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CPA - Business Environment > B3 - Operations Management: Cost Accounting end Performance Management > Flashcards

B3 - Operations Management: Cost Accounting end Performance Management Flashcards

1
Q

What is a product cost?

A
  1. Product costs include direct materials, direct labor, factory (applied) overhead, and freight-in.
  2. These are inventoriable costs, and they sit on the balance sheet until the product is sold (asset)
  3. These costs are not expensed until the product is sold. Capitalized into inventory.
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2
Q

What is a prime cost?

A

Direct materials and direct labor

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3
Q

What is conversion costs?

A

Direct labor and factory overhead

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4
Q

What is a period cost?

A
  1. Period costs are expensed on the Income Statement in the period incurred.
  2. They are not inventoriable.
  3. They include interest expense, SG&A (including freight-out), management of the company (executive salaries), accounting and legal expenses
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5
Q

What is a cost driver?

A

Activities that cause cost to increase as the activity increases

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6
Q

What is the behavior of a variable cost?

A

Variable costs change in total, but they remain constant per unit (fixed). As production volume increases (decreases), total variable cost increases (decreases), but the variable cost per unit will always remain the same.

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7
Q

What is the behavior of a fixed cost?

A

Fixed cost remain constant (fixed) in total, but they vary per unit. As production volume increases (decreases), fixed costs remain the same, but the cost per unit will decrease (increase).

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8
Q

What are semi-variable costs (mixed costs)?

A

Cost that include both fixed and variable components. The costs include components that remain constant over a relevant range and it also includes components that fluctuate.

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9
Q

What is a relevant range?

A

Relevant range is the range of activity within which the relationship of fixed cost and variable costs are meaningful and valid.

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10
Q

What is the formula to compute cost of goods manufactured (COGM)?

A

Add: Work in process (WIP) - Beg
Add: Direct Materials used
Add: Direct labor
Add: Manufacturing OH applied
= Total manufacturing costs incurred
Add: Total manufacturing costs available
Less: WIP - End
= Cost of goods manufactured (COGM)

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11
Q

What is the formula to calculate direct materials used?

A

Add: Raw materials - Beg
Add: Purchases
Add: Transportation in (freight in)
Less: Purchase returns and allowance
= Cost of materials available for use
Less: Raw materials - End
= Cost of Materials used

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12
Q

What is the formula to compute cost of goods sold (COGS)?

A

Add: Finished goods - Beg
Plus: Cost of goods manufactured
= Cost of goods available for sale
Less: Finished goods - End
= Cost of goods sold (COGS)

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13
Q

What is the formula to compute total manufacturing cost?

A

Total manufacturing cost = Direct material + direct labor + OH applied

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14
Q

How to compute the applied OH to determine if its over/underapplied in activity based costing?

A
  1. Compute the application rate per hour = Total standard (budgeted) OH cost/Total standard (budgeted) hours
  2. Compute the amount of OH applied = Total actual hours * Application rate per hour
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15
Q

Where are indirect materials included?

A

Indirect materials are included in factory overhead costs (controls) as they are used in the production process. Indirect materials decrease store controls and increase factory overhead controls

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16
Q

What is the formula to calculate equivalent units under FIFO for process costing?

A

Formula:
BI WIP based on % already completed (1 - % already completed)
Add: Units completed and transferred out (ignore units started in the period)
subtract: Total units from BI WIP
Add: Ending WIP based on % of units completed
= Equivalent units under FIFO method

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17
Q

How to calculate the equivalent cost per unit under FIFO?

A

Equivalent cost per unit = total cost of units completed and tranferred out/equivalent units - FIFO

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18
Q

What is the formula to calculate equivalent units under weighted-average for process costing?

A

Formula:
Add: Units completed and transferred out (ignore units started in the period)
Add: Ending WIP based on % of units completed
= Equivalent units under weighted-average method

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19
Q

How to calculate equivalent cost per unit under weighted average?

A

Equivalent cost per unit = BI WIP cost + total cost of units completed and tranferred out/equivalent units - weighted average

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20
Q

What type of cost is considered normal spoilage?

A

Normal spoilage is considered a necessary cost of production and is a product (inventoriable) cost.

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21
Q

What type of cost is cosidered abnormal spoilage?

A

Abnormal spoilage is considered unecessary and is a period cost.

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22
Q

How is normal spoilage allocated as a product cost?

A

Normal spoilage is allocated as follows:
1. determine the % of units sold = units sold/total units completed
2. Normal spoilage allocation is completed as follows:
Normal spoilage allocated = Normal spoilage * % sold

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23
Q

How is the total spoilage expense recorded in the income statement against revenue?

A

Allocated Normal Spoilage
Add: Abnormal spoilage
= total spoilage expense

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24
Q

What is a value added cost?

A

Value added costs are those resource uses that provide value to the consumer.

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25
Q

What are non-value added costs?

A

Costs of inventorying products, generally moving, handling and storing them does not add value and is generally considered one of the most significant non-value added activities.

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26
Q

How are joint costs allocated?

A

Joint costs are allocated based upon relative unit volume, relative sales value at split off, or net realizable value.

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27
Q

When are employee and managers motivated to use nonfinancial measures?

A

Employees and managers are motivated to use nonfinancial measures if they are tied to individual effort and, by extension, the individual can control the outcome.

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28
Q

What are types of nonfinancial measures?

A
  1. Delivery time
  2. percentage of defective products
  3. Number of workplace accidents

They also require an entire organizational effort.

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29
Q

What is benchmarking?

A

Identifying standards for critical success factors of a firm. This process entails identifying peers and industry leaders whose practices represent best in class (or world-class) performance standards.

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30
Q

What is a pareto diagram?

A

Pareto diagram is a quality control tool used to evaluate error rates and process improvement issues by combining a histogram (displays individual errors or issues) and a line graph (accounts for all errors or issues)

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31
Q

What is a fishbone diagram?

A

A fishbone diagram describes the process, the contribution to the process, and the potential problems that occur at each phase of the process.

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32
Q

On what is a successful responsability accounting reporting system dependent upon?

A

Responsability for costs, and the authority to do something about them, are necessary for a successful responsability accounting system.

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33
Q

How are critical success factors (perspectives) classified in a balanced scorecard?

A

Critical success factors are:
1. Financial
2. Internal business processes
3. Customer satisfaction
4. Learning and growth - Advancement of innovation and human resource development

34
Q

What is the formula to compute residual income?

A

Residual income = income - minimum required rate (investment * hurdle rate)

35
Q

How do you compute any ratio that is turnover?

A

Any ratio that is turnover should be computed to always have sales in the numerator.

36
Q

How do you compute any ratio that is about return (e.g., return on investment)?

A

Any ratio that is about return should be computed to always have net income in the numerator.

37
Q

How to calculate investment as the denominator of ROI?

A

Avg. plant & equipment
+ Avg. working capital
= Investment

38
Q

What is the purpose of return on assets (ROA)?

A

It is a profitability measure that can be used to evaluate the efficiency of asset usage and management, and the effectiveness of business strategies to create profits.

39
Q

What is the ROI denominator that is criticized?

A

The ROI denominator that is criticized is shareholders’ equity because it combines the effects of operating decisions made at another organization level.

40
Q

What are the two limitations of ROI?

A
  1. Short-term focus: can inadvertently focus managers purely on maximizing short-term returns. This is called investment myopia.
  2. Disincentive to invest: Profitable units are reluctant to invest in additional productive resources because they could reduce ROI in the short term.
41
Q

How is goal congruence promoted?

A

Goal congruence is promoted through the use of the residual income approach.

42
Q

What is economic value-added?

A

It is a residual income technique used for capital budgeting and performance evaluation on a firm’s capital on a given year.

It represents the residual (excess) income of project earnings in excess of the cost of capital (including cost of equity) associated with invested capital.

43
Q

What is the formula to compute economic value -added?

A

Net operating profit after taxes (NOPAT)
- Required return (Investment * WACC)
= Economic value-added

44
Q

What is the formula to compute productivity ratio?

A

productivity ratio = quantity of units produced/quantity of inputs used in production (e.g., direct labor hrs)

45
Q

What is the purpose of a master budget?

A

Annual business plans are prepared to provide comprehensive and coordinated budget guidance for an organization consistent with overall strategic objectives.

46
Q

What information is documented in the master budget (“annual business plan”)?

A

The master budget documents specific short-term operating performance goals for a period, normally one year or less.

47
Q

What is the Tax Burden formula?

A

Tax Burden = Net Income/Pretax Income

The extent a company retains profits after paying taxes.

48
Q

What is the interest burden formula?

A

Interest Burden = Pretax Income/Earnings before interest and taxes

Reflects how much in pretax income company retains after paying interest to debt holders.

49
Q

What is the Earnings before interest and taxes (EBIT) margin formula?

A

EBIT margin = EBIT/Sales

Measures profits earned on sales after paying operating and nonoperating costs.

50
Q

What is the required rate of return used in calculating residual income?

A

The required rate of return could be WACC or any minimum required rate of return (target return) that management decides.

51
Q

What is the purpose of the balance scorecard?

A

It is a strategic performance measurement and management framework for implementing strategy by translating the organization’s mission and strategy into a set of performance measures (financial and non-financial).

52
Q

Why is important to have effective scorecards?

A

effective scorecards should be designed so that the tactics that promote achievement of strategic goals in one area, support achievement of strategic goals in other areas.

53
Q

What does the financial perspective key strategic objective of the balance scorecard refers to?

A
  1. increase profitability
  2. increase revenue growth
54
Q

What does the customer perspective key strategic objective of the balance scorecard refers to?

A
  1. increase customer satisfaction
  2. increase revenue per customer
  3. attract new customers
55
Q

What does the Internal Business process perspective key strategic objective of the balance scorecard refers to?

A
  1. Improve cycle time which leads to an increase in on-time delivery
  2. improve quality performance
  3. Operating effectively and efficiently includes a focus on the following:
    - production cost
    - distribution cost
    - quality cost
    - time for processes that are critical to the customers (e.g. # of defects, cycle time, time from order to delivery to customer and “after the sale” customer service)
  4. throughput time
56
Q

What is throughput time?

A

The time it takes to turn raw material into a completed product.

57
Q

What does the learning and growth perspective of the balance scorecard refers to?

A

Focuses on performance measures relating to employees, employee satisfaction, hours of training per employee, IT expenditures per employee

58
Q

What does the learning and growth strategic objectives of the balance scorecard refers to?

A

Hiring employees with IT skills, R&D skills, reduce the number of safety incidents, percentage of ideas and best practices shared across the organization.

59
Q

What is the formula to compute the extended DuPont Model?

A

Extended DuPont Model = tax burden (NI/pretax income) * interest burden (Pretax income/EBIT) * EBIT margin (EBIT/Sales) * asset turnover (Sales/Assets) * financial leverage (Assets/Equity)

60
Q

What is the formula to compute financial leverage?

A

Financial leverage = Avg. Total assets/equity

measures the extent to which a company uses debt in its capital structure. Bigger numerator, smaller denominator, most of the money is received from debt, then bigger risk

61
Q

What is the formula to compute the DuPont Model?

A

DuPont Model = net profit margin (NI/sales) * asset turnover (Sales/Assets) * financial leverage (Assets/Equity)

62
Q

How does traditional based costing works?

A

Costing system that assigns OH as a single cost pool with a single plant-wide OH application rate using a single allocation base. These rates generally use volume-based cost drivers such as direct labor hours or machine hours.

63
Q

What is a disadvantage of assigning OH cost based on volume?

A

It can distort the amount of cost assigned to various product lines because all OH costs do not fluctuate with volume.

64
Q

How does Activity-Based costing system works?

A
  • Refines traditional costing methods and assumes that the resource-consuming activity (task, units of work, etc.) with specific purpose cause costs.
  • Helps to improve cost allocation by emphasizing long-term product analysis.
65
Q

What does activity-based costing assumes?

A

ABC assumes that the best way to assign indirect costs to products (cost objects) is based on the product’s demand for resource-consuming activities (i.e., costs are assigned based on the consumption of resources).

66
Q

What are characteristics of Activity-Based costing?

A
  • Focuses on multiple causes (activities) and effects (costs) and then assigns costs to them.
  • Cost of activities is used to “build-up” the engineering cost of products using increased cost pools and allocations.
  • ABC can be part of a job order process cost system
  • ABC can be used for manufacturing or service businesses.
  • ABC takes a long-term viewpoint and treats production costs as variable.
  • Cost driver is often a nonfinancial variable
  • ABC may be used for internal but not for external purposes.
67
Q

How does the cost per unit results using activity based costing?

A

use of ABC usually results in substantially greater unit costs for low-volume products than is reported for traditional product costing.

68
Q

Is activity-based costing beneficial for allocating indirect costs?

A

Yes, as it is used for allocating indirect costs when there are multiple activities. Each activity is evaluated independently and assigned a cost driver, which results in allocation rate unique to that activity. The greater the % of total costs considered indirect, the greater the need for proper allocation for each activity.

69
Q

What is residual income?

A

It is a measure of performance where we measure the excess of income earned above and beyond what we required, not in terms of percentages but in terms of a dollar value.

70
Q

Why is residual income a better measure of performance for an investment center manager than ROI?

A

Residual income measures actual dollars that an investment earns over the required rate of return. Performance evaluation on this basis means that desirable investment decisions will not be rejected by high-return divisions.

71
Q

What is the formula to allocate joint costs using the average cost per unit method?

A

1) obtain the total of units sold from all products (e.g., product X and Y)
2) Divide the joint cost by the total units sold from both products.
3) obtain the per unit costs
4) Allocate the joint cost by multiplying the per unit cost times the # of units for each product
Example:
Product X = per unit cost * product X units.

72
Q

What are separable costs?

A

If there are further processing costs given, they must be subtracted from the selling price to determine net realizable value. The joint costs are allocated using pro-rata allocation using the net realizable value.

73
Q

What are examples of product cost?

A
  1. Direct materials
  2. Direct labor
  3. Indirect labor
  4. Manufacturing OH (e.g., depreciation of factory machinery, salaries of factory supervisors)
  5. Freight-in
74
Q

What are examples of period costs?

A
  1. Selling and marketing expenses (e.g., freight out)
  2. Accounting and legal expenses
  3. Executive salaries and back-office employees
  4. General expenses (office supplies, travel, etc.)
75
Q

What is Total Quality Management (cost of quality)?

A

Product’s ability to meet or exceed customer expectations.

Cost of quality includes costs associated with activities related to conformance with quality standards and opportunity costs or activities’ associated with correcting nonconformance with quality standards.

76
Q

What are conformance costs under Total Quality Management?

A

The costs of ensuring conformance with quality standards. Two types:
1. Prevention costs
2. Appraisal costs

77
Q

What are nonconformance costs under Total Quality Management?

A

The costs of nonconformance with quality standards. Often difficult to compute because most of these costs are in the form of opportunity costs (e.g., lost sales or reputation damages). Two types:
1. Internal Failures
2. External Failures

78
Q

What are prevention costs?

A

Prevention costs are incurred to prevent the production of defective units. Examples include:
1. Employee training
2. Inspection expenses (for raw materials coming in)
3. Preventive maintenance
4. Redesign of product
5. Search for higher-quality suppliers

79
Q

What are appraisal costs?

A

Appraisal costs are incurred to discover and remove defective parts before they are shipped to the customer or the next department. Examples include:
1. Statistical quality checks
2. Testing
3. Inspection (for completed products to be shipped)
4. Maintenance of the laboratory

80
Q

What are internal failure costs?

A

Internal failure costs are the costs to cure a defect discovered before the product is sent to the customer. Examples include:
1. Rework costs
2. Scrap
3. Tooling changes
4. Cost to dispose
5. Cost of the lost unit
6. Downtime

81
Q

What are external failure costs?

A

External failure costs are costs to cure a defect discovered after the product is sent to the customer. Examples include:
1. Warranty costs
2. Cost of returning the good
3. Liability claims
4. Lost customers
5. Reengineering an external failure

CPA - Business Environment (6 decks)

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