Chapter 5 Cost Accounting and Performance Measurement Flashcards
What is Cost Accounting?
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods
Cost Accounting also records for the Income Statement
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAP
Managerial Accounting - Internal Focus- Not GAAP
What are Product Costs (aka Inventory Costs)?
Prime Costs
Conversion Costs
What are included in Prime Costs?
Direct Material USED - Have become part of the product or had a direct impact on the product
Direct Labor Used - Employees who worked on product and had direct impact
What is Factory Overhead?
All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).
What is included in Fixed Factory Overhead?
FFO : Estimated Costs / Normal Capacity
Uses Normal Activity
Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes
Under/Over-applied Fixed OH always goes to COGS
What is included in Variable Overhead?
VO : Estimated Activity / Actual Activity
Uses Actual Activity
Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)
Where is Under/Over-applied Variable OH recorded?
If Immaterial - Goes to COGS
If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance
Where is Under/Over-applied Fixed OH recorded?
It always goes to COGS
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Under-applied overhead.
If it’s Fixed OH- under-applied goes to COGS.
If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
A credit balance indicates over-applied overhead.
If Fixed overhead- it is corrected from COGS.
If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.
Which variables are used to calculate Direct Material balances?
Beginning Balance DR Net purchases (plus freight-in)CR Direct Materials Used
: Ending balance (goes to BS)
What variables are used to calculated Work in Process (WIP)?
Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost)
: Ending Balance (Goes to BS)
What variables are included in Finished Goods calculations?
Beginning BalanceDR COGM
: COGAS (Cost of Goods Avail for Sale)
CR COGS
: Ending Balance (Goes to BS)
How does Freight In affect Cost Accounting calculations?
Inventory (Product) Cost
Part of DM Purchases
How does Freight Out affect Cost Accounting?
Selling (Period) Cost
Not part of inventory
When is Job-Order Costing used?
Used when costs are easily connected to a specific product or product line
Can also be applied to services
Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You’re likely going to be solving for the last job in the queue
What is the Direct Method for allocating service department costs?
No services allocated between service departments- even if they serve each other. Only allocate to product(s)
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
Under process costing- how are the units shipped calculated?
Beginning Inventory+ Units Started- Ending Inventory
: No. Units Shipped
Which two inventory methods are used under Process Costing?
FIFO
Weighted Average
What is another name for Process Costing?
Equivalent Units of Production
How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?
EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)
How are Direct Materials calculated under the Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
How are Equivalent Finished Units calculated for Direct Materials?
Units Shipped + EI x % Complete DM
: EFU (Weighted Average Method)
- Beginning Inventory x % Complete
: EFU (FIFO)
How are Equivalent Finished Units calculated for Conversion Costs?
Units Shipped+ EI x % Complete CC
: EFU (Weighted Average)
- Beginning Inventory x % Complete
: EFU (FIFO)
How are Direct Materials calculated under the FIFO method?
Current Costs / EFU FIFO
Note: FIFO method uses Current Period costs only and ignores Beginning Inventory
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFO
FIFO method uses Current Period costs only and ignores Beginning Inventory
How is WIP calculated?
Beginning balance (DM- DL- OH)+ Current Costs (DM- DL- OH)- COGM (Goes to Finished Goods)+ DM EFU x Cost per DM EFU+ CC EFU x Cost per CC EFU
: Ending WIP
How do period costs and product costs relate to net sales- gross margin and operating income?
Net Sales - Product Costs
: Gross Margin
- Period Costs
: Operating Income
What is the focus of Activity Based Costing (ABC)?
Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about
Inventory is expensive to store and storing something is not a value-added expenditure
Uses Cost Pools - Different departments can have different OH rates
Uses Several OH rates based on Activity - Cost Pool / Cost Driver
How do Cost Pools and Allocations compare under ABC versus traditional costing system?
Cost Pools and Allocations increase compared to a traditional costing system
What is Backflush Costing?
Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)
- Works backward to flush out COGS
- Mostly GAAP
What are the characteristics of By-Products?
Usually immaterial and common costs aren’t allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products
What are Cost Functions?
Measure how costs change relative to activity levels
High-Low Method
Change in Cost (High-Low pts) / Change in Activity (High-Low pts)
What four perspectives are included in Balanced Scorecard?
Financial / Customer / Internal Business Processes / Learning and Growth
Why was Balanced Scorecard created?
To measure Performance.
What are Strategy Maps?
Diagrams of Strategic Cause and Effect Relationships.
What is a Strategic Initiative?
A plan to achieve goals.
What measures are used under Value-Based Management?
Return on Investment Residual Income Spread Economic Value Added Free Cash Flow
How is Return on Investment (ROI) calculated?
ROI : Return / Investment
Example: You Invest $100 to buy a machine that generates $60 in Operating Income
$60 / $100 : 60% ROI
How is Residual Income calculated?
Operating Income - (Required Rate of Return x Invested Capital) : Residual Income
What is another name for Required Rate of Return (RROR)?
RROR is also called ‘Cost of Capital’
What is Weighted Average Cost of Capital (WACC)? How is it calculated?
Cost of Capital is the weighted average of the interest rates you pay for your Capital.
Includes Debt and the Rate of Return your Equity Shareholders expect
Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%
Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%
How is Spread calculated?
Spread : ROI - Cost of Capital
What is the primary point of Economic Value Added? How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value.
Economic Value Added : Operating Income After Tax - (Net Assets x WACC)
How is Free Cash Flow calculated?
Operating Income After Tax \+ Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital \: Free Cash Flow
What is measured by Six Sigma?
It measures a product versus its quality goal.
What is the Asset Turnover Ratio?
Sales / Average Assets
What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities?
Current Ratio : Current Assets / Current Liabilities
What does the Debt to Equity Ratio tell us? How is it calculated?
How is the company financing its capital?
Debt to Equity Ratio : Total Debt / Total Equity
What does the Debt to Total Assets ratio tell us? How is it calculated?
What proportions of the company’s assets are encumbered with debt?
Debt to Total Assets : Total Liabilities / Total Assets
What does Gross Margin % tell us? How is it calculated?
How profitable is the product after COGS?
Gross Margin : Gross Profit / Net Sales
What does Operating Profit Margin tell us? How is it calculated?
How profitable is the product after all expenses (except interest and taxes)?
Operating Profit Margin : Operating Profit / Net Sales
How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments?
Times Interest Earned : Earnings Before Tax & Interest / Interest Expense
What does Return on Assets tell us? How is it calculated?
What % return are the assets generating?
Return on Assets : Net Income (net of interest & taxes) / Average Total Assets
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
What is Inventory Turnover and how is it calculated?
How quickly does inventory get sold?
Inventory Turnover : COGS / Average Inventory
What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)
Quick Ratio : (Current Assets - Inventory) / Current Liabilities
What is Average Collection Period- and how is it calculated?
How many days does it take the company to collect payment on A/R?
Average Collection Period : Average AR / Average Sales Per Day
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product.
This includes recalls.
What is Appraisal Cost?
Quality control- testing & inspection costs.
