Cost Accounting

Question 1

What is Cost Accounting?

Answer 1

"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”

Question 2

What is the difference between Cost Accounting and Managerial Accounting?

Answer 2

“Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP”

Question 3

What are Product Costs (aka Inventory Costs)?

Answer 3

“Prime Costs

Conversion Costs”

Question 4

What are included in Prime Costs?

Answer 4

“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”

Question 5

What is Factory Overhead?

Answer 5

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).

Question 6

What is included in Fixed Factory Overhead?

Answer 6

“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”

Question 7

What is included in Variable Overhead?

Answer 7

“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)
“

Question 8

Where is Under/Over-applied Variable OH recorded?

Answer 8

“If Immaterial - Goes to COGS

If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance”

Question 9

Where is Under/Over-applied Fixed OH recorded?

Answer 9

It always goes to COGS

Question 10

What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?

Answer 10

“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.”

Question 11

What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?

Answer 11

“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.”

Question 12

Which variables are used to calculate Direct Material balances?

Answer 12

“Beginning Balance
DR Net purchases (plus freight-in)
CR Direct Materials Used
: Ending balance (goes to BS)”

Question 13

What variables are used to calculated Work in Process (WIP)?

Answer 13

“Beginning Balance (End Bal of Previous WIP)
DR Direct Materials Used
DR Direct Labor Used (Conversion Cost)
CR COGM
DR Factory Overhead Applied (Conversion Cost)
: Ending Balance (Goes to BS)”

Question 14

What variables are included in Finished Goods calculations?

Answer 14

"Beginning Balance
DR COGM
\: COGAS (Cost of Goods Avail for Sale)
CR COGS
\: Ending Balance (Goes to BS)"

Question 15

How does Freight In affect Cost Accounting calculations?

Answer 15

“Inventory (Product) Cost

Part of DM Purchases”

Question 16

How does Freight Out affect Cost Accounting?

Answer 16

“Selling (Period) Cost

Not part of inventory”

Question 17

When is Job-Order Costing used?

Answer 17

“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”

Question 18

What is the Direct Method for allocating service department costs?

Answer 18

No services allocated between service departments- even if they serve each other. Only allocate to product(s)

Question 19

What is the Step Method for allocating service department costs?

Answer 19

Services can be allocated to both other service departments and the product(s)

Question 20

Under process costing- how are the units shipped calculated?

Answer 20

“Beginning Inventory
+ Units Started
- Ending Inventory
: No. Units Shipped”

Question 21

Which two inventory methods are used under Process Costing?

Answer 21

“FIFO

Weighted Average”

Question 22

What is another name for Process Costing?

Answer 22

Equivalent Units of Production

Question 23

How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?

Answer 23

EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)

Question 24

How are Direct Materials calculated under the Weighted Average Method?

Answer 24

Beginning Inventory + Current Costs / EFU WA

Question 25

How are Conversion Costs calculated under Weighted Average Method?

Answer 25

Beginning Inventory + Current Costs / EFU WA

Question 26

How are Equivalent Finished Units calculated for Direct Materials?

Answer 26

“Units Shipped
+ EI x % Complete DM
: EFU (Weighted Average Method)

• Beginning Inventory x % Complete
  : EFU (FIFO)”

Question 27

How are Equivalent Finished Units calculated for Conversion Costs?

Answer 27

“Units Shipped
+ EI x % Complete CC
: EFU (Weighted Average)

• Beginning Inventory x % Complete
  : EFU (FIFO)”

Question 28

How are Direct Materials calculated under the FIFO method?

Answer 28

“Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory”

Question 29

How are Conversion Costs calculated under the FIFO method?

Answer 29

“Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory”

Question 30

How is WIP calculated?

Answer 30

"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"

Question 31

How do period costs and product costs relate to net sales- gross margin and operating income?

Answer 31

"Net Sales 
- Product Costs
\: Gross Margin
- Period Costs
\: Operating Income"

Question 32

What is the focus of Activity Based Costing (ABC)?

Answer 32

“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”

Question 33

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

Answer 33

Cost Pools and Allocations increase compared to a traditional costing system

Question 34

What is Backflush Costing?

Answer 34

“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”

Question 35

What are the characteristics of By-Products?

Answer 35

“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”

Question 36

What are Cost Functions?

Answer 36

“Measure how costs change relative to activity levels

High-Low Method

Change in Cost (High-Low pts) / Change in Activity (High-Low pts)”