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”

Activity-based costing system allocates costs to products by determining which activities performed by the entity drive the costs. An activity-based costing approach differs from traditional costing methods, which accumulate costs by department or function. Activity-based costing accumulates costs by the specific activities being performed—printing, cutting, and binding in this case. By analyzing the activities of the entity, activities that do not add value to the product can be identified and reduced or eliminated.

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”

Typical product-costing systems synchronize the recording of accounting-system entries with the physical sequence of purchases and production. The alternative (which is normally used in high-speed automated environments) of delaying journal entries until after the physical sequences have occurred is referred to as BACKFLUSH COSTING.

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)”

Question 37

method for allocating service department costs that best recognizes the mutual services rendered to other service departments is the

Answer 37

linear algebra (reciprocal) allocation method
the linear algebra or reciprocal allocation method recognizes reciprocity among service department by explicitly including the mutual services rendered among support departments.

Question 38

dual-rate allocation cost method

Answer 38

The dual-rate allocation method is really a refinement of either the direct or step-down methods, depending upon how it is applied. In the dual-rate method, variable and fixed costs are allocated to departments in a two-step process, variable costs on current use and fixed costs on a long-term, maximum capacity basis. This method may not recognize any reciprocity of services among service departments.

Question 39

Direct-Allocation cost method

Answer 39

The direct allocation method allocates the cost of service departments directly to the production departments without any intermediate allocations to other service departments. Thus, this method does not recognize any reciprocity of services among service departments.

Direct allocation is allocation of the costs of each service department directly to production departments. This method ignores any service rendered to another service department. For example, Service Dept. 1 costs are directly allocated to Production Depts. 1 and 2, and Service Dept. 2 costs are directly allocated to Production Depts. 1 and 2.

Only standard costs should be allocated so that the originating department is responsible for variations from standard.

Question 40

step-down allocation method for costing

Answer 40

allocates service department costs to other service departments and production departments usually starting with the service department that provides the most service to other service departments. This method allows for partial recognition of reciprocity of services among service departments.

Question 41

COST ALLOCATION METHODS

Answer 41

Cost allocation is assigning one or more costs to one or more subunits (departments, divisions, cost centers) of an organization according to some logical measure of use, such as the benefits received; the assigning of the costs of service departments to production departments for inclusion in inventory and cost of goods sold.

Aspects of service cost allocation:

Choosing the cost object, i.e., the cost to be allocated. This is usually the cost of a service provided to another unit.
Choosing and accumulating the costs that relate to the cost object (the direct materials, direct labor, and overhead of the unit supplying the service).
Choosing the basis of allocation, e.g., physical identification, benefits received (usage level), ability-to-bear: e.g., number of employees, payroll dollars, square-footage, units of service used (e.g., kw/hr of electricity, computer time, repair man-hours, etc.).
Choosing the method of allocation: direct, step, or reciprocal.

Question 42

STEP ALLOCATION

Answer 42

Step allocation is the allocation of the costs of each service department in sequence to all departments that receive the service, whether other service departments or production departments. In each step, costs are allocated only to remaining departments such that ultimately all service costs are allocated to production; this method recognizes some of the service rendered from one to another service department. Because the allocation is step-wise, a sequence of allocation must be chosen: costs from Service Dept 1 are allocated to all other receiving departments, then costs from Service Dept 2 (including its allocation of costs from Service Dept 1) are allocated to all other receiving departments except Service Dept 1, and so on until all service department costs have been allocated to production departments. Only standard costs should be allocated so that the originating department is responsible for variations from standard.