Cost Accounting

Question 1

What are cost objects?

Answer 1

they are resources or activities that serve as the basis for management decisions; cost objects require separate cost measurement and may be products, product lines, departments, geographic territories, or any other classification that aids in decision making

Question 2

What are product costs?

Answer 2

all costs related to the manufacturing of the product; they are recorded as part of inventory on the balance sheet and consist of direct materials, direct labor, and applied overhead

Question 3

What are period costs?

Answer 3

they are expensed in the period in which they are incurred and represent the nonmanufacturing costs of selling the product and administering the operations of the firm

Question 4

What are direct costs?

Answer 4

they can be easily traced to a cost pool or object, as the cost directly relates to that item; common direct costs include DM and DL

Question 5

What are indirect costs?

Answer 5

they are costs that are not easily traceable to a cost pool or cost object; they are typically incurred to benefit two or more cost pools/objects and are included in MOH; common indirect costs include indirect materials, indirect labor, and other indirect costs

Question 6

What are prime costs?

Answer 6

DM + DL

Question 7

What are conversion costs?

Answer 7

DL + MOH

Question 8

Overhead allocation using cost drivers

Answer 8

indirect costs are allocated/assigned to benefiting cost pools/objects using cost drivers that are considered to have a strong relationship to the incurrence of these costs

allocation bases: the cost drivers that are used to allocate indirect costs are referred to as allocation bases

accounting for overhead: when traditional costing is used, all indirect costs are allocated to a single cost pool called “overhead” and allocated as a single pool; overhead may also be allocated using activity-based costing

when traditional costing is used, the application of overhead is accomplished in two steps:
overhead rate = budgeted overhead costs / estimated cost driver
applied overhead = actual cost driver * overhead rate (from step 1)

Question 9

Cost behavior (fixed vs variable)

Answer 9

costs can be classified by their behavior and the degree to which they are either fixed or variable; direct material and direct labor are generally variable costs, whereas indirect costs consist of both fixed and variable components

variable costs = constant per unit, total varies

fixed costs = varies per unit, total remains constant

mixed costs (semi-variable costs) - costs frequently contain both fixed and variable components; costs that include components that remain constant over the relevant range and include components that fluctuate in direct relation to production are classified as mixed

Question 10

What is relevant range?

Answer 10

it is the range for which the assumptions of the cost driver are valid; when the cost driver activity is no longer within the relevant range, the variable and fixed cost assumptions for that cost driver cannot be used to allocate costs to cost objects

Question 11

What is cost accumulation systems?

Answer 11

they are used to assign costs to products; the system used is driven by the cost object involved; if the cost object is a custom order, job costing is used; if the cost object is a mass-produced, homogeneous product, process costing is used

Question 12

What is job-order costing (job costing)?

Answer 12

it is the method of product costing that identified the job as the cost objective and is used when relatively few units are produced and when each unit is unique or easily identifiable

Question 13

What is process costing?

Answer 13

it is a method of product coting that averages costs and applies them to a large number of homogenous items

Question 14

What are equivalent units?

Answer 14

costs must be attached to the completed units as well as to the units that are partially complete at the end of each period; this calculation is made by taking into account the partially completed units and by making use of equivalent units

accounting for the physical flow of units is an important step in process costing; remember, however, that the pure physical flow of units will be different from the equivalent units of production

Question 15

How to calculate equivalent units using FIFO

Answer 15

under FIFO, the ending inventory is priced at the cost of manufacturing during the period, assuming that the beginning inventory was completed during the period

the equivalent units are composed of 3 elements:

completion of units on hand at the beginning of the period

units started and completed during the period (units completed - beginning WIP)

units partially complete at the end of the period

current costs incurred during the period are allocated to the equivalent units produced during the period

Question 16

How to calculate equivalent units using weighted average

Answer 16

the weighted average cost method averages the cost of production during the period with the costs in the beginning WIP

the equivalent units are composed of 2 elements:

units completed during the month (beginning WIP + units started and completed during the month)

units partially complete at the end of the period

total costs, including both the costs of beginning inventory and current costs, are allocated to equivalent units to arrive at a weighted average unit cost

Question 17

Equivalent unit facts

Answer 17

the FIFO method specifically accounts for work to be completed, and the weighted average method blends the units

cost per equivalent unit is computed by dividing total costs by equivalent units; FIFO uses only current costs, and the weighted average method uses both beginning inventory and current costs

FIFO = current cost only / equivalent units

WA = (beginning cost + current cost) / equivalent units

Question 18

What is spoilage/shrinkage?

Answer 18

it is generally take care of automatically because the equivalent units added for the month are generally less than the actual units added during the month due to problems with the production process

normal spoilage occurs under regular operating conditions and is included in the standard cost of the manufactured product; it is capitalized as part of the inventory cost; normal spoilage costs, if accounted for separately, are allocated to good units produced

abnormal spoilage should not occur under normal operating conditions and is excluded from the standard cost of a manufactured product; the cost of abnormal spoilage is normally expensed separately on the income statement as a period expense

Question 19

Types of operational cost drivers

Answer 19

traditional costing systems assign overhead as a single cost pool with a single plant-wide overhead application rate using a single allocation base; these rates generally use volume-based cost drivers such as direct labor hours or machine hours

activity-based costing (ABC) assumes that the best way to assign indirect costs to products is based on the product’s demand for resource-consuming activities; ABC applies a more focused and detailed approach than using a department or plant as the level for gathering costs; ABC focuses on multiple causes (activities) and effects (costs) and then assigns costs to them; the cost of activities is used to “build up” the engineered cost of products using increased cost pools and allocations

Question 20

What is an activity?

Answer 20

any work performed inside a firm; they are identified for ABC

Question 21

What is a resource?

Answer 21

an element that is sued to perform an activity

Question 22

What is a cost driver?

Answer 22

used in ABC, they are activity bases that are closely correlated with the incurrence of manufacturing overhead costs in an activity center, and they are often used as allocation bases for applying overhead costs to cost objects

a cost driver is a factor that has the ability to change total costs; cost drivers are identified by ABC and are related to one of multiple cost pools for cost allocation

Question 23

What is an activity center?

Answer 23

an operation necessary to produce a product

Question 24

What is a cost pool?

Answer 24

a group of costs or a specially identified cost center in which costs are grouped, assigned, or collected

Question 25

ABC is done using the following steps

Answer 25

identify the cost drivers

accumulate the costs in cost pools

trace indirect costs to activity centers

allocate remaining indirect cost pools

divide assigned costs by level of activity for the cost center

cost the product

Question 26

Service costs allocation using ABC

Answer 26

companies in all sectors of the economy allocate service department costs to production or user departments and ultimately the final products produced

direct method - this is the most widely used and least complex method to allocate service costs; each service department’s total costs are directly allocated to the production departments without recognizing that service departments themselves may use the services from other service departments

step-down (sequential) method - this is a more sophisticated approach to allocate service costs in more complex situations; service department costs are also allocated to other service departments as well as production departments; step-down allocations assume that once a service department’s costs have been allocated to another service department, there can be no subsequent costs allocated back to the other service departments

Question 27

What are joint products?

Answer 27

two or more products that are generated from a common input

Question 28

What are by-products?

Answer 28

minor products of relatively small value that incidentally result from the manufacture of the main product

Question 29

What is a split-off point?

Answer 29

it is the joint in the production process at which the joint products can be recognized as individual products

Question 30

What are joint product costs (joint costs)?

Answer 30

they are costs incurred in producing products up to the split-off point

Question 31

What are separable costs?

Answer 31

they are costs incurred on a product after the split-off point

Question 32

Relative net realizable values at split-off point

Answer 32

net realizable value equals sales value less cost of completion and disposal; relative sales value at split-off point is used purely for inventory costing and is of little use for cost planning and control purposes

the relative sales value at split-off point can be used to allocate joint costs if sales price quotations are known or can be determined; the relative sales value approach assigns costs to the separate joint products in relation to their market values

if sales values at split-off are not available because there are no markets for the joint products at split-off, then sales values at split-off must be derived using the following formula:

sales value at split-off = final selling price - identifiable costs incurred after split-off