BEC 1 Operation Management: Cost Measurement Methods Flashcards
Name the 3 components of product cost and identify which of these components are categorized as prime costs and conversion costs.
- Direct materials (DM)
- Direct Labor (DL)
- Manufacturing Overhead (MO)
Prime Cost = DM + DL
Conversion Costs = DL + MO
Distinguish between product cost and period costs.
Product Costs = Inventoriable; they become COGS when sold
Period Costs = Expensed in the period incurred as they are not inventoriable.
Name the 3 most frequent objectives of an entity’s cost accounting system(s)
- Product costing (inventory and COG manufactured and sold)
- Efficiency measurement (comparison to standards)
- Income determination (profitability)
Determine the traditional overhead rate.
Traditional OH rate =
Budgeted manufactured overhead costs
/
Estimated cost driver
Define relevant range
The relevant range is the range of volume for which the assumptions of the cost driver (i.e.., linear relationship with the cost incurred) are valid and in which the actual value of the cost driver exists.
Compare and contrast the direct method and the step-down method for allocating service costs in activity-based costing.
Under the direct method, each service department’s total costs are directly allocated to the production departments without recognizing that the service departments themselves may use the services from other service departments.
Under the step-down method, a sequential approach is used to allocate service department costs to production department as well as other service departments.
With joint products, what is the treatment of costs incurred before the split-off point?
Costs incurred before the split-off point are sunk costs, not relevant to further processing decisions.
Joint costs are allocated by an arbitrary means such as by unit relationships or relative net realizable values at the split off point.
What is the formula for COG Manufactured?
WIP (beginning)
Add: DM; DL, M O/H
Less: WIP (ending)
= Cost of Goods manufactued
Formula for COGS?
Finish Goods (beginning)
Add: COG Manufactured
Less: Finished Goods (ending)
= COGS
OR
BI
Add: Purchases
Less: EI
= COGS
What is the difference between job and process costing?
Job costing: With job costing, each unit / batch is unique and easily identifiable costs are determined by each job. Example: We print your resume in our print shop
Process Costing: With process costing, continuous mass-produced identical units are manufactured and costs are determined by activity / process / department.
Example: We process crude oil into gasoline.
What is an equivalent unit and how are the costs applied?
Used in process costing, EU are fully completed and partially completed units during the period.
In applying costs, determine the units, then costs, then apply the cost flow assumption for cost per unit and allocation of costs.
How are the EU and total cost calculated using the FIFO method?
EU = Beginning WIP x % to be completed) + Units started and completed + (Ending WIP x % completed)
Total Costs = Cost incurred during the current period.
How are the EU and total costs calculated using the weighted average method?
EU = Units completed and transferred out + (Ending WIP x % completed)
Total Costs = Costs in beginning WIP + Costs incurred during the current period.
Name the types of spoilage and indicate the appropriate accounting treatment.
Abnormal: Charge to income of the current period
Normal: Increase the cost of the production produced (i.e. inventory)
Define Activity Based Costing (ABC)
ABC is a costing theory that assumes that resource consuming activities cause cost and that costs should be assigned to benefiting products based on the activities performed and the resources consumed.
ABC system often divide costs into multiple activity centers and identify the activities that drove the costs in each cost center. Costs are then assigned based on the volume of cost drivers at the determined rate per cost driver.
