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BUS140 - Introduction to Management Accounting > Chapter 3 Reading > Flashcards

Chapter 3 Reading Flashcards

1
Q

What would urge managers to install a more sophisticated system?

A

If it’s benefits outweigh its costs

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2
Q

What is the cost benefit context approach used for?

A

Designing and choosing costing systems

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3
Q

What are the building blocks of a costing system?

A

Cost object
Direct costs
Indirect costs
Cost pool
Cost-allocation base

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4
Q

What do costing systems aim to report?

A

Costing systems aim to report cost numbers that reflect the way that chosen cost objects use the resources of an organisation

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5
Q

What do job costing systems do?

A

Assign costs to a distinct unit of a product or service

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6
Q

What do process costing systems do?

A

Assign costs to masses of similar units & calculate unit costs in an average basis

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7
Q

Do most companies choose a job costing system or a process costing system?

A

Most companies have a combination of both

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8
Q

What does a general approach to job costing involve?

A
  • Involves identifying the job
  • involves identifying the direct-cost & indirect-cost categories
  • identifying the costing allocation bases
  • identifying the cost allocation rates
  • adding all direct and indirect costs
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9
Q

How does actual costing and normal costing differ in their use of actual/budgeted indirect-cost rates?

A

Actual costing uses actual rates for direct-cost & indirect-cost rates

Normal costing uses actual rates for direct costing & budgeted rates for indirect costing

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10
Q

What do costing systems aim to report?

A

The cost numbers that reflect the way chosen cost objects use the resources of an organisation

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11
Q

What are the three key source documents in a job-costing system?

A
  • Job cost record
  • a materials requisition record
  • a labour time record
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12
Q

What do the transactions in a job-costing system in manufacturing track?

A
  • the acquisition of materials
  • their conversion into work in progress
  • their conversion into finished goods
  • the sale of finished goods
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13
Q

How are Job-costing system transactions represented?

A

In journal entries

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14
Q

How should one handle under/over allocated indirect costs?

A

Prorate the amount on the basis of the amount of the cost in the ending balances of stocks and COGS

Most organisations write-off such amounts to COGS

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15
Q

Cost object =

A

Anything for which a separate measurement of costs is desired

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16
Q

Direct costs of a cost object =

A

Costs that are related to the cost object and can be traced to it in an economically feasible way

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17
Q

Indirect costs of a cost object =

A

Costs that are related to the cost object but cannot be traced to it in an economically feasible way

Indirect costs are allocated to costs through cost-allocation method

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18
Q

Cost assignment =

A

Encompasses tracing direct costs and allocating indirect costs to a particular cost object

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19
Q

Cost pool =

A

A grouping of individual cost items

Can range from very broad to very narrow

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20
Q

Cost-allocation base =

A

A factor that is the common denominator for systematically linking an indirect cost or group of indirect costs to a cost object

Can be financial or non-financial

Companies often use the cost driver of the indirect costs as the cost allocation base

(For example, # of KM travelled is the base for allocating motor vehicle operating costs)

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21
Q

Job costing system =

A

Costing system in which the cost of a product/service is obtained by assigning costs to a distinct unit, batch or lot of a product/service

Often custom-made

e.g., an audit by an accounting firm uses job costing as all audits are different & specific

22
Q

Job =

A

A task for which resources are expended

23
Q

Process-costing system =

A

Cost object is masses of identical/similar units.

Cost of a product/service is obtained by using broad averages

Customers all receive the same product (eg, retail clothing)

24
Q

Examples of job costing in service, merchandising & manufacturing sector

A

Service - audits, advertising

Merchandising - promotion of new product

Manufacturing - aircraft assembly, house construction

25
Q

Examples of process costing scenarios in the service, merchandising & manufacturing sector

A

Service - deposit processing, postal delivery

Merchandising - grain dealing

Manufacturing - oil refining, beverage production

26
Q

Actual costing =

A

A costing method that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantity times

Also allocates indirect cost rates times the actual quantity of the cost allocation base

27
Q

Six steps for job costing

A
  1. Identify the job (chosen cost object)
  2. Identify the direct costs for the job

3 identify the indirect-cost pools associated with the job

  1. Select the cost allocation base to use in allocating each indirect-cost pool to the job
  2. Develop the rate per unit of the cost allocation base
  3. Assign the costs to the cost object by adding all direct & indirect costs
28
Q

Source documents =

A

Original records that support journal entries in an accounting system

29
Q

Normal costing method =

A

Costing method that traces direct costs to a cost object by using the actual direct cost rate times the actual quantity of the direct cost

Also allocated indirect costs based on the budgeted indirect cost rates times the actual quantity of the cost allocation base

30
Q

Do normal and actual costing treat direct costs in the same way?

A

Yes

31
Q

What is the difference between actual and normal costing?

A

Actual costing uses an actual indirect-cost rate, while normal costing uses a budgeted indirect-cost rate

32
Q

Why do normal costing use actual direct costs but budgeted indirect costs?

A

Actual direct costs are easily traceable

Indirect costs cannot be traced, so a budgeted amount is used

33
Q

What is the key source document in a job costing system?

A

Job cost record

Source document that records & accumulates all the costs assigned to a specific job (AKA Job cost sheet)

34
Q

Materials requisition record =

A

Record used to charge departments and job cost records for the cost of the materials used in a specific job

35
Q

Labour time record =

A

Record used to charge departments and job cost records for labour time used on a specific job

36
Q

Two direct costs for manufacturing companies?

A

Direct materials
Direct manufacturing labour

37
Q

What is the indirect cost pool for manufacturing companies?

A

Manufacturing overheads

38
Q

Under-allocated indirect costs =

A

Allocated amount of indirect costs in an accounting period is less than the amount actually incurred in the period

39
Q

Over-allocated indirect costs =

A

Occur when the allocated amount of indirect costs in an accounting period exceed the amount actually incurred in the period

40
Q

Indirect costs incurred - indirect costs allocated =

A

Under/over-allocated indirect costs

41
Q

Proration =

A

The spreading of underallocated or overallocated overhead along closing stocks and COGS

42
Q

Synonyms for under/overallocation

A

Under/over applied
Under/overabsorbed

43
Q

What goal does a job-costing system serve?

A
  • Department responsibility & control
  • product costing
44
Q

How does a job costing system serve its two goals of department responsibility & control and product costing in a manufacturing company?

A
  • purchase of materials & other manufacturing inputs
  • conversion into work in progress
  • conversion into finished goods stock
  • sale of finished goods
45
Q

What advantage does budgeted indirect cost rates have over actual indirect cost rates?

A

Budgeted indirect costs rates are more timely as they don’t have to wait till the end of the accounting period when actual costs will be known

However they may be inaccurate

46
Q

Manufacturing overhead control =

A

The record of the actual costs in all individual overhead categories

E g, indirect materials, indirect manufacturing labour, power & rent

47
Q

Manufacturing overhead allocated =

A

Record of the manufacturing overhead allocated to individual jobs on the basis of the budgeted rate multiplied by actual machine/labour hours

48
Q

Two main approaches to disposing of an under/over allocation of manufacturing overhead?

A
  • Adjusted allocation rate approach
  • Proration approach
49
Q

Adjusted allocation rate approach?

A

Restates all entries in the general ledger by using actual cost rates rather than budgeted cost rates

50
Q

Why are adjusted allocation rate approaches becoming more common and affordable?

A

Due to the widespread adoption of computerised accounting systems

51
Q

A general approach to job costing involves…

A

Identifying
- the job / cost object
- the direct cost categories
- the indirect cost categories
- the cost allocation bases
- the cost allocation rates
- adding all direct & indirect costs

BUS140 - Introduction to Management Accounting (15 decks)

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