Chapter 4

Question 1

Manufacturing Costs

Answer 1

• Usually classified into three groups
  
  • Direct Matericals
  • Direct Labor
  • Manufacturing Overhead

Question 2

Finished Goods Inventory

Answer 2

• costs are moved from the work-in-process inventory account to the finished goods inventory account

Question 3

When goods are sold…

Answer 3

• their costs are moved from the finished goods inventory account to cost of goods sold

Question 4

The basic idea behind all manufacturing costing systems

Answer 4

• to determine the costs that products accumulate as they consume organzation resources during manufacturing

Question 5

Retail Organizations

Answer 5

• the primary focus is the profitability of product lines or departments
• their major cost is merchandise

Question 6

Service Organzation

Answer 6

• the major cost item is usually employee pay
• the focus is on determining the cost of a project

Question 7

Cost Object

Answer 7

• Anything for which a cost is computed
• example: activities, products, product lines, departments, or even entire organizations

Question 8

Consumable Resource (Felxible Resource)

Answer 8

• Cost depends on the amount of resource that is used
• examples: wood in a furniture factory and iron ore in a steel mill.
• Often called a variable cost because the total cost depends on how much of the resource is consumed

Question 9

Capacity-Related Resource

Answer 9

• its cost depends on the amount of resource capacity that is acquired and not on how much of the capacity is used
• example: as the size of a propsed factory or warehouse increases, the associated capacity related cost will increase
• examples: depreciation on production equipment and salaries paid to employees in a consultancy
• often called a fixed cost because the cost of the resource is independent of how much of the resource is used in the short run

Question 10

Direct Cost

Answer 10

• A cost that is uniquely and unequivocally attributable to a single cost object
• If a single cost object consumes a consumable resource, the cost of the consumable resource is a direct cost for that cost object
• example: the cost of wood used to make a table in a furniture factory is a direct cost that would be assigned to the table
• almost all variable costs are direct costs

Question 11

Indirect Costs

Answer 11

• Any cost that fails the test of being a direct cost
• most capacity-related costs are indirect
• almost all fixed costs are indirect costs

Question 12

Cost Pool

Answer 12

• If the cost is indirect, it is assigned to this
• There can be one or many
• an appropriate portion of the indirect cost is then allocated from the cost pool (or pools) to the cost object (or objects)

Question 13

Fixed Manufacturing Overhead

Answer 13

• Indirect costs in a factory setting
• Examples: heating, lighting, depreciation on factory equipment, factory taxes, and supervisory salaries

Question 14

Variable Overhead

Answer 14

• Includes costs for such items as machine electricity usage, minor materials grouped as indirect materials (thread, glue, etc.), and machine supplies
• actually direct costs that are too costly and too immaterical (in relation to total product cost) to trace to individual cost objects
• example: the cost of the glue used to make each piece of furniture

Question 15

Applied Indirect Costs

Answer 15

• Indirect costs allocated as production occurs during the year
• organzations use a separate account to record this

Question 16

Cost Driver Rate

(Indirect Cost Rate)

(Predetermined Overhead Rate)

Answer 16

• Once the cost drivre is chosen, cost analysts dived expeected indirect factory costs by the number of cost driver units
• Cost Driver Rate = (Estimated total factory indirect cost) / (Practical Capacity in cost driver units)

Question 17

Why Planned capacity-related costs and not actual are used in computing the cost driver rate

Answer 17

• the annual actualy capacity-related costs are not known until the end oft he accounting period
• using planned rather than actual, sets a benchmark against which to compare actual capacity-related costs at the end of the accounting period

Question 18

Reconciling Actual and Applied Capacity Costs

Answer 18

• Option 1:
  
  • Charge the difference between actual and applied indirect costs to cost of goods sold
• Option 2:
  
  • Prorate the difference between actual and applied indirect costs to work in process, finished goods, and cost of goods sold
• Option 3:
  
  • Decompose the difference between actual and appolied indirect costs into two parts
    
    • The differencebetween actual and budgeted indirect costs
    • The differencebetween budgeted and applied indirect costs

Question 19

Four commonly propsed activity levels used to compute the cost driver rate

Answer 19

• practical capacity
• the actual level of operations
• the planned level of operations
• the average level of operation

Question 20

Job Order Costing

Answer 20

• an approach to costing that estimates costs for specific customer orders because the orders vary from customer to customer

Question 21

Process Costing

Answer 21

an approach to that is used when all products are identical

Question 22

Equivalent Unit of Production

Answer 22

• expresses the work equivalent, in finished units of the work, that has been invensted in work in process

Question 23

Conversion Costs

Answer 23

• Include all manufacturing costs that are not direct material costs
• conversion costs consist of labor and factory overhead