit remains the same from one period to the next.)

23

How does absorption costing (AC) v. direct costing (DC) effect inventory valuation?

Inventory using AC will always be greater than inventory using DC because AC includes fixed product overhead costs.

24

How is absorption costing (AC) fundamentally different from direct costing (DC)?

The difference between AC and DC can be fundamentally isolated to the treatment of fixed manufacturing overhead. For AC it is a product cost and with DC it is a period cost.

25

Which costing method is required for compliance reporting (i.e., financial and tax reporting)?

Absorption costing.

26

What types of product costs are included in the direct costing model?

Only variable manufacturing costs are included in product costs.

27

When does absorption costing income equal direct costing income?

When the number of units sold equals the number of units produced, absorption costing and direct costing produce identical incomes. (Note: This assumes that fixed cost per unit remains the same from one period to the next.)

28

How does absorption costing (AC) versus direct costing (DC) effect inventory valuation?

Inventory using AC will always be greater than inventory using DC because AC includes fixed product overhead costs.

29

How is the contribution margin calculated using the direct costing method?

Contribution margin is equal to revenue minus all variable costs, including period costs.

30

Define "applied overhead."

The estimated overhead charged to production: calculated by multiplying the overhead rate times the allocation base activity units (direct labor hours, machine hours, raw material weight, etc.).

31

Describe the accounting treatment of over-applied or under-applied overhead (e.g., the difference between actual overhead and overhead applied to production).

If immaterial, simply charge to Cost Of Goods Sold (COGS); if material, prorate to Work In Process (WIP), Finished Good (FG), and COGS.

32

Define "actual overhead."

The amounts actually paid for indirect costs (utilities, maintenance, supervision, etc.).

33

Describe how job order costing is used.

It is used to accumulate costs related to the production of often large, relatively expensive, heterogeneous (custom ordered) items.

34

How would one choose an overhead resource driver such as direct labor hours or machine hours?

Direct labor hours would make sense for a labor-intensive business with little automation. Machine hours would make sense for a highly automated capital-intensive business.

35

What are the three steps in overhead allocation?

(1) Choose the predetermined overhead rate (POR); (2) Allocate using the POR; (3) Adjust over/underapplied overhead to actual at the end of the year.

36

When is the predetermined overhead rate (POR) established?

The POR is established prior to the beginning of the year.

37

How is the predetermined overhead rate (POR) calculated

The POR is based on an estimated overhead amount divided by an estimated allocation base amount.

38

How is applied overhead calculated?

Applied overhead is calculated by multiplying the predetermined overhead rate by the actual number of finished goods units used in production (e.g., direct labor hours or machine hours).

39

What does the journal entry look like that actually allocates overhead?

Work-in Process is debited; Factory Overhead Applied is credited.

40

How are overhead accounts closed?

If overhead is overapplied, then "actual" overhead is debited and Cost of Goods Sold is credited for the amount overapplied. Where underapplied, the opposite entry is made.

41

Name the three types or "versions" of overhead involved in allocation?

1. Estimated;
2. Actual;
3. Applied.

42

When over/underapplied overhead is significant (i.e., large), how is the amount reconciled?

Prorated amounts of the overhead are allocated to WIP, FG, and CGS.

43

When are overhead accounts closed?

Overhead accounts are closed at the end of every year.

44

Describe the difference between "Process Costing" and "Job Order costing."

Process Costing typically accumulates production costs across a large number of mass-produced units that are often homogeneous, small, and inexpensive. Job Order Costing accumulates costs often associated with large, relatively expensive, heterogeneous (custom-ordered) items.

45

Define "transferred-in costs."

Costs transferred from one department (process) to the next.

46

Define "equivalent units."

In process costing, the number of whole units represented by the partially complete units in terms of cost; for example, 100 units that are 50% complete (in terms of cost) equal 50 equivalent units.

47

How should you think about transferred-in costs in process costing?

Transferred-in costs are viewed by the transferring department as "cost of goods transferred out," while the receiving department should treat those costs in a manner similar to an additional category of direct materials used.

48

What are the three major steps involved with process costing?

(1) determine equivalent units; (2) determine cost per equivalent unit; and (3) Determine (a) cost of goods transferred out of WIP and (b) Ending WIP Inventory.

49

What kind of process costing problems include "transfers-in"?

Organizations that have more than one sequential WIP account.

50

Equivalent units are equivalent in what sense?

They are equivalent in terms of "cost."

51

Define "joint products."

Products which are produced from the same set of raw materials and which are not separately identifiable until a split-off point; only products with significant sales value are treated as joint products: products with little or no sales value are treated as by-products or scrap.

52

Define "joint costs."

Costs incurred prior to split-off that must be allocated to the joint products.

53

Describe the relative physical volume allocation used in joint product costing.

Joint costs are allocated to products based on the quantity of products produced (units, gallons, feet, pounds, etc.).

54

Describe the relative sales value allocation used in joint product costing.

Joint costs are allocated to products based on the relative sales values of the products either at split-off or after additional processing.

55

List the methods of accounting for by-product sales.

The sales value of the by-product may be recognized (e.g., used to reduce the cost of joint products) either:

1. When the by-product is produced; or
2. When the by-product is sold.

56

What is the accounting treatment of scrap and by-products in joint product costing?

Costs: Joint costs are not allocated to scrap or by-products; costs incurred to process scrap or by-products after split-off are offset against proceeds from the sale of the scrap or by-product.

Proceeds: Proceeds from sale of the scrap or by-product are used to reduce joint product overhead costs (unless they can be identified with a particular direct material, in which case they may be offset against that cost).