BEC QM Flashcards
Quality of conformance
Refers to the degree to which a product meets its design specifications and/or customer expectations. This is goal of Total Quality Management (TQM)
Quality of design
Meeting or exceeding the needs and wants of customers. 2nd goal of TQM
Cost of quality:
- Prevention cost- cost to make sure job done right the 1st time (training, engineering, control activities)
- Appraisal cost- testing and inspection costs
- Internal failure cost- costs incurred when substandard products are produced but discovered before shipment (scrap, rework, spoilage)
- External failure cost- products do not meet requirements and have reached customer (recalls, warranty, returns and allowances)
Total cost of quality=sum of all of these
Increased cost of prevention and appraisal=
Decreased cost of failure, increase in quality of conformance.
Throughput time (manufacturing cycle time)
Total time required for an item to make it’s way through the manufacturing system.
Which of the following types of performance measures integrates financial performance, internal operations, learning and growth, and customer satisfaction?
Balanced scorecard
Financial performance measures for balanced scorecard:
Gross profit margin, sales growth, profitability per job or product, stock price, achievement of cash flow goals, and any of the standard financial ratios (inventory turnover, return on investment, current ratio, etc.)
Customer performance measures for balanced scorecard:
Market share, product returns as a percentage of sales, number of new customers, sales trends
Internal business process measures for balanced scorecard:
Percentage of production downtime, delivery cycle time, manufacturing cycle time/throughput, manufacturing cycle efficiency, standard cost variances, product defect rate, amount of scrap and rework
Learning, innovation and growth measures for balanced scorecard:
Percentage of employees with professional certifications, hours of training per employee, number of new products developed, employee turnover, number of customer requests for specific designers
How is contribution margin (CM) different from gross margin (GM)?
CM equals sales less variable costs; GM equals sales less cost of goods sold.
Delivery cycle time
Time between order and delivery
Manufacturing cycle efficiency
Time required for nonvalue-added activities/total manufacturing time
Why is cost avoidance a faster way to increase profits than to increase revenue?
Increasing revenue often results in at least some proportional cost increases.
Types of risk:
- Strategic- occurs as a consequence of the specific and overall action plans to achieve the organization’s mission, controlled with forcasting, optimizing operating leverage (fixed vs. variable costs) and cost control
- Operational-short-term in nature and involves daily implementation issues, mitigated with EE training, customer credit checks, quality control
- Market risk- large-scale economic events or natural disasters that, to some extent, influence all companies, systematic risk, controlled with insurance and assessments of exposure to economic downturns
- Financial risk- interest rate, foreign exchange (hedging)
Pure risk
Possibility of either breaking even or losing but never profiting (insurance). All other risk is speculative risk.
What is the objective of the demand flow approach?
To link process flows and manage them based on customer demand.
What tools does Six Sigma commonly use to achieve quality control?
Tools common to TQM (e.g., control charts). Six Sigma is very similar to total quality management (TQM) and uses TQM tools such as control charts, run charts, pareto histograms, and Isikawa (fish-bone) diagrams.
Jago Co. has two products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity.
For short-run profit maximization, Jago should manufacture the product with the
Greater contribution margin per hour of manufacturing capacity in the short run, in the long run, the firm should expand to take advantage of the market for its products.
Theory of constraints
Identifies strategies to maximize income when the organization is faced with bottleneck operations. A bottleneck operation occurs when the work to be performed exceeds the capacity of the production facilities. Over the short run, revenue is maximized by maximizing the contribution margin of the constrained resource. NOTE: this is not overall contribution margin but contribution margin of constrained resource.
Lean manufacturing traits:
- Small batches of a high variety of unique products
- Automated or otherwise sophisticated machinery (multi-use equipment)
- Highly skilled labor (usually cross-trained).
- Smaller # of suppliers with increased quality expected
Thus, lean production blends the features of craft (small number of unique products) and mass (large # of standardized products) production processes.
Demand flow approach (demand flow technology, DFT)
Uses mathematical methods to link materials, time, and resources based on continuous flow planning. The objective is to link process flows and manage those flows based on customer demand.
Contribution margin per unit of constraining resource=
CM per unit x Amount of constraining resource per unit
Example: $1 CM x 72 lbs per hour can be processed vs. $.5 CM x 100 lbs per hour can be processed
In a process cost system, the application of factory overhead usually would be recorded as an increase in
Work-in-process inventory control. Journal entries to record the manufacturing cost are similar for job-order and process costing. When overhead is applied, it is debited to work in process.
In a traditional job order cost system, the issue of indirect materials to a production department increases
Factory overhead control, The issuance (use in production) of indirect materials results in a debit (increase) to factory overhead control. This account accumulates actual overhead cost incurrence. Actual overhead is not debited to work in process. Rather, work in process is debited to factory overhead applied.
Fundamental cost classifications:
- Product costs- generally attach to physical product units and are expensed in the period in which the goods are sold (COGS). Product costs are also known as inventoriable costs or manufacturing costs.
- Period costs- Cannot be matched with specific revenues (i.e., accountant’s salary) and are expensed in the period incurred. These costs are also called selling and administrative costs.
Direct costs
Direct material and direct labor
Indirect costs
Factory overhead (fixed and variable)
Prime costs
Direct materials and direct labor
Conversion costs
Direct labor and factory overhead (cost to convert)
Steps to overhead allocation (applied overhead)- VERY IMPORTANT THREE STEP PROCESS
- Estimated total overhead costs/estimated volume activity= overhead allocation rate, determined at beginning of period, ALWAYS based on current capacity
- Overhead allocation rate x units used in production (ie direct labor hours or machine hours)= applied overhead, applied throughout the year
- At the end of the year, close out over/underapplied overhead to COGS
Applied overhead is charged to WIP:
DR: Work in Process
CR: Factory overhead applied
Actual overhead is charged to Factory Overhead Control account:
DR: Factory overhead control - utility expense
CR: Accounts Payable
Overapplied factory overhead
When more overhead costs are applied to products than are actually incurred. When the accounts are closed at the end of the period, overapplied overhead reduces Cost of Goods Sold.
DR: Factory overhead applied
CR: Factory overhead control
CR: COGS
Underapplied factory overhead
DR: Facotry overhead applied
DR: COGS
CR: Factory overhead control
Types of overhead:
Estimated- estimated total overhead for budgeting, used to calculate overhead allocation base
Applied- based on allocation base, amount applied based on allocation base and actual units of allocation base consumed (ex. DLH)
Actual- actual overhead costs incurred
Spoilage costs:
- Normal spoilage- inventoriable product cost (debited to finished goods)
- Abnormal spoilage- separated and deducted as a period expense
- Scrap- that is sold for immaterial amount decreases COGS, treated as other sales if amt is material
Schedule of Cost of Goods Manufactured: IMPORTANT
Beginning value WIP \+Total manufacturing costs (Direct labor & materials, overhead) =WIP available -Ending WIP =Cost of goods manufactured
Schedule of Cost of Goods Sold: IMPORTANT
Beginning Finished Goods \+Cost of goods manufactured =GAFS -Ending Finished Goods =COGS
Schedule of Direct Materials Inventory:
Beginning Direct Materials Inventory \+Purchases =Direct Materials available -Ending Inventory Direct Materials =Direct materials used
Fixed vs. variable cost behavior
Fixed costs per unit vary and in TOTAL stay the same.
Variable costs per unit stay the same and TOTAL vary.
High-low method
Calculates variable costs since any change in costs due to production volume are variable costs.
- Calculate difference in cost between highest and lowest production volumes.
- Calculate difference in volume.
- Divide cost by volume=variable cost per unit
- Using this variable cost per unit, multiple by quantity given to determine fixed costs
Absorption costing
Assigns all 3 factors of production (direct materials and labor and fixed and variable overhead to inventory (product costs)
Variable (Direct) costing
Assigns only variable manufacturing overhead, direct material and labor to inventory. These are considered product costs while fixed manufacturing overhead is a period cost. Variable selling admin costs are always period costs.
Absorption costing income statement
Sales
-Variable manufacturing costs (for units sold)
-Fixed manufacturing costs (for units sold)
=GROSS MARGIN
-Variable selling/admin (for units sold)
-Fixed selling/admin (total)
=Operating income
Variable costing income statement
Sales
-Variable manufacturing costs (for units sold)
-Variable selling/admin (for units sold)
=CONTRIBUTION MARGIN
-Fixed manufacturing costs (for units sold)
-Fixed selling/admin (total cost)
=Operating income
Inventory valuation comparing absorption and variable costing.
Inventory valuation will ALWAYS be higher with absorption costing b/c fixed costs are only considered when item sold, not in total.
When the # of units sold=# units produced, absorption costing and direct costing = same income, when this is not the case, calculate difference with formula:
Ending inventory units x fixed costs per unit - beginning inventory units x fixed cost per unit
Known as Income Reconciliation rule, tested widely on CPA
Units sold > Units produced
Absorption costing income < Direct costing income
Units sold < Units produced
Absorption costing income > Direct costing income
At the breakeven point, the contribution margin equals total
Fixed costs
Breakeven analysis assumes that over the relevant range
Unit variable costs are constant (also assumes fixed costs, product mix and price are constant) All relationships are linear and CVP model is a before-tax model.
The contribution margin (CM) represents:
The portion of revenues which are available to cover fixed costs. = sales revenues-variable costs
Break-even point in units=
Total fixed costs/CM per unit
Contribution margin ratio can be used when
No unit information is available, represents the percentage of each sales dollar that is available to cover fixed costs. Ex. 30% of each sales dollar is available to cover fixed costs
Contribution margin ratio=
Total CM/Sales Revenue
Can also use common size income statement approach: Sales in dollars and 100% -Variable costs in dollars and % =CM in dollars and % Variable cost % and CM% add up to 100%
Break-event point in sales dollars=
Total fixed costs/CM ratio
Margin of safety
Difference between the current sales level and the break-even point. That is, the margin of safety indicates how much revenue can decrease before operating income becomes negative.
Sales in units to reach target profit=
(Fixed costs+Targeted profit)/CM per unit
Same as break-event with profit added, think of the denominator just having to cover everything in numerator.
In a job cost system, manufacturing overhead is:
- An indirect cost of jobs
2. Necessary to production
Underapplied overhead might be explained by which of the following?
Actual volume LESS than expected or actual fixed costs GREATER than expected.
Applied Overhead = (bud. FOH/bud. volume) X (actual volume)
For overhead to be underapplied, either the actual fixed costs must be greater than the budgeted fixed costs or the actual volume must be less than the budgeted volume.
A standard cost system may be used in
Either job order costing or process costing
Job order costing
Used to accumulate costs related to the production of large, relatively expensive, heterogeneous (custom-ordered) items. Costing follows the general rules for manufacturing cost flows (WIP to finished goods to COGS). Uses predetermined OH rate.
Predetermined OH allocation rate=
KNOW HOW TO CALCULATE
Estimated total OH costs/Estimated volume of activity
Applied overhead=
Predetermined OH rate x actual units used in production (DLH, machine hours, etc)
DR: Work in process
CR: Factory OH applied
Differences between material and immaterial differences to over and underapplied overhead:
- Material- prorated to WIP, finished goods and COGS
- Immaterial- difference allocated to COGS
DR: Factory OH applied
CR: Factory OH Control
CR: COGS (overapplied, COGS will decrease)
In computing the current period’s manufacturing cost per equivalent unit, the FIFO method of process costing considers current period costs
Only
FIFO does not mix cost and effort from the previous period with that of the current period when computing cost per equivalent unit. This does not mean, however, that the beginning inventory cost and effort from the previous period are not included in goods transferred out. Rather, it means that all effort performed in the current period is costed using only the current period costs.
Process costing
Used to accumulate costs for mass-produced, continuous, homogeneous items, which are often small and inexpensive. Since costs are not accumulated for individual items, the accounting problem becomes one of tracking the number of units moving through the work-in-process (WIP) into finished goods (FG) and allocating the costs incurred to these units on a rational basis (using equivalent units)
Process costing Step 1:
Determine EU: Beg WIP + Units added to production= Ending WIP + Units completed
Weighted avg method: (avg previous period costs into goods completed EU)
Goods completed x % completion=EU +
Ending inventory x % completion=EU
FIFO: (only considers current period costs)
Beg inventory x % needing completion (100%-prior period completion)= EU+
Units started and finished x 100%=EU +
Ending inventory x % completed=EU
Cost flow assumptions for inventory (Weighted avg vs. FIFO):
Weighted average allocates all costs (beg WIP inventory costs are added to the current period), FIFO only allocates current period costs (not costs associated with beginning WIP
Process costing Step 2:
Determine costs per EU by dividing costs to account for by EU.
Process costing Step 3:
Determine cost of goods transferred out using cost per EU:
Weighted average=Goods completed EU x cost per EU
FIFO: (Beg inventory EU + Units started/completed EU) x Cost per EU PLUS prior period cost (given)
Joint products
Two or more products of significant sales value are said to be joint products when they:
- Are produced from the same set of raw materials; and
- Are not separately identifiable until a split-off point.
Cost allocation of joint products:
- Relative physical volume (%)
- Relative sales value at split-off (used when significant market exists at split-off)
- Net realizable value (%)- when no market at split-off point, Final sales value-separable processing costs=net realizable value, calculated as % of total net realizable value of all products
By-products
Relatively insignificant value compared to main product. (1) if the by-product is treated as revenue, then there is no effect on the total joint costs; and (2) if the by-product is treated as a reduction in cost of the joint costs, then there will be no cost basis for the by-product and no impact on revenue. Treating the by-product’s impact as miscellaneous revenue recognizes the by-product as relatively insignificant.
When net proceeds from the sales of by-product are used to reduce joint costs, what profit is recognized?
None
By-product recognition
- When produced- sales value less any selling costs deducted from joint costs of main products produced when by-product is produced (COGS for main product=Main product cost-NRV of by-product-ending inventory of main product)
- When sold- recorded as other revenue and there is not effect on total joint costs
Variances are based on Currently attainable standards
Currently attainable standards are based on higher than average levels of efficiency, but are clearly achievable. Standards may be used to value inventories as long as they don’t result in significant variances.
Difference in cost (variance):
Price/rate variance
Material/labor variance
Differences in quantity (variance):
Usage/efficiency variance
Material/labor variance
Calculating the difference:
Standard amount-actual amount=variance (positive or negative sign=favorable or unfavorable)
Price/rate variance=
Difference in rates x Actual quantity
Usage/efficiency variance=
Difference in quantity x Standard rate
Sales variances—Use slightly different names (NOT highly tested)
Sales price variance—Difference in prices × actual quantity sold.
Sales quantity variance—Difference in units × planned unit price.
A negative value here is favorable, opposite of other variances.
Which of the following standard costing variances would be least controllable by a production supervisor?
Overhead volume (volume variance)
Overhead spending variance=
Measures variance due to changes in both rates and quantities of overhead items. It is a controllable variance.
Difference in quantity x standard rate
Overhead efficiency variance=
Measures variance due to variations in the efficiency of the base used to allocate overhead (i.e., direct labor hours, machine hours, etc.). As long as the underlying allocation base is under the control of the production manager, it is a controllable variance.
Difference in rate x actual quantity
Overhead volume variance=
Merely an artifact of the way that we assign fixed overhead to production, it is considered an uncontrollable variance since fixed overhead is applied at a per unit rate but the total is actually the same.
Budgeted fixed overhead - (standard fixed OH rate x standard quantity of avg production)
Overhead budget variance=
The difference between the actual fixed overhead and the budgeted (or planned) fixed overhead is known as the budget variance.
Actual - budgeted
Contribution margin ratio=
100%- Variable cost %
Which changes in costs are most conducive to switching from a traditional inventory ordering system to a just-in-time ordering system?
Increases in ordering costs argue against JIT systems because JIT orders more frequently, in lower quantities, to maintain lower inventory levels. Also, when carrying costs decrease, there is less incentive for a JIT system. JIT systems seek to reduce total inventory holdings by ordering more frequently in lower quantities. If inventory holding carrying costs decreased to minimal levels, there would be less argument for holding down inventory quantities, one of the main results of JIT systems.
Related to the CFROI metric, “the required annual cash investment needed to replace fixed assets” is the definition of what?
Economic depreciation
Conversion cost per unit=
Total conversion cost/equivalent units
Residual income=
Residual income is calculated as operating income less the investment (total assets here) multiplied by the required rate of return.
Which of the following items is never relevant to a sell or process further decision?
Joint costs
Avoidable costs
Relevant, these costs are eliminated when choosing one opportunity over another, includes opportunity cost
Unavoidable costs
Sunk costs, future costs or benefits that do not differ between alternatives.
Incremental costs
Difference in cost between two decision alternatives.
Keep or drop product line questions:
- Often shows net operating loss for potentially dropped segment, don’t let this fool you. Look at differences in cost with dropping vs. not.
- When given additional cost information, it is often in addition to total fixed or variable costs already given, not already included in those costs.
Special orders with excess capacity must consider:
- Sales revenues
2. Variable costs of production
Special orders without excess capacity must consider:
- Sales revenues
- Variables costs of production
- Forgone profits (opportunity costs) given up (these are ADDED to costs of the option under consideration)
Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?
Standard variable cost is preferable. The “variable” part of the cost description results in passing to the purchasing division only the incremental costs of the item. The purchasing division should not pay for the fixed costs of the selling division unless the order caused those fixed costs to increase (which is not implied by the question’s data). The “standard” part of the cost description makes sure that the purchasing division is not charged for inefficiencies in the selling division.
Minimum transfer price (floor)=
When there is excess capacity, this equals the additional costs incurred to produce each unit. If there is no excess capacity, this equals additional costs incurred + opportunity costs of foregone revenue (which would be = market price).
Maximum transfer price (ceiling)=
Market price
Cost-based pricing:
- Variable cost pricing- preferred by seller because covers their costs and promotes efficiency because based on standard costs, not actual costs
- Full-cost (absorption) pricing and cost-plus pricing- allocates portion of fixed costs from selling division to buying division, making these fixed costs variable costs for buying division, these options do not consider company as a whole and can lead to suboptimal decisions later on
Negotiated transfer prices
Best to use when no external market exists for component being transferred.
How does ABC allocated overhead?
ABC first allocates overhead to activities and then to products, rather than to departments and then to products, as is the case with traditional systems.
A company would most benefit from using an activity-based costing (ABC) system as opposed to a traditional costing system under which of the following conditions?
When indirect costs are a high percentage of total costs.
Each of the following should be considered in the selection of appropriate cost drivers for an activity-based costing system except
Volume-based production- this is the opposite of ABC costing and uses on predetermined factory OH rate
Benefits of ABC costing:
- More precise measure of cost
- More cost pools
- More allocation bases
- Can be used with job-order and process costing and with standard costing and variance analysis.
- Shifts costs away from high volume, simple products to lower volume, complex products
What are Lon’s estimated cash disbursements for inventories?
First, purchases must be computed, and then the estimated payments to be made on accounts payable. With inventory declining, purchases must equal cost of sales less the decline in inventory. In other words, purchases are less than cost of sales if inventory declines. If the gross margin is 40% of sales, then cost of sales is 60% of sales.
Purchases = cost of sales - inventory decline
= (.60)($2,800,000) - $70,000
= $1,610,000
If accounts payable (AP) is to decrease, payments on AP must exceed purchases. Estimated payments on AP = $1,610,000 + $150,000 decrease in AP = $1,760,000.
Master budget (static budget) contains the operating budget, what are the components of the operating budget?
- Sales budget
- Production budget
- Production costs budget (direct materials, labor and OH budgets)
- Selling and admin budget
Master budget contains the financial budget, which includes the cash budget, what makes up the cash budget?
- Operating receipts (cash sales and credit sales/accounts receivable collections)
- Operating expenditures (expenses, purchases on account and acct payable disbursements)
Strategic budgets
Implies a long-range view to planning based on the identification of action plans to achieve the company’s goals.
Flexible budget
Adjusts sales revenue and total variable costs based on actual quantity rather than planned quantity. Differences between flexible and master budget=sales activity or volume variance
What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection?
At this probability level, the expected income of providing frost protection exceeds that of not providing frost protection. Let p = the probability of frost. Expected net income if frost protection is provided = $90,000(p) + $60,000(1-p) - $10,000. Expected net income if frost protection is not provided = $40,000(p) + $60,000(1-p). The firm is indifferent between the two actions when the expected net income is the same for both. Setting the two expressions equal to each other and solving for p determines at what probability of frost the two actions provide the same income.
$90,000(p) + $60,000(1-p) - $10,000 = $40,000(p) + $60,000(1-p)
$50,000(p) = $10,000
p = .20
In a regression analysis, the coefficient of determination measures:
Goodness of fit
Probability of expected value=
Weighted average of outcomes added together
Joint probability=
Probability of ones event occurring given that other has already occured. Multiply % probability together to get combined rate, divide individual rate by total combined rate to = probability (total probability should = 1)
Correlation coefficient (R)
Measures strength of relationship between indep and dep variables, ranges from -1 to 1
Coefficient of determination (R-squared)
Degree to which behavior of indep variable predicts dep variable (ranges from 0 to 1)
Regression analysis equation=
Y=A+Bx where Y is dependant variable and X is indep variable, B= slope and A= Y-intercept
Cost equation=
Y=A+Bx where Y is total cost, x is number of units, B=variable costs and A=fixed costs
Which of the following items is a process management approach that involves radical change?
Business process reengineering.
A static budget contains which of the following amounts?
Budgeted costs for budgeted output.
A static budget is a comprehensive financial plan produced at the beginning of the year for the entire enterprise and does not change (or flex) during the year. Thus, it uses budgeted costs based on budgeted output.
