BEC - B3: Operations Management Flashcards
Which of the following is assigned to goods that were either purchased or manufactured for resale
- Period cost
- Relevant cost
- Opportunity Cost
- Product cost
Product cost. Assigned to goods that were either purchased or manufactured for resale. Product costs are also known as “inventoriable costs”
Period costs are expensed during a period. They are not charged to a product (therefore they are not capitalized), hence, why they are expensed.
Relevant costs are costs that are relevant to a particular decision
Opportunity costs are not applicable here.
What costs make up “conversion costs”?
Direct Labor and overhead (everything but direct material)
What costs make up “prime costs”?
Direct Materials and Direct Labor (everything but factory overhead).
Think “PRIME”, like “Primary”… These are primarily applied to a product to make it finished…
What is another way of thinking about inventoriable costs?
Product costs.
They include direct labor, direct materials, and factory overhead. These are capitalized costs added to the value of inventory.
Which one of the following is a purpose of cost allocation?
- Implementing A-B-C costing
- Aiding in variable costing for internal reporting
- Measuring income and assets for external reporting
- Evaluating revenue center performance
- Measuring income and assets for external reporting. Cost allocation is essential to this (need to know what goes into inventory for assets, what goes into COGS for income…)
- Cost allocation will not aid in implementing ABC. ABC requires determining the cost drivers (cause) and cost (effect)
- It does not aid in variable costing for internal reporting. Variable costing matches costs directly variable with volume to the items produced / sold. Costs are not allocated, as it is already clear to which items they relate
- Cost allocation will not aid in evaluating revenue center performance, as centers are responsible for revenues only.
How do we distinguish between normal and abnormal spoilage when it comes to inventoriable costs?
Normal spoilage is considered a necessary cost of production, and is an inventoriable cost (a “product” cost). Abnormal is a period cost.
What is the difference between each of the following:
- Operation Costing
- Job order costing
- Activity-based costing
- Process costing
- Operation costing is a hybrid system that allows the company to use job order costing for some costs, and process costing for other costs.
- Job order costing allocates production costs to products and services that are “identifiable as separate units and require greater or lesser amounts of work to complete”. KEY: Job costing is used in the production of tailor-made or unique goods.
- Activity based costing accumulates all costs of overhead for each activity of an organization, and then allocates those activity costs to the cost objects that caused the activity.
- Process costing allocates production costs to products and services by averaging the cost over the total units produced. Costs are usually accumulated by department, rather than by job. KEY: Process costing is used where the product is composed of mass produced homogeneous units. Such as gasoline and oil, chemicals, paints, flour, rubber, food preparation in fast food outlets, lumber, beverage drink manufacturer
In a traditional job order cost system, the issue of indirect materials (to a production department) increases… what?
Factory overhead control. NOT factory overhead applied.
Overhead applied is the allocated amount of factory overhead that is applied to work in process, based on estimates of production
Indirect materials are appropriately included in factory overhead costs, as they are used in the production process. Therefore, the issue of indirect materials would decrease stores control, and increase factory overhead control.
Using weighted average method, how do we calculate equivalent units?
Add the units completed (during the period) to the ending WIP - which is also equal to a “percentage of completion times a number of units.”
Using FIFO, how do we calculate equivalent units?
Add the units started and completed during the period, subtract the beginning inventory (except for the “to be completed percentage from beginning… this gets added in), and add the work in process ending inventory.
These three added up get you equivalent units.
An accounting system that collects financial and operating data on the basis of the underlying nature and extend of the cost drivers is…
Activity based costing!
What benefit does management get out of traditional costing?
Traditional costing uses a common departmental or factory wide measure of activity, such as DL hours or dollars, to distribute manufacturing overhead to products.
Which of the following can be used with activity based costing?
- Process costing
- Job costing
- Process costing: yes
- Job costing: yes
ABC is appropriate for all types of cost accumulation systems. All it does is assume that resource-consuming activities of an enterprise that generates costs are “activities” and not “outputs”
Activity based costing is acceptable for which of the following:
- External Reporting
- Internal reporting
External: No
Internal: Yes
ABC uses cause and effect relationships to capitalize costs to inventory.
This is not acceptable for external reporting purposes. This is useful for internal reporting though.
Each of the following should be considered in the selection of appropriate cost drivers for an activity based costing system, except:
- Degree of correlation
- Behavioral effects
- Cost of measurement
- Volume-based production
- Volume based production should NOT be considered as a means for determining WHAT the appropriate cost drivers are for an activity…
- V-B production will determine HOW you should allocate costs once the cost drivers have already been established.
- Behavioral effects, costs of measurement, and degree of correlation are all factors that should be considered when selecting an activity’s appropriate cost drivers. Volume based production is more a hallmark of traditional costing.
A cost that bears an observable and known relationship to a quantifiable activity base is:
An engineered cost.
When calculating the joint cost allocated to a product, using the “net realizable value method” to allocate costs, do we focus on the…
- units produced
- units sold
Units produced. Net realizABLE value, not “net realized value”. You CAN realize it. You haven’t realized it yet.
A company manufactures a major product “Major”, which gives rise to a by-product “Minor”. The only separable cost when a “Minor” unit is sold is $1 selling cost, at a sales price of $4. The company uses a by-product method of accounting for this “Minor” product. It switches to joint-product accounting. What is the effect on overall Gross Margin?
Gross margin will increase by $1 per unit for each unit of “minor product” sold.
Gross margin is sales - COGS. in the by-product original method of accounting, the selling costs are included in COGS. In the new method of accounting - joint-product - selling expenses will not be included in calculation of gross margin, as they are period expenses.
Net income is the same, but gross margin is different because of the treatment as a period expense.
What are some examples of critical success factors in the balanced scorecard?
- Human resource aspects (harnessing employee motivation, innovation, etc.)
- Internal business process improvement
- Customer satisfaction
- Financial performance
What technique is used to analyze the source of potential problems and their locations within a process?
Fishbone diagram.
Jack pitfall:
-Pareto diagram is different. Pareto shows a graphical analysis of errors by type. Bar graph and a line graph are used in conjunction to show individual errors and cumulative number of errors. Pareto diagram is used to prioritize improvement efforts.
- Fishbone on the other hand describes a process, contributions to the process, and the potential problems that could occur at each phase of a process. The process is a single horizontal line. Contributions to the process are diagonals (forming the fishbone structure). Main purpose of a fishbone is providing the framework for managers to analyze the problems that contribute to the occurrence of defects.
- Control Charts are also different.
