Cost Accounting Flashcards
What is Cost Accounting?
Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet and Income Statement for:
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods
What is the difference between Cost Accounting and Managerial Accounting?
Cost Acct - External Focus, GAAP
Managerial Acct - Internal Focus, Not GAAP
What are Product Costs (aka Inventory Costs)?
Prime Costs (DL and DM used) Conversion Costs (DL used and OH applied)
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 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)
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/Overapplied Fixed OH always goes to COGS
Where is Under/Overappllied 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/Overapplied Fixed OH recorded?
It always goes to COGS
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
Underapplied overhead.
Fixed OH, underapplied goes to COGS.
Variable OH, underapplied 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 overapplied overhead.
Fixed overhead, it is corrected from COGS.
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 Used
DR Direct Labor Used (Conversion Cost)
DR Factory Overhead Applied (Converstion Cost)
CR COGM
= Ending Balance (Goes to BS)
What variables are included in Finished Goods calculations?
Beginning Balance DR COGM = COGAS (Cost of Goods Avail for Sale) CR COGS = Ending Balance (Goes to BS)
How does Freight In affect Cost Acct 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
o DM to WIP to FG to COGS
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 (EFU) 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 Inv 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)?
Collects financial and operating data based on nature of the cost divers (cost pool/cost driver).
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
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?
Based on the removal of the standard cost of finished products from the WIP inventory upon completion. The effect is to decrease the detail of costs traced to jobs throughout the production process.
o Works backward to “flush out” COGS
o ‘Mostly’ GAAP
What are the characteristics of By-Products?
Usually immaterial and common costs aren’t allocated to them
o Low Market Value
o Can be valued at NRV
o Can be treated as a contra expense and netted against COGS
o Can be treated as a contra sale and netted against Sales
o 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 is Just in Time Production? What are the advantages and disadvantages?
An inventory strategy to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.
Advantage: Production Run Short, Reduces Costs for warehouse storage and raw materials
Disadvantages: Disruptions in Supply or order for good that surpass expectations
What is Benchmarking? What are the objectives?
A measurement of the quality of an organization’s policies, products, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of its peers.
Objectives:
(1) To determine if improvements are called for and where
(2) To analyze how other organizations achieve their high performance levels
(3) Use this information to improve performance.
What is throughput costing?
Throughput costing relegates all product costs except direct materials to period cost (expense) status. It is a newly proposed costing method
What are the advantages and disadvantages of Job Order Costing?
Advantage:
Assigning Costs to individual jobs
Reporting
Disadvantage:
Recordkeeping
What are the advantage and disadvantage of Activity Based Costing?
Advantages:
Improve Business Process (identify non-valued added activities and better allocate resources to more efficient activities)
Identifies Wasteful Products (find better ways of allocating and eliminating overheads)
More accurate pricing decisions
Disadvantages:
Expensive implementation
Misrepresentation of data
What are the eight principles of total quality management?
- customer focused
- Employee involvement
- Process centered
- Integrated system
- Continual improvement
- Fact-based decision-making
- Strategic and systematic approach
- Communications
What does Activity Based Costing (ABC) do?
Identifies activities and cost of performing those activities
Identifies appropriate cost drives for all activities
Develops activity costs per unit of cost driver
Assigns costs to products/services based on consumption of activity costs
When do absorption and variable costing have the same operating income?
When production and sales are equal for a period
When is operating income higher under absorption costing?
When production exceed sales and ending inventory increases
When is operating income higher under variable costing?
When production is less than sales and ending inventory decreases
