Cost Accounting

Question 2

What is Cost Accounting?

Answer 2

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 3

What is the difference between Cost Accounting and Managerial Accounting?

Answer 3

Cost Acct - External Focus, GAAP

Managerial Acct - Internal Focus, Not GAAP

Question 4

What are Product Costs (aka Inventory Costs)?

Answer 4

Prime Costs

Conversion Costs

Question 5

What are included in Prime Costs?

Answer 5

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 6

What is Factory Overhead?

Answer 6

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 7

What is included in Fixed Factory Overhead?

Answer 7

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

Question 8

What is included in Variable Overhead?

Answer 8

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 9

Where is Under/Overappllied Variable OH recorded?

Answer 9

If Immaterial – Goes to COGS

If Material – Goes to WIP, Finished Goods, or COGS, based on their Ending Balance

Question 10

Where is Under/Overapplied Fixed OH recorded?

Answer 10

It always goes to COGS

Question 11

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

Answer 11

Underapplied overhead.

If it’s Fixed OH, underapplied goes to COGS.

If it’s Variable OH, underapplied goes to COGS if immaterial, but is allocated to WIP, FG or COGS based on ending balances.

Question 12

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

Answer 12

A credit balance indicates overapplied 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 13

Which variables are used to calculate Direct Material balances?

Answer 13

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

Question 14

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

Answer 14

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

Question 15

What variables are included in Finished Goods calculations?

Answer 15

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

Question 16

How does Freight In affect Cost Acct calculations?

Answer 16

Inventory (Product) Cost

Part of DM Purchases

Question 17

How does Freight Out affect Cost Accounting?

Answer 17

Selling (Period) Cost

Not part of inventory

Question 18

When is Job-Order Costing used?

Answer 18

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
o You’re likely going to be solving for the last job in the queue

Question 19

What is the Direct Method for allocating service department costs?

Answer 19

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

Question 20

What is the Step Method for allocating service department costs?

Answer 20

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

Question 21

Under process costing, how are the units shipped calculated?

Answer 21

Beginning Inventory
+ Units Started
- Ending Inventory
= No. Units Shipped

Question 22

Which two inventory methods are used under Process Costing?

Answer 22

FIFO

Weighted Average

Question 23

What is another name for Process Costing?

Answer 23

Equivalent Units of Production

Question 24

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

Answer 24

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

Question 25

How are Direct Materials calculated under the Weighted Average Method?

Answer 25

Beginning Inventory + Current Costs / EFU WA

Question 26

How are Conversion Costs calculated under Weighted Average Method?

Answer 26

Beginning Inventory + Current Costs / EFU WA

Question 27

How are Equivalent Finished Units calculated for Direct Materials?

Answer 27

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

• Beginning Inventory x % Complete
  = EFU (FIFO)

Question 28

How are Equivalent Finished Units calculated for Conversion Costs?

Answer 28

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

• Beginning Inv x % Complete
  = EFU (FIFO)

Question 29

How are Direct Materials calculated under the FIFO method?

Answer 29

Current Costs / EFU FIFO

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

Question 30

How are Conversion Costs calculated under the FIFO method?

Answer 30

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

Question 31

How is WIP calculated?

Answer 31

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 32

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

Answer 32

Net Sales 
- Product Costs
= Gross Margin
- Period Costs
= Operating Income

Question 33

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

Answer 33

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 34

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

Answer 34

Cost Pools and Allocations increase compared to a traditional costing system

Question 35

What is Backflush Costing?

Answer 35

Connected to Just-in-Time Production, which is part of Activity-Based Costing and Total Quality Management (TQM)

o Works backward to “flush out” COGS
o ‘Mostly’ GAAP

Question 36

What are the characteristics of By-Products?

Answer 36

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

Question 37

What are Cost Functions?

Answer 37

Measure how costs change relative to activity levels

High-Low Method

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