Exam 2

Question 1

Process costing

Answer 1

• mass production of identical items
• cost for each production process (or department)
• ex: paint and chemical manufacturers, limestone quarry, cereal manufacturers, lumber mill

Question 2

Job Costing

Answer 2

• unique custom products or small batches of different products
• total cost for that job
• ex: custom home builders, furniture manufacturer, hospitals, professional firms

Question 3

flow of costs in a manufacturing company

Answer 3

raw materials, direct labor, manufacturing overhead -> work in process inventory -> finished goods inventory -> cost of goods sold (income statement)

everything else on the balance sheet

Question 4

used to determine the cost of a job

Answer 4

job cost record

Question 5

allocating manufacturing overhead

Answer 5

• MOH is an indirect cost

Question 6

allocation

Answer 6

a way of dividing up the MOH and assigning it to the jobs

Question 7

adjusting COGS

Answer 7

overallocated -> decrease COGS

underallocated -> increase COGS

Question 8

Actual overhead (recording transactions)

Answer 8

Debit - Manufacturing Overhead

Credit - Accounts payable

Question 9

Direct Materials and labor (recording transactions)

Answer 9

Debit - WIP

Credit - Wages Payable, inventory

Question 10

Allocated Overhead (recording transactions)

Answer 10

Debit - WIP

Credit - MOH

Question 11

recording journals (T)

Answer 11

Actual - Left

Allocate - Right

Question 12

depreciation (recording transactions)

Answer 12

Debit - manufacturing overhead

Credit - accumulated depreciation

Question 13

plantwide overhead allocation rate

Answer 13

• Based on estimates made at the beginning of the year

Question 14

cost distortion

Answer 14

results in some products are overcosted and some are undercosted by the cost allocation system

Question 15

refining cost system

Answer 15

As companies diversify their product lines and manufacturing processes, a single plantwide overhead rate may not be useful

Question 16

departmental overhead rates

Answer 16

• Separate predetermined manufacturing overhead rates for each department
• useful when:
  o Departments incur different amounts and types of MOH
  o Different jobs or products use the department resources to a different extent

Question 17

Activity based costing

Answer 17

• ABC

- focuses on activities instead of departments

Question 18

ABC steps

Answer 18

1) Identify the primary activities and estimate a total cost pool for each
2) Select an allocation base for each activity
3) Calculate activity cost allocation rate
4) Allocate costs: Activity cost rate x Actual amount of activity allocation base

Question 19

cost heirarchy

Answer 19

System used by companies to assist in establishing activity cost pools

Question 20

unit level activities (cost heirarchy)

Answer 20

• activities and costs incurred for every unit

* Examples: inspecting and packaging each unit

Question 21

batch level activities (cost heirarchy)

Answer 21

• activities and costs incurred for every batch, regardless of the number of units in the batch
• Example: machine set-up

Question 22

product level activities (cost heirarchy)

Answer 22

• activities and costs incurred for a product, regardless of the number of units or batches of the product produced
• Examples: cost to research, develop, and market new products

Question 23

facility level activities (cost heirarchy)

Answer 23

• activities and costs incurred regardless of volume of production
• Example: depreciation, insurance, property tax, and maintenance on the production plant

Question 24

activity based management

Answer 24

• ABM

- Using ABC to make decisions to improve profitability

Question 25

Cost of implementing ABC

Answer 25

- may be significant | - could be lower if accounting and information systems people develop a good system

Question 26

Benefits of ABC are higher when

Answer 26

a company has high indirect costs and produces many different products that use differing amounts of resources

Question 27

Warning signs that cost system is outdated

Answer 27

- Managers don’t understand costs - Companies lose bids they expected to win - Competitors price similar products much higher or lower - Company has reengineered or diversified products and still using old system

Question 28

Risk of cost distortion is high (ABC)

Answer 28

* Many different products using many different resources * High indirect costs * High volumes of some products, low volumes of others

Question 29

value engineering (cutting ABC costs)

Answer 29

° Improve value-added activities | ° Eliminate or Reduce non-value-activities

Question 30

Value-Added Activities (cutting ABC costs)

Answer 30

customers are willing to pay for because these activates add value

Question 31

Non-Value-Added Activities (cutting ABC costs)

Answer 31

- waste activities | - do not enhance the product

Question 32

variable costs

Answer 32

- Total variable costs change in direct proportion to changes in volume - Variable cost per unit remains constant - y = vx - starts at 0

Question 33

fixed costs

Answer 33

- Total fixed costs remain constant with changes in volume - Fixed costs per unit of activity varies inversely with changes in volume - y = f

Question 34

mixed costs

Answer 34

- Total mixed costs increase as volume increases (but not proportionately) - Total mixed costs can be expressed as a combination of the variable and fixed cost equations: - y = vx + f

Question 35

relevant change

Answer 35

• The normal range of operating activity. • Band of volume where - Total fixed costs remain constant - Variable costs per unit remain constant - The cost equation remains valid • Managers must be sure that planned activity is within the relative range

Question 36

Committed Fixed Costs

Answer 36

* Fixed costs that cannot be changed in the short-term . | * Examples: depreciation, signed lease

Question 37

Discretionary Fixed Costs

Answer 37

* Fixed costs that can be changed in the short-term. | * Examples: Advertising, training

Question 38

account analysis

Answer 38

* Managers use judgment and experience * Classify various accounts as mixed, variable, and fixed * Subjective

Question 39

scatter plots

Answer 39

- uses historical data to break mixed costs into fixed and variable components - helps managers visualize the relationship between cost and volume - where line through dots intersects y axis is fixed cost

Question 40

high low method

Answer 40

* Also uses historical data, but only the highest and lowest activity points * Use scatterplot to determine if a linear relationship exists; then, use high-low method to estimate the cost equation - disadvantage: only uses two data points. doesnt account for outliers

Question 41

regression

Answer 41

- most accurate, statistical fit of total cost line (best fit line) - R^2

Question 42

contribution margin income statement

Answer 42

organizes costs by behavior rather than function (GAAP)

Question 43

contribution margin income statement equation

Answer 43

``` sales - variable costs ------------------------- Contribution margin - fixed costs ------------------------- operating income ```

Question 44

Functional (GAAP) income statement equation

Answer 44

``` sales - COGS ------------------------- Gross margin - operating expenses ------------------------- operating income ```

Question 45

traditional income statements organize costs by

Answer 45

function

Question 46

purpose of classifying costs as variable or fixed

Answer 46

to allow management to better assess performance given a level of activity that differed from budget

Question 47

cost volume profit analysis (CVP)

Answer 47

- powerful tool that helps managers make important business decisions

Question 48

calculation margin per unit

Answer 48

once a company reaches breakeven each additional unit sold increases profitability by this amount

Question 49

breakeven point

Answer 49

where operating income = 0

Question 50

CM ratio deff

Answer 50

% of sales $ that is available to cover fixed costs and provide a profit

Question 51

cushion

Answer 51

how far sales can decrease before incurring a loss

Question 52

operating leverage def

Answer 52

- measures risk - sensitivity of profits to change in sales volume - higher when fixed costs are higher

Question 53

CVP graph

Answer 53

breakeven point where revenue and cost intersect

Question 54

companies with many different products

Answer 54

should use CM ratio and breakeven point in sales dollars rather than units