2-1. Cost accounting

Question 1

Manufacturing cost: what are 3 factors of production?

Answer 1

1. Direct material: significant raw materials and components that make up the finished product
2. Direct labor: wages for work that directly converts raw materials into finished products
3. Manufacturing overhead: cost of indirect labor and supplies that support the production process but are not easily traceable to the finished product

Question 2

Manufacturing cost: what is prime cost and conversion costs?

Answer 2

Prime: Direct material costs and direct labor costs
Conversion: Direct labor costs and factory overhead costs

Question 3

Manufacturing cost: what is product costs and what is it also know for?

Answer 3

They generally attach to physical product units and are expensed in the period in which the goods are sold.
Also known: Inventoriable costs or manufacturing costs.

Question 4

Manufacturing cost: what can product costs be associated with?

Answer 4

With the production of specific revenues (i.e. COGS).

Question 5

Manufacturing cost: what is period costs? What can it be associated with? Also know for?

Answer 5

They can’t be matched with specific revenue (i.e. accountant’s salary) and are expensed in the period incurred.
Selling and administrative costs.

Question 6

Manufacturing cost: what are 3 traditional costing methods? What makes them different?

Answer 6

Actual, normal, and standard costing.

How and when products costs are assigned.

Question 7

Manufacturing cost: what is actual costing and how is it computed?

Answer 7

The simplest and most accurate methods.
Waits until all the costs are known and then records them in the accounts.
AC = AQ (actual qty) x AP (actual price)

Question 8

Manufacturing cost: what is normal costing and how is it computed?

Answer 8

A moderately simple and moderately accurate method.
Done periodically (e.g. weekly, monthly etc).
Direct materials and direct labor are traced to WIP when the costs become known.
Direct labor/Direct materials = AQ x AP
MOH (manufacturing overhead) = AQ (actual qty of the allocation base) x POR (predetermined overhead rate)

Question 9

Manufacturing cost: what is standard costing and how is it computed?

Answer 9

A costing method that uses predetermined, estimated rates and qty to record both direct costs and overhead.
SC = SQA (standard qty of inputs allowed for the actual units of outputs) x SP

Question 10

Manufacturing cost: what is the relationship between POR and SP?

Answer 10

Conceptually equivalent.

Question 11

Manufacturing cost: what is indirect cost and direct costs?

Answer 11

Direct: Direct material and labor
Indirect: Manufacturing overhead

Question 12

Manufacturing cost: what are value-added and nonvalue-added costs?

Answer 12

• Value: Products costs that enhance the value of the production in the system of the consumer (e.g. most direct costs)
• Nonvalue: Costs that could be eliminated without deterioration of product quality, performance, or perceived value to the consumer (e.g. most overhead costs)

Question 13

Manufacturing cost: what is marginal cost or revenue?

Answer 13

Additional cost or revenue resulting from one more unit of output

Question 14

Manufacturing cost: what happens to average fixed costs when volume increases?

Answer 14

Decrease.

Question 15

Manufacturing cost: what happens to average variable costs when volume increases?

Answer 15

Increases.

Question 16

Manufacturing cost: what is committed costs?

Answer 16

Can’t be avoided.

Question 17

Manufacturing cost: how is predetermined OH cost is computed? What is the amount based on?

Answer 17

= Estimated total OH costs / Estimated Activity volume.

Based on currently attainable capacity (NOT historical, ideal, or theoretical amounts).

Question 18

Manufacturing cost: What is applied overhead? How is it computed? How is it recorded in T account?

Answer 18

*The amount of estimated overhead charged to production.
*= POR (Predetermined overhead rate) x AQ (e.g. direct labor hrs or machine hrs)
*DR: WIP
CR: Factory overhead applied

Question 19

Manufacturing cost: What is actual overhead? How is it recorded in T account?

Answer 19

*The amount actually paid for overhead expenses.
*DR: Factory overhead control account (e.g. control utility expense etc)
CR: AP

Question 20

Manufacturing cost: How is closing out the overhead accounts recorded in T account?

Answer 20

At the end of the period the Factory Overhead Control account (which contains the actual overhead costs) and the Factory Overhead Applied account (which contains the overhead costs that were applied to production using the Predetermined Overhead Rate) are closed out.
*DR: Factory overhead applied
CR: Factory overhead control

Question 21

Manufacturing cost: Closing OH accounts: what happens to discrepancies?

Answer 21

• Immaterial differences - allocated to COGS

* Material differences - Prorated to WIP, Finished goods, COGS based on their respective ending balances.

Question 22

Manufacturing cost: In T account, show actual and applied OH.

Answer 22

DR: Actual OH

CR: Applied OH

Question 23

Spoilage, cost, and Inventory flow: what are 2 types of spoilage/scrap? Where would they be included?

Answer 23

• Normal: unavoidable as part of the manufacturing process - included with an inventoriable product costs
• Abnormal: e.g. due to carelessness or inefficiency - deducted as a period expense to compute NI

Question 24

Spoilage, cost, and Inventory flow: Normal/Abnormal: are they controllable?

Answer 24

Normal: uncontrollable costs
Abnormal: controllable costs

Question 25

Spoilage, cost, and Inventory flow: Treatment of sale (if salable)?

Answer 25

• The amount immaterial - revenue reduces OH - reduces COGS

* Material amount: Other sales in the revenue category

Question 26

Spoilage, cost, and Inventory flow: Describe the flow of inventory.

Answer 26

Beg inventory
\+ Purchase (Net)
= Goods available for sale
- Ending inv
=COGS

Question 27

Spoilage, cost, and Inventory flow: what are 3 inventories for manufacturing organizations?

Answer 27

Raw materials, WIP, Finished goods.

Question 28

Spoilage, cost, and Inventory flow: How is the 3 inventory accounts show on 2 schedules?

Answer 28

Raw materials / WIP = Cost of goods manufactured

Finished goods = COGS

Question 29

Spoilage, cost, and Inventory flow: Describe the schedule for Cost of goods manufactured.

Answer 29

Beg WIP
\+ Direct materials*
\+ Direct labor
\+ OH
- Ending WIP
= Cost of goods manufactured

*Beg direct materials
\+ Purchase
= Direct materials available for use
- End direct materials
= Direct materials used

Question 30

Spoilage, cost, and Inventory flow: Describe the schedule of COGS.

Answer 30

Beg finished goods
\+ Cost of goods manufactured
= Goods available for sale
- End finished goods
= COGS

Question 31

Cost behavior patterns: when is this useful?

Answer 31

Predicting total costs and estimate profits.

Question 32

Cost behavior patterns: when can this be valid?

Answer 32

Within a relevant range.

Question 33

Cost behavior patterns: what is a relevant range?

Answer 33

A range of production volume where;

1. The range of activity for which the assumptions of cost behavior reasonably hold true
2. The range of activity over which the company plans to operate
   * *When (1) is true but (2) is not - NOT relevant
   * *When both (1) and (2) are true or (1) is not true but (2) is - relevant

Question 34

Cost behavior patterns: of fixed costs in total and per unit?

Answer 34

In total: Remain constant regardless of volume.

Per unit: Vary - increase when volume decreases and decrease when volume increase.

Question 35

Cost behavior patterns: of variable costs in total and per unit?

Answer 35

In total: Vary - increase when volume increase and vice versa.
Per unit: Remain constant regardless of volume.

Question 36

Cost behavior patterns: what is total costs?

Answer 36

Both fixed and variable costs.

Question 37

Cost behavior patterns: what is step-variable costs?

Answer 37

Remain constant in total over a small range of production levels, but vary with larger changes in production volume

Question 38

Cost behavior patterns: Step-variable costs examples?

Answer 38

Supervisory salaries, utility costs, shipping costs.

Question 39

Cost behavior patterns:What is mixed costs? Also known as?

Answer 39

As Semi-variable costs.

• Have a fixed component and a variable component
• The variable component causes them to vary in total with changes in volume.
• The fixed component prevents them from varying in direct proportion to the change in volume.

Question 40

Cost behavior patterns: what doe high-low methods provide?

Answer 40

A rough estimate of the fixed and variable cost components that comprise total costs.

Question 41

Cost behavior patterns: High-low methods: what is the underlying concept?

Answer 41

when total manufacturing costs change in response to changes in production volume, the changes are, by definition, caused by variable costs.

Question 42

Cost behavior patterns: High-low methods: how can the total change in variable costs be isolated?

Answer 42

By calculating the change in total costs between two production volume extremes (the high value and low value).

Question 43

Cost behavior patterns: High-low methods: how can unit variable cost be computed?

Answer 43

By dividing the change in total costs by the difference in units produced.

Question 44

What is process costing?

Answer 44

a sequential costing system in which the cost of a product/service is obtained by assigning costs to masses of similar units as they are produced and then computing unit costs on an average basis.

Question 45

What is operating costing?

Answer 45

a hybrid costing system that blends characteristics of both job-order and process-costing systems.

Question 46

What is direct costing?

Answer 46

or variable costing is a method of inventory costing in which all variable product costs are treated as inventoriable costs and fixed manufacturing overhead is treated as a period cost.

Question 47

What is backflush costing?

Answer 47

delaying journal entries until after the physical sequences have occurred is referred to as
*Normally used in high-speed automated environment