Business 1: Operations Management Cost Measurement Flashcards
What are cost objects?
- Resources/activities that serve as the basis for management decisions
Can a single cost object have more than one measurement?
YES
Prime costs =
DM + DL
Conversion costs =
DL + O/H applied
What are product costs?
- Costs related to the manufacturing of the product
- Not expensed until product sold (matching principle)
What are the three product costs?
1) Direct materials
2) Direct labor
3) Manufacturing overhead applied
True or false.
Product costs are inventoriable (i.e. considered as assets before the product is sold)
True
Are period costs on the B/S?
NO (I/S only)
What are period costs?
- Expensed in period in which they are incurred and are not inventoriable
What is included in period costs?
- SG&A
- Interest (financing) expense
Once you have a cost objective, you can hone in in cost _____.
Control
What is included in manufacturing costs?
All costs associated with the manufacture of a product
What are the components of manufacturing cost?
Consist of both
- direct costs (DM + DL)
- and indirect costs (O/H = IM, IL, Factory)
Cost accounting systems are designed to meet the goal of measuring cost objects/objectives. The three most frequent objectives include what?
PIE
1) Product costing (inventory, COGS)
2) Income determination (profitability)
3) Efficiency measurements (comparisons to standards)
We can trace costs to cost objects like what?
- Product (bottled product, canned product)
- Department (salary for manufacturing, accounting, sales department)
- Geographic Area (NE, SE, North America, Europe)
Define direct raw materials.
Product cost/Prime cost
- Cost of materials purchased to be used in production
- Including FREIGHT-IN net of any applicable purchase discounts
- Plus a reasonable amount for normal scrap created by the process
Define direct labor
Product cost/prime cost
- Cost of labor directly related to production of the product or performance of a service
- Plus a reasonable amount of expected “down time” for the labor
- E.g. breaks, setup, training
If an indirect cost is produced in the factory, what do you classify it as?
- Product cost (manufacturing O/H)
If rent, insurance, utilities, depreciation relates to the office, what type of cost do you classify it as?
- Period cost (SG&A)
What do we use to allocate overhead?
Cost drivers
The cost drivers that are used to allocate indirect costs are referred to as “allocation bases.” Give an example of an allocation base.
- Direct labor dollars or hours, machine hours
True or false
When traditional costing is used, all indirect costs are allocated to a single cost pool called “O/H” and allocated as a single pool.
True
When traditional costing is used, the application of O/H is accomplished in what two steps?
1) Calculated O/H rate = Budgeted O/H costs / Estimated cost driver
2) Applied O/H = Actual cost driver * O/H rate (from step 1)
What are generally variable costs?
- Direct material costs
- Direct labor costs
What are generally mixed costs?
- Indirect costs (e.g manufacturing overhead costs have both fixed and variable components)
In the long run, can any cost be considered variable?
YES
What is the relevant range?
Range for which assumptions of the cost driver (i.e. linear relationship w/ costs incurred) are valid
When the cost driver activity is no longer within the relevant range, may the variable and fixed cost assumptions for that cost driver be used to allocate costs to cost objects?
NO
Cost accumulation systems are used to do what?
Assign costs to products
If the cost object is customer order, what type of cost accumulation system is used?
Job costing
If the cost object is a mass-produced homogeneous product, what type of cost accumulation system is used?
Process costing
Does operations costing use components of both job-order costing and process costing?
YES
True or false.
Backflush costing accounts for certain costs at the END of the process in circumstances where there is little need for in-process inventory valuation (unless we finish it, it’s worthless).
True
How would you calculate COG Manufactured?
WIP inventory, beginning \+ DM used \+ DL \+ Manufacturing O/H applied = Total mfg. costs available - WIP, ending = COG manufactured (to COGS)
In calculating COG manufactured, if DM used is not given, how would you calculate it?
Beginning Raw Materials \+ Purchases = Direct Materials Available - EI Raw Materials = Direct Materials Used
How do you calculate COGS for a manufacturer?
Finished goods inventory, beginning \+ COG Manufactured = COG AFS - Finished goods inventory, ending = COGS (to I/S)
When would you use job-order costing as a cost accumulation system?
- When there are relatively few units produced
- AND when each unit is unique or easily identifiable
Job-cost records are maintained for each product/service/batch of products and they serve as the primary records used to accumulate all costs for the job. Job-cost records accumulate data from what internal documents?
1) Materials requisitions (doc showing materials requested for use on the job)
2) Labor time tickets (time cards)
3) Overview of job-order costing (job-costing systems require a limited # of work in process accounts)
Process costing is a method of product costing that _________ costs and applies them to a large # of homogeneous items.
Averages
A production report includes what types of information?
- beginning inventory
- # units started
- # units completed
- # units remaining in inventory
What is the goal of a production report?
Keep track of physical flow of units and costs
What is an equivalent unit of DM, DL, or conversion costs equal to?
Amount of DM, DL, or conversion costs necessary to complete one unit of production
How do you calculate WA equivalent units of production?
Units completed and transferred out (always 100%)
+ Ending WIP (units * % complete)
= WA EU of production
How do you calculate the FIFO equivalent units of production?
Beginning WIP (units * “% to be completed”)
+ Units started and completed this period ( = units completed and transferred out less units in beginning inventory)
+ Ending WIP (units * percent complete)
= FIFO EU of production
How do you calculate cost per EU for WA?
= (Beginning cost + Current cost) / EU
How do you calculate cost per EU for FIFO?
= (Current cost ONLY) / EU
Normal spoilage occurs under regular operating conditions and is included in the standard cost of the manufactured product. What is the accounting treatment for normal spoilage?
- Capitalized as part of inventory cost on B/S
What is the accounting treatment for abnormal spoilage?
- Expensed separately on the income statement as a period expense
What is the difference between a traditional costing system and activity-based costing?
- Traditional: volume-based; uses single O/H rate for all departments
- ABC: activity-based; uses multiple O/H rates by department
What is a cost driver?
- Factor that has ability to change total costs (e.g. sales or production volume)
- Identified by ABC and are related to one of multiple cost pools for cost allocation
What is a synonym for ABC?
Transaction-based costing
May ABC be used for external purposes?
No (only internal purposes)
Give an example of a non-value added activity
- Surplus inventory
What are the six basic operations of ABC?
1) Analysis of cost drivers
2) Accumulate costs in cost pools
3) Trace indirect costs to activity centers
4) Allocate remaining indirect cost pools
5) Divide assigned costs by level of activity for the cost center
6) Cost the product
What is the advantage of ABC?
Removes much of the cost distortion caused by traditional, volume-based O/H systems
What is the most widely used and least complex method to allocate service costs?
Direct Method
What is a more sophisticated approach to allocate costs that accounts for the fact that service departments do use services of other service departments and we want to allocate that?
Step-down Method
What are joint products?
- Main products
- Two or more products that are generated from a common input
What are by-products?
- Minor products of relatively small value that incidentally result from manufacture of the main product
What is the split-off point?
- Point in production process
- Where joint products can be recognized as individual products
What are joint product costs?
- Costs incurred
- in producing products
- UP TO the split-off point
What are separable costs?
- Costs incurred
- on a product
- AFTER the split-off point
Define committed cost.
Costs that are in the future, but unavoidable
Define sunk cost.
Costs that are in the past, but unavoidable
Define carrying cost.
Costs of carrying inventory
For the purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the what?
Net sales value at split-off
Could conversion cost pricing be used when the customer furnishes the material used in manufacturing a product?
YES
Smile Labs develops film using a four-step process that moves progressively through four departments. The company specializes in overnight service and has the largest drug store chain as its primary customer. DL, DM, and O/H are accumulated by department. The cost accumulation system that best describes the system Smile Labs is using is what?
Process costing
