BEC Cost Accounting - Personal

Question 1

What is the primary purpose of cost measurement?

Answer 1

(1) allocate the costs of production (DM, DL, MOH) to units produced and (2) provide information for management decisions (i.e. pricing)

Question 2

What is the purpose and formula for COGM (or Net Purchases for retailers)?

Answer 2

• Purpose: summarize the manufacturing activity of the period
• COGM = BWIP + DM Used + DL + MOH Applied - EWIP
• COGM = Net Purchases for retailers
• COGM statement prepared regardless of which costing system is used
• Note: COGM is the cost of goods COMPLETED

Question 3

How is COGS calculated?

Answer 3

BFG + COGM = COGAS

COGAS - EFG = COGS

Question 4

Name 4 financial performance measures.

Answer 4

1. Profit
2. Return on Investment (B3)
3. Variance Analysis (spending)
4. Balanced Scorecard (implement strategy)

Question 5

Name nonfinancial performance measures.

Answer 5

1. External benchmarks - Productivity measures
   - Total Factor Productivity Ratios (total costs denominator)
   - Partial Productivity Ratios (specific quantity denominator)
2. Internal benchmarks - Find and Analyze problems
   - Control Charts (determine “zero” defects)
   - Pareto Diagrams/Histogram/Frequency Diagram
   - Cause-and-Effect (Fishbone) Diagram (after Pareto Diagram)

Question 6

Name the 9 characteristics of effective performance measures.

Answer 6

1. promote achievement of goals (motivate)
2. relate to goals of organization
3. balance long- and short-term issues
4. reflect management of key activities (“critical success factors” in the balanced scorecard)
5. under control or influence of employee
6. understood by employee
7. used to both evaluate & reward employee or otherwise constructively influence behavior
8. are objective and easily measured
9. used consistently

Question 7

What are performance measures designed to do and what is the key issue?

Answer 7

Measures designed to provide feedback that will motivate appropriate employee behaviors.

Key issues: linkate of measures, incentives, and goals

Note: feedback tied to self-interest is most effective.

Question 8

What must marketing decisions consider? What does marketing seek to do?

Answer 8

Decisions must consider:

• management’s objectives
• manner in which alternative practices will achieve those objectives

Seeks to:

• establish value for an organizations products
• drive customer and employee behavior

Question 9

Name the 5 types of marketing methods.

Answer 9

1. Transaction: lowest price/single transaction
2. Interaction-Based Relationship: repeat business/loyalty discount
3. Database: target markets/segments
4. E-marketing: internet
5. Network/Multilevel: relationships and referrals

Question 10

What marketing method is associated with the following performance measures:

• Sales-volume-driven compensation/incentive and evaluation?
• Customer satisfaction and quality measures?

Answer 10

1. Single transaction

2. relationship-based marketing

Question 11

Name the 3 types of management compensation.

Answer 11

1. fixed salary (not incentive compensation)
2. bonuses - based on either profit or sock performance
   - profit based: incentive to improve operating performance
   - stock based (i.e. stock options): long-term
3. Other incentives (“perks”)
   - may be taxable income if not related to manager’s business activities

Question 12

Name the factors to consider in the design of management compensation.

Answer 12

1. Time horizon
   - Cash bonuses = current performance
   - Stock options = current performance + future performance (retention)
2. Fixed vs. Variable
   - Fixed: objective, impacted by uncontrollable events, do not accommodate Balanced Scorecard
   - Variable: subjective
3. Stock vs. Accounting-Based Performance Evaluation
4. Local vs. Company-wide Performance
5. Cooperative vs. Competitive Incentive Plans
   - Cooperative: stock options for company-wide perf. regardless of department performance
   - Competitive: tiered commission structures in which commission rates increase for individuals as thresholds are reached/exceeded

Question 13

Define cost object/objective.

Answer 13

Cost Object/Objective: resources or activities that serve as the basis for management decisions

Cost Object: anything for which costs are measured and assigned

Cost measurement and assignment objectives include:

• valuation of product (product costing) or inventory
• cost control (cost comparison to standards/budgets)

Question 14

Define product costs

Answer 14

Product Costs: all costs related to manufacturing of product

• not expensed until product is sold (matching principle)
• “Inventoriable” / capitalized
• attached to units of output
• “Manufacturing Costs” = all costs associated with the manufacture of a product

Question 15

What are the 3 main types of product costs?

Answer 15

1. direct materials
2. direct manufacturing labor
3. manufacturing overhead (indirect)

Question 16

Define period costs

Answer 16

Period Costs: costs of selling the product and administering and managing the operations of the firm

• expensed in the period in which they are incurred
• are not inventoriable
• “Non-manufacturing costs” - all costs not related to the manufacture of a product

Question 17

What are the 3 main types of period costs?

Answer 17

1. Selling & Marketing
2. General & Administrative
3. Interest (financing) expense

Question 18

What are Cost Accounting Systems designed to meet?

Answer 18

Designed to meet the goal of measuring cost objects or objectives.

Examples: PIE

• Product costing (inventory, COGM, COGS)
• Income determination (profitability)
• Efficiency measurements (comparison to standards)

Question 19

Define Prime Costs and Conversion Costs. What type of costs are these costs considered to be?

Answer 19

Prime Costs = DM + DL
Conversion Costs = DL + MOH Applied

These are considered product costs.

Question 20

List the different methods for tracing costs to cost objects

Answer 20

1. Direct costs: easily (without excessive cost or significant effort) traced to cost pool or object as cost directly relates to that item
   - Direct Materials
   - Direct Labor
2. Indirect Costs: not easily traceable to cost pool or cost object, typically benefit 2+ cost pools or objects
   - Capitalized as “manufacturing overhead”
   - Note: must be related to the FACTORY (not OFFICE = SG&A)
   - 3 main types of costs:
   - —- Materials: cleaning supplies for factory, replacement parts for machines
   - —– Labor: generally supports manufacturing process but does not work directly on the specific job (forklift driver, maintenance workers, shift supervisors, workers in receiving dept., janitorial staff, inspectors, engineers, training, other HR functions)
   - —- Other: depreciation, rent, machine maintenance, property taxes, insurance, utilities

Question 21

How is MOH allocated?

Answer 21

Using cost drivers that are considered to have a strong relationship to the incurrence of these costs.

Question 22

Describe the overall flow of costs through manufacturing accounts.

Answer 22

1. Purchases –> Dr. Raw Materials
2. Direct Materials/Labor Used –> Dr. WIP, Cr. Raw Materials
   - Note: Factory OH: Dr. WIP Inventory
3. Goods Completed –> Dr. FG, Cr. WIP
4. Goods Sold –> Dr. COGS, Cr. FG

Question 23

Name the two methods for accounting for MOH.

Answer 23

1. Traditional: all indirect costs (total) are allocated to a single cost pool (account) called “Overhead”) and allocated as a single pool
   Step #1: POH Rate = Budgeted OH Costs / Est. Cost Driver
   Step #2: Applied OH = Actual Cost Driver / POH Rate
2. Activity-Based Costing

Question 24

Describe the 3 types of cost behavior. What is the purpose of the classification?

Answer 24

Purpose: used to allocate costs to cost drivers.

1. Variable:
   - Total cost changes proportionally with cost driver
   - Per Unit cost is constant
2. Fixed
   - Total cost does NOT change with driver (in the short-term within the relevant range)
   - Per Unit cost changes
   - Long-run = variable cost
3. Mixed/Semi-Variable Costs (i.e. Mfg. OH)
   - have a base component
   - have a variable component that fluctuates in direct relation to production

Question 25

Define the Relevant Range

Answer 25

Relevant Range: the range of production over which cost behavior assumptions (linear relationships, fixed, variable) are valid.

When cost driver activity is not longer within the relevant range, variable and fixed cost assumptions fro that cost driver cannot be used to allocate costs to cost objects.

Question 26

Define a Cost Accumulation System and list the different types of systems used.

Answer 26

Cost Accumulation System: used to assign costs to products

System used is driven by cost object involved:

1. Job-Order Costing (custom orders/unique)
2. Process Costing (mass-produced, homogenous)
3. Operations Costing (uses components of both job-order and process)
4. Backflush Costing (accounts for certain costs at the end of the process in circumstances where there is little need for in-process inventory costing)
5. Life-Cycle Costing (seeks to monitor costs throughout the product life cycle and expand on traditional costing that focuses only on the manufacturing phase of the product life cycle)

Question 27

How must fixed MOH be accounted for under US standards?

Answer 27

Fixed MOH must be ALLOCATED to inventory based on NORMAL capacity (long-run product demand)

• Estimated normal capacity must be used to allocated Fixed MOH
• Actual activity level is used to allocate Variable MOH

Question 28

Describe Job-Order Costing. When is it used?

Answer 28

Definition: Method of product costing that identifies the job (or individual unites or batches) as the cost objective

Note: each job is a cost center

Used: relatively few units produced and each is uniquely identifiable

Question 29

What job records are used in Job-Order Costing?

Answer 29

In Job Costing, subsidiary records (job-order cost sheets) needed to keep track of all unfinished jobs (WIP) and finished jobs (FG). Total of all unfinished job cost sheets = WIP balance.

1. Materials Requisitions
2. Labor time Tickets (time cards showing hours and rate)
3. Job-Cost Sheets (show accumulated DM, DL, MOH for each job)

Question 30

How is MOH accounted for in a Job Costing system?

Answer 30

1. Overhead items are grouped by cost behavior (fixed/variable)
2. Fixed and variable OH costs are estimated for the forthcoming period
3. Denominator (activity) base is chosen
4. Actual activity level is estimated for the forthcoming year
5. Determine the NORMAL capacity of the facility
6. Determine the predetermined overhead rates = estimated cost/normal capacity for each cost type
   OR
   Variable OH may be estimated on a per unit basis based on past history
7. As actual MOH costs are incurred, they are debited to “Factory Overhead” account
8. As jobs are completed, the POH Rate is used to apply overhead to the jobs.

Note: Actual OH rates are NEVER assigned to a job

• MOH flow into WIP using the POH Rate using an “Overhead Control” account
• Actual OH costs NEVER enter the WIP account
• Fixed MOH variance always closed to COGS
• Variable MOH variances are closed to COGS if immaterial
• Variable MOH variances closed to WIP, FG, and COGS if material (proratin may be made based on total ending balance before proration)

Question 31

Describe Process Costing. When are the steps used?

Answer 31

Process Costing: method of product costing that averages costs and applies them to large number of homogeneous items

Note: each processing department becomes a cost center

Steps: (PECUA)

1. Summarize the flow of physical units (beginning with the production report)
2. Compute the Equivalent Units of Production
3. Determine costs to allocate
4. Compute unit ocsts
5. Allocate total costs to
   - Goods completed
   - Ending WIP

Question 32

How is Process Costing WIP different from Job-Order Costing WIP?

Answer 32

There are usually several WIP accounts under Process Costing (one for every department) while only a limited number of WIP accounts are required for Job Order Costing.

Question 33

What are the two methods for calculating Equivalent Units of Production under Process Costing? Describe some differences.

Answer 33

1. FIFO
   - Assumes Beg. WIP is first batch completed and is a distinct layer (separate from goods that are started and completed during the period)
   - Any work done last period (Beg. WIP) must be taken into consideration
   - Equivalent Unit figures reflect the work done during the current period
   - Cost per equivalent unit computed using only current period costs
2. Weighted Average
   - Combines current costs with prior period costs
   - All units carried at an average cost of production
   - Assumes ALL units completed during the period were started AND completed during that period
   - Percentage of work done last period on Beginning WIP is ignored
   - Cost per equivalent unit computed using Beg. WIP Inventory + Current Costs

Differences: treatment of Beg. WIP

Question 34

What two categories of Equivalent Units are accounted for?

Answer 34

1. Materials
   - Note: materials added at the beginning of the process are assumed to be 100% complete
2. Conversion Costs (DL + MOH)