Operations Management & Strategic Planning (26%) Flashcards

Question

Job Order Costing

Answer 1

Job order costing is used to accumulate costs related to the production of **large, relatively expensive, heterogeneous (custom-ordered) items**. Costing follows the general rules for manufacturing cost flows and is relatively straightforward. As with traditional costing methods, **estimated amounts** based on currently attainable capacity are always used for this formula. * **Immaterial** differences between the two amounts are usually allocated to COGS. * If the difference is **material**, it should be prorated to WIP, finished goods, and COGSbased on their respective ending balances.

Answer 2

Applied Overhead = (bud. FOH/bud. volume) X (actual volume)

Answer 3

Process costing is used to accumulate costs for **mass-produced, continuous, homogeneous items, which are often small and inexpensive.** Job Order Costing is exactly the opposite. Since costs are not accumulated for individual items, the accounting problem becomes one of **tracking the number of units** moving through the work-in-process (WIP) into finished goods (FG) and allocating the costs incurred to these units on a rational basis. **The cost allocation process is complicated** because: * There may be partially completed items in beginning and ending inventories. * Each of the three factors of production (labor, material, and overhead) may be at different levels of completion, making it necessary to perform separate calculations for each factor. * Some costs do not occur uniformly across the process; this is particularly true for direct materials (DMs). This is why the two categories of the factors of production indicated are typically DMs and conversion costs (i.e., direct labor [DL] and overhead [OH]). DL and OH are normally included together because they are typically uniformly incurred.

Answer 4

The term **"cost of goods transferred out"** is often used in process costing rather than the "cost of goods finished" since the units could be transferred through several departments prior to going to FG inventory. Cost of goods finished would only accurately apply to the last department in the sequence.

Answer 5

**Cash** The cash budget is the last budget to be prepared and includes a plan for earning and financing all of the strategic action plans of the enterprise and other incidental issues earning and requiring cash flow.

Answer 6

**Budgeted Costs for Budgeted Output** A static budget is a comprehensive financial plan produced at the beginning of the year for the entire enterprise and does not change (or flex) during the year. Thus, it uses budgeted costs based on budgeted output. The **Master Budget** is a static budget.

Answer 7

y = A + Bx * y = dependent variable * A = the y-intercept * B = the slope of the line * x = independent variable

Answer 8

The correlation coefficient (R) measures the strength of the relationship between the dependent and independent variables. The correlation coefficient can have values from −1 to 1 where: * 1 indicates perfect positive correlation (as x increases, so does y), * −1 indicates perfect negative correlation (as x increases, y decreases), and * 0 indicates no correlation (you cannot predict the value of y from the value of x).

Answer 9

The coefficient of determination, identified as R2 (R-squared), indicates the degree to which the behavior of the independent variable predicts the dependent variable. The coefficient of determination is calculated by squaring the correlation coefficient. R2 can take on values from 0 to 1. * The closer R2 is to 1, the better the independent variable predicts the behavior of the dependent variable.

Answer 10

1. **Market** price - Market price is the **"theoretically correct"** transfer price. The price the purchasing unit would have to pay on the **open market**. 2. **Cost-based** price - one of several variations on the selling units' cost of production: variable cost, full cost, **cost "plus"** (a percentage or a fixed amount). 3. **Negotiated** price - a price that is **mutually agreeable** to both the selling and purchasing unit.

Answer 11

1. **Goal Congruence** - Senior management establishes the methodology for setting internal TP's in such a way as to promote goal congruence. Goal congruence occurs when the department and division managers make decisions that are **consistent with the goals and objectives of the organization as a whole**. 2. **Suboptimization** - when both managers act in their individual best interests, the organization as a whole may suffer resulting in suboptimization. Typically occurs in **decentralized** organizations. 3. **Goal Incongruence -** exists when actions encouraged by the reward structure of a department conflict with goals for other departments or the organization as a whole.

Answer 12

**Transfer Price per Unit** = Additional Outlay Cost per Unit + **Opportunity Cost per Unit** **Opportunity Cost per Unit** = Selling Price per Unit - Additional Outlay Cost per Unit **General rule is that the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. However, this is only true where idle capacity exists to make the transfer.**

Answer 13

The breakeven point is the ratio of **fixed costs to the contribution margin ratio (or contribution margin per unit for the unit breakeven poin**t). If the fixed costs are decreased (numerator), and the contribution margin is increased (increasing the denominator of either breakeven formula), then the ratio and, therefore, the breakeven point decrease. Decreasing the fixed costs causes the numerator of the ratio to decrease, and increasing the contribution margin causes the denominator to increase. Both changes have the effect of decreasing the ratio. This also makes real-world sense. If fixed costs have decreased, it is easier for the firm to break even because there are less fixed costs to cover. Likewise, if the contribution margin increases, each unit provides a greater contribution to covering fixed costs, thus requiring the sale of fewer units to break even.

Answer 14

In the linear **Cost-Volume-Profit Analysis** model (where marginal costs and marginal revenues are constant, among other assumptions), thebreak-even point (BEP) (in terms of Unit Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as: * TR = TC * P x Units = TFC + VC x Units * P x Units - VC x Units = TFC * (P - VC) x Units = TFC * BE Units = TFC / (P - VC)

Answer 15

**CM = Revenue (or Sales) - Variable Costs** For breakeven analysis: * **Total Contribution Margin = Total Fixed Costs** * Unit CM x Units = TFC * **BE Units = TFC / Unit CM** * **BE Sales = TFC / (CM/P)** CM is the selling price per unit minus the variable cost per unit. **“Contribution” represents the portion of sales revenue that is not consumed by variable costs** and so **contributes to the coverage of fixed costs.**

Answer 16

MoS = Current Output - Break-even Output or Current Sales - Break-even Sales

Answer 17

Standards are developed for each factor of production (materials, labor and overhead) and may be used to value inventory (raw materials, WIP, FG) and CoGS. Standard costs are budgeted amounts, but are actually entered into the General Ledger.

Answer 18

Price Variances (responsibility of **purchasing** department) * Price/Rate = (Difference in Prices) x **Actual Units** * Usage/Efficiency = (Difference in Quantities) x **Standard Rate**

Answer 19

Relative sales value at split-off.

Answer 20

Remember you must subtract the separable costs from the Sales Value for each product and then compute the weight for each product. Example attached, Product A carries an 80% weight based on 72/90.

Answer 21

The balanced scorecard is a strategic performance measurement and management framework for implementing strategy by translating an organization’s mission and strategy into a set of performance measures. These performance measures are generally in four primary perspectives: 1. **Financial** - investment focused 2. **Customer** - customer centric 3. **Internal business processes** - operations 4. **Learning and growth** - employees

Answer 22

Increasing **Total Cost**.

Answer 23

Relevant costs and benefits * **future costs** and **benefits that differ** among alternatives * **avoidable costs** are those that can be eliminated by choosing one alternative over the the other - they are always considered relevant.

Answer 24

1. **Sunk costs**—A sunk cost is a **cost that has already been incurred and cannot be changed**. For example, when deciding whether to buy a new car or keep your current car, the price paid for the current car is irrelevant as it occurred in the past and cannot be changed. On the other hand, the **market value of the current car if you sold it is relevant** to the decision as it differs between the two alternatives: if you buy the new car, you can sell the current car for its market value; if you keep the current car, you forgo receiving its market value. 2. Future costs and benefits **that do not differ** between alternatives—Future costs that do not differ between alternatives tend to be fixed costs or allocated costs.

Answer 25

Fixed costs are **not equivalent** to unavoidable costs. Unavoidable costs cannot be changed while fixed costs can change. **Remember that fixed costs are fixed with respect to output.** For example, utility costs of heating fluctuate constantly with weather conditions and the commodity price per unit of natural gas—but this does not make them variable. **Fixed costs are always fixed with regard to the volume of units produced/sold.**

Answer 26

When making this decision, the only relevant facts are the differential future costs and benefits: * separable costs incurred beyond split-off point, and * the difference between the revenue that can be earned at split-off and the revenue that can be earned after further processing. Remember that the **joint costs are not relevant**.

Answer 27

When organizations track performance by product line or business segment, they often discover that some products and segments do not perform as well as others and that some may even be operating at a loss. The problem then becomes whether to continue producing the product or segment or to eliminate it. The decision is not as straightforward as it might appear because: 1. Some of the costs charged to the product or segment may not be eliminated if the product or segment is eliminated 2. Changes in one part of the organization may impact other parts of the organization 3. There may or may not be alternative uses for the resources freed up by elimination of the product or segment. Remember that VC are generally avoidable costs and FC are both avoidable and unavoidable. **Key Points:** 1. **elimination of losing segment will also eliminate the CM provided by losing segment.** 2. **Some costs are avoidable and some are not** 3. **There may be unintended negative consequences on other remaining segments**

Answer 28

Only relevant costs are the costs **directly attributable** to the special order, and if the company is operating at capacity, the **opportunity costs** associated with the production that must be cancelled in order to complete the special order. * SO's **with** Excess Capacity: can be completed with existing capacity, **only sales revenues and** the (avoidable) **variable costs** of producing need to be considered. * SO's **without** Excess Capacity: acceptance of a SO means that other units must be removed from production schedule to make room for the SO. The foregone profits related to the units that were removed from production represent opportunity cost that must included in the analysis of the SO.

Answer 29

The decision of whether to outsource production - to make or buy a component - is based on comparative analysis of the external purchase costs and the relevant costs of internal production. The buy price is usually given on the exam. One additional component when making a make or buy decision would be the **quality** of the supplier's product. Is it adequate?

Answer 30

Exponential smoothing is a quantitative approach to predicting sales based on historical amounts.

Answer 31

Backflush Costing

Answer 32

Just-in-time (JIT) is a **demand-pull** inventory system which may be applied to purchasing so that raw material arrives just as it is needed for production. JIT may also be applied to production so that each component of the completed good is produced only when needed by the next production step. And, finished goods are produced only when sales orders are received. * Reduction of inventories, ideally to 0. * Emphasis on solving production problems immediately * Emphasis on reducing production cycle time * Focus on simplifying production activities

Answer 33

* Lower investments in inventories and in space to store inventory. * Lower inventory carrying and handling costs. * Reduced risk of inventory obsolescence. * Reduced manufacturing costs. * The luxury of dealing with a reduced number (when compared with traditional systems) of reliable, quality-oriented suppliers.

Answer 34

**Production** Sales ADD Desired End FG Inv. = Total Needs SUBTRACT Beg. FG Inv. = Units to be produced-----\> **Units to be produced x DM/unit = Production Needs** **Direct Materials Budget** Production needs ADD Desired End DM Inv. = Total needs SUBTRACT Beg. DM Inv. = DM to be purchased in units x Price/unit = DM purchased in dollars

Answer 35

* **No change to VC/unit** * **FC/unit will increase** By definition, variable costs per unit do not fluctuate within a relevant range. However, as production levels decline there will be fewer units over which to spread fixed costs, and fixed costs per unit will increase.

Answer 36

* **Budget -** quantification of the plan for operations * **Flexible Budget** - budget that is adjusted for changes in volume (sales) * VC/unit are assumed constant through a relevant range, FC/unit will change with production volume (i.e. production up, FC/unit are down because the allocation base gets bigger and vice versa) * **Performance Report** - compare budgeted and actual performance

Answer 37

**Variable Costs** Prices under the contribution margin approach are set at variable cost plus a percentage markup. The percentage markup, or contribution margin, will be used to cover fixed costs and any remainder will be profit. If the selling price is set at variable cost, no contribution margin will be generated. Therefore, income will remain constant.

Answer 38

Reciprocal Allocation Method The linear algebra or reciprocal allocation method recognizes reciprocity among service departments by **explicitly including the mutual services rendered** among support departments.

Answer 39

**Accounting!** The value chain is the activities required for a **firm to deliver a product or service to market**. The accounting function is not part of the value chain.

Answer 40

GP or GM = Sales (or Revenue) - CGS GM% = GP / Sales

Answer 41

No impact. Safety stock is a buffer for variations in demand and lead-time for the delivery of material. Safety stock affects the **reorder point**, but does not enter into the quantity to be ordered.

Answer 42

A backflush costing system is used in **just-in-time** inventory systems. Part of the philosophy of JIT is to **reduce nonvalue-added activities**, and **reduce defects**. Part of the aim is to reduce accounting costs that are nonvalue-added. Backflush costing systems simplify product costing by costing production at the completion of an order. Minimal inventories are maintained, and cellular production facilities are used. Thus, there is much less need to maintain detailed records of cost by job. The job is simply costed at completion. There is no need to know the cost until that time. **Inspection costs are reduced because zero defects is a goal.** Production stops until the cause of the defect can be identified and fixed.

Answer 43

1. **Financial** - specific measures of financial performance 2. **Customer** - targeted customers and market segments 3. **Internal Business Processes** - internal operations that create value 4. **Learning, Innovation & Growth** - internal employee initiatives

Answer 44

Dupont ROI = Return on Sales x Asset Turnover where ROS = Net Income / Sales where AT = Sales / Total Assets

Answer 45

Net Income / Sales

Answer 46

Sales / Total Assets

Answer 47

EVA = NOPAT - WACC(Total Assets - Current Liabilities) EVA = NOPAT – (WACC x Capital Invested) Where Capital Invested or Net Assets = TA - CL

Answer 48

Use of RI solves the diluted hurdle rate problem related to accrual accounting. RI = Operating Income - (RRofR x Invested Capital)

Answer 49

Elastic product - revenue is **uncertain** Inelastic product - as price increases, **revenue will increase** as well.

Answer 50

* Sales 20,000 * - CGS 12,000 * **GM = 8,000** * - SGA 3,000 * **EBIT = 5,000**

Answer 51

* Sales 20,000 * - VC 7,000 * **CM = 13,000** * - FC 8,000 * **EBIT = 5,000**

Answer 52

**Operating Margin** = Operating Income / Sales * Typically a better representation of how the business is performing before the inclusion of interest and taxes. **Operating Income = EBIT** **Profit Margin** = Net Income / Net Sales * Important measure in external reporting. It is the **after-tax** ratio of income over sales.

Answer 53

ART = Sales on Account / **Avg**. Accounts Receivable

Answer 54

Average A/R / Average Sales per Day

Answer 55

CGS / Average Inventory

Answer 56

* Current Ratio = CA - CL * Quick (acid) = (CA - Inventory) / CL

Answer 57

* Debt to Assets = Total Debt / Total Assets * Debt to Equity = Total Debt / Total OE * TIE = Operating Income / Interest Expense TIE represents a firm's ability to make regular interest payments and service its debt obligations

Answer 58

* **Price Earnings (PE)** = Market Price per Share / EPS * **Market-to-Book** = Market Value per Share / Book Value per Share * **Book Value per share** = Common SOE / # CS outstanding

Answer 59

Has **low sales value** when compared to the main products.

Answer 60

Products or services require the performance of activities, and activities consume resources. ABC is based upon two principles. First, **activities consume resources**. Second, **these resources are consumed by products, services, or other cost objectives (output).** ABC allocates overhead costs to products on the basis of the resources consumed by each activity involved in the design, production, and distribution of a particular good. When the company produces products that **heterogeneously** consume resources, an activity-based costing system improves costing.

Answer 61

**Avg. A/R / Avg. Sales Per Day**

Answer 62

**(Standard Quantity - Actual Quantity) x Standard Price** standard can also be stated as "budgeted" or "estimated"

Answer 63

**Delphi** The Delphi technique may be used to assist in developing **qualitative forecasts**. This technique develops consensus among a group about the future through a series of structured questionnaires and an iterative process.

Answer 64

1. Sales - first budget developed 1. first step in sales budget is determining **sales volume** 2. Production 3. Direct Materials Purchases 4. Cash Disbursments - last in budgeting process

Answer 65

1. **Strategic** Risk - addresses long-term & broad exposure related to overall strategy of the organization. this is managed by **rigorous planning and long-term forecasting**. 2. **Operational** Risk - short-term in nature and includes risk covering processes, shared services, onshore/offshore & credit/default. 3. **Market** Risk - **economic events or natural disasters**.

Answer 66

1. Safeguarding equipment 2. Building in redundancy 3. Backup procedures 4. Insurance

Answer 67

1. **Hedging** **completely offsets** risk. Hedging is used to offsets uncertainty via options and future contracts related to commodities, foreign currency and other investment exposure to minimize price risk. 2. **Diversification** - cannot completely offset risk as with hedging, but reduces **unsystematic** and **portfolio** risk.

Answer 68

Insurance is used to offset exposure to **specific and known hazards**. Insurance is unique in that it deals with **pure risk (the risk of only losing)** as opposed to speculative risk (where gain is possible).

Answer 69

Six Sigma is a continuous improvement approach designed to systematically reduce defects by recognizing that: 1. The overall yield of a group of related processes is much lower than the yields of the individual processes; and 2. The total cost of a product or service is directly related to the defect rate. **The name, Six Sigma, reflects a level of quality that is nearly perfect.** Considering a normal distribution and the fact that the term sigma indicates standard deviation, six sigma implies that no defective observations would be present until after six standard deviations from the mean (i.e., **only 3.4 defects per million units produced or outside of 99.999966% of production).**

Answer 70

1. **Define the business** -- Business goals, objectives, processes, team responsibilities, resources, scope of operations, and quality definitions. 2. **Measure the processes** -- Defects per unit, defects per million opportunities, and production yield. Note that all defects are counted (not just the number of defective units). 3. **Analyze the process** -- Analysis is done to determine the root cause of defects. Tools commonly used with total quality management (TQM) such as Pareto diagrams (histograms) and/or Ishikawa (fishbone) diagrams are used to identify potential causes of defects. 4. **Improve the process** -- This involves (1) design experiments and (2) change management to allow statistical exploration of relationships to reveal how to improve quality levels. Once determined, training, policy, and procedures are effected to achieve the desired change. 5. **Control** -- TQM-type quality tools (e.g. control charts, run charts) are used to achieve sustained improvement in operational quality.

Answer 71

**Mass production** is typically characterized by: * higher setup times * dedicated equipment * low-skilled workers with a high degree of specialization. **Lean Production** is characterized by: * using small batches of a high variety of unique products * lower setup times * flexible equipment * highly skilled, cross-trained workers

Answer 72

1. **Planning Risks** - related to adequately defining the project, properly organizing resources, and organizing and committing team members. 2. **Implementing** Risks - related to managing people, time and cost restrictions, and properly managing the interrelationships of activities. 3. **Monitoring** Risks - involve effectively monitoring resources, quality levels, cost and timeliness, and changing plans when necessary to ensure objectives are met.

Answer 73

**Crashing** * often used and is defined as the process of adding resources (such as overtime labor or adding additional materials or equipment) to shorten selected activity times on the critical path. **Crash time is the shortest possible time to complete an activity after accelerating resources.** Finishing the job early can save money, while going over the original time estimate can include penalties. Thus, crashing is frequently used by offsetting the costs and benefits of earlier completion with the costs and benefits of accelerating resources applied.

Answer 74

The critical path is the **longest path in the network** and indicates that if any activity on the critical path is delayed, then the project will not be accomplished according to the original schedule.

Answer 75

Slack time is always calculated as the **maximum amount of time that an activity can be delayed without delaying the entire project.**

Answer 76

**Prime Costs =** Direct Materials and Direct Labor **Conversion Costs** = Direct Labor and MFG. OH

Answer 77

Establish the present level of operating capacity and cannot be altered in the short run. Committed costs arise from a company’s basic commitment to open its doors and engage in business (depreciation, property taxes, management salaries).

Answer 78

Weighted Average - * Weighted average uses only two categories: **goods completed and ending inventory**. The format will differ in that weighted average combines prior period work (i.e., beginning inventory) with current period work (units finished this period not in [BI]) to determine "goods completed." FIFO - * The FIFO method uses three categories, separating (1) beginning inventory from (2) the new or current period completed work (called "units started and finished"), while (3) ending inventory (at least for EU) is treated the same as with weighted average.

Answer 79

Is more time consuming and cumbersome because it involves more people in the process. PB is a **bottoms-up approach** to budgeting.

Answer 80

Total costs are linear. There are a number of underlying assumptions to breakeven analysis that need to be considered in the calculation and interpretation of breakeven computations. One of these assumptions is that the behavior of total cost and total revenue is linear, even though in actuality it may not be. It is important to note that under breakeven analysis, the linearity assumption is only applicable for a particular relevant range of activity and is not assumed for all levels of activity. Since the actual behavior of total cost and total revenue within a relevant range is usually close to being linear, this assumption will only slightly affect the precision and reliability in a given breakeven calculation.

Answer 81

Has more independent variables. If only one independent variable exists, the analysis is known as simple regression. Multiple regression consists of a functional relationship with multiple independent variables.

Answer 82

1. If a manager is only responsible for costs, his/her area of responsibility is called a **cost center.** 2. If the manager is responsible for both revenues and costs, his/her area of responsibility is called a **profit center.** 3. Finally, if the manager is responsible for revenues, costs, and asset investment, his/her area of responsibility is called an **investment center.**

Answer 83

**Direct - costs that are easily traceable to final product.** * **Direct Material** - The cost of significant raw materials and components that are directly incorporated in the finished product. For example, direct material costs of a leather briefcase include cost of leather (raw material) as well as buckles and zippers (purchased components). * **Direct Labor** - The wages and salaries paid for work that directly converts raw materials into a finished product. Continuing with our leather briefcase example, the direct labor costs associated with the manufacture of a leather briefcase include wages paid to workers who cut the leather, finish the leather, and sew the briefcase. **Indirect** - costs that are not directly traceable to final product and **must be allocated**. * **Factory Overhead** - The cost of indirect labor, indirect materials, and other manufacturing costs other than direct material and direct labor that are necessary to support the production process but are not easily traceable to the finished product. For example, factory overhead associated with production of a leather briefcase includes salaries paid to the production line supervisors, wages paid to mechanics who maintain the equipment, wages paid to custodians who maintain the factory, thread used to sew the briefcase together, electricity used to power the equipment and provide lighting to the factory, and depreciation on the factory building and equipment.

Answer 84

An indirect costs that can be variable and fixed and must be allocated to WIP based on the standard overhead rate (which you calculate based on the appropriate cost base - typically labor hours). * Factory overhead can be **variable** (the total cost changes with the quantity produced) or **fixed** (the total cost remains the same regardless of the quantity produced, within reasonable limits). In the example above, the cost of thread is variable overhead because with the production of more briefcases, more thread is used; the depreciation on the factory building is fixed because the depreciation stays the same regardless of how many briefcases are produced. * In highly automated manufacturing environments, direct labor costs are frequently so insignificant a part of total production costs that they are not separately tracked but simply added to factory overhead costs.

Answer 85

* **Value-added costs** -- Product costs that enhance the value of the product in the eyes of the consumer. Most direct costs are value-added costs. Continuing with the briefcase example, the leather that the briefcase is made of and the labor required to cut the pieces and sew them together are value-added costs. * **Non Value-added costs** -- Costs that could be eliminated **without deterioration of product quality**, performance, or perceived value to the consumer. Many nonvalue-added costs are essential to production and cannot be completely eliminated. For example, oiling the machine that is used to sew the briefcase together is a nonvalue-added cost from the customer's viewpoint. However, if the machine wasn't oiled, sooner or later, it would stop sewing. **Oiling the machine is an essential, but nonvalue-added, cost.** **Most, though not all, overhead costs are nonvalue-added costs.** For example, the thread used to sew the briefcase together is usually an overhead cost, but most consumers would see it as a value-added cost. *

Answer 86

* Absorption costing and direct costing **assign different costs to inventory**. Since direct costing does not include fixed manufacturing costs as part of product cost, the **inventory valuation under absorption costing will always be greater than the inventory valuation under direct costing**. From an external reporting point of view, **direct costing understates assets on the balance sheet.** * The difference between the two measures of income is due to the **different treatment of fixed manufacturing costs**. Direct costing deducts all fixed manufacturing costs as a lump sum period cost when calculating income. **Absorption** costing assigns fixed manufacturing costs to products and therefore **only deducts fixed manufacturing costs when the units are sold**.

Answer 87

**Increases** in Cash: * Cash Sales * Decrease in A/R **Decreases** in Cash: * Cash Expenses * Increase in A/P

Answer 88

* Budgeted or planned sales -- Quantities and prices are used instead of "standard" quantities and prices. * Sales variances work backwards -- When compared to cost variances, that is: * When **actual prices** are greater than planned prices, **favorable** **variances result** (e.g. it is good for people to pay more than you had planned). * When **actual quantities** sold are greater than planned quantities sold, **favorable variances result** (e.g., it is good to sell more than you had planned). * Sales variances -- Use slightly different names: * Sales price variance -- Difference in prices × actual quantity sold. * Sales quantity variance -- Difference in units × planned unit price.

Answer 89

When more overhead costs are applied to products than are actually incurred, factory overhead is said to be overapplied. When the accounts are closed at the end of the period, overapplied overhead **reduces Cost of Goods Sold.** **Question:** Priceless Products incurs $20,000 in actual overhead costs during the period. Using their predetermined overhead allocation formula, Priceless applied $21,000 to products as overhead costs, resulting in $1,000 of overapplied overhead. Priceless regards this amount as immaterial and charges over/underapplied overhead to Cost of Goods Sold at the end of the period when the accounts are closed. How will this entry affect Cost of Goods Sold? **Answer:** Cost of Goods Sold will decrease when the accounts are closed: * **DR: Factory Overhead Applied $21,000** * **CR: Factory Overhead Control $20,000** * **CR: Cost of Goods Sold $1,000**

Answer 90

When more overhead costs are actually incurred during the period than are applied to products, factory overhead is said to be underapplied. When the accounts are closed at the end of the period, **underapplied overhead increases Cost of Goods Sold**. **Question:** Cost Conscious Products incurs $10,000 in actual overhead costs during the period. Using their predetermined overhead allocation formula, Cost Conscious applied $9,500 to products as overhead costs. If Cost Conscious charges over/underapplied overhead to Cost of Goods Sold at the end of the period when the accounts are closed, how will this affect Cost of Goods? **Answer:** **Cost of Goods Sold will increase** when the accounts are closed: * **DR: Factory Overhead Applied $9,500** * **DR: Cost of Goods Sold $500** * **CR: Factory Overhead Control $10,000**

Answer 91

* **Total Costs** - linear with production level, i.e. will increase or decrease accordingly. * **Total Variable Costs** - linear with production level, i.e. will increase or decrease accordingly. * **VC/unit** - assumed to be constant * **Total Fixed Costs** - assumed to be constant * **FC/unit** - inverse relationship with level of production, if production is increasing, FC/unit will decrease as the allocation base gets bigger for the fixed costs. opposite is true if production is decreasing, FC/unit will increase.

Answer 92

EI - BI + COGS = Purchases Arrived at by usual formula of: BI + P = EI + COGS

Answer 93

1. **SMaps are Diagrams** of the cause-and-effect relationships between strategic objectives. 2. **SInitiatives are** **key action** programs required to achieve strategic objectives.

Answer 94

**High-risk divisions will overinvest** in new projects and low-risk divisions will underinvest in new projects.

Operations Management & Strategic Planning (26%) Flashcards

(123 cards)