Cost Accounting Flashcards
What is Cost Accounting?
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
What is the difference between Cost Accounting and Managerial Accounting?
Cost Accounting - External Focus- GAAP
Managerial Accounting - Internal Focus- Not GAAP
What are Product Costs (aka Inventory Costs)?
Prime Costs
Conversion Costs
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/Over-applied Fixed OH always goes to COGS
Where is Under/Over-applied 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/Over-applied Fixed OH recorded?
It always goes to COGS
What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?
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.
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 (Conversion 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)
What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?
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.
How does Freight In affect Cost Accounting calculations?
Inventory (Product) Cost
Part of DM Purchases
How does Freight Out affect Cost Accounting?
Selling (Period) Cost
Not part of inventory
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)
The direct method does not recognize any services provided between the service departments. It goes straight directly from service to production
Under process costing- how are the units shipped calculated?
Beginning Inventory
+ Units Started
- Ending Inventory
= # of Units Shipped
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
o You’re likely going to be solving for the last job in the queue
What is the Step Method for allocating service department costs?
Services can be allocated to both other service departments and the product(s)
The step method recognizes somewhat that some service departments provide services to other service departments so they do it partially
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 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 Inventory 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 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
How are Conversion Costs calculated under the FIFO method?
Current Costs / EFU FIFO
FIFO method uses Current Period costs only and ignores Beginning Inventory
What is the focus of Activity Based Costing (ABC)?
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
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 is Backflush Costing?
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
Note: Within JIT is Backflush costing, which is accounting for JIT inventory method
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 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 the Overhead application process?
Overhead consists of all manufacturing costs other than direct materials and direct manufacturing labor
Manufacturing overhead cannot be directly traced to the final product as can direct material and direct manufacturing labor; thus overhead must be applied, rather than directly charged, to goods produced
The overhead application process is described as follows:
- Overhead items are grouped by cost behavior (i.e. fixed & variable)
- The fixed and variable overhead costs are estimated for the forthcoming period
- A denominator (activity) base is chose. Most common is DL hours or machine hours
- The actual activity level is estimated for the forthcoming year
- Determine the normal capacity of the facility
- Determine the predetermined OH rates for variable & fixed OH:
Estimated variable OH costs
/ Estimated ACTUAL Activity level
= Variable OH Predetermined rate
Estimated fixed OH costs
/ Normal capacity
= Fixed OH Predetermined rate
- As actual OH costs are incurred, they are debited to factory OH accounts
- As jobs are completed, the predetermined OH rate is used to apply OH to these jobs
What are the implications of Overapplied Fixed Overhead?
Overappied fixed overhead means that more is applied than incurred due to the following:
- Overhead costs were overestimated
- Actual activity was greater than normal capacity
- Actual overhead costs were less than expected
What are the implications of Underapplied Fixed Overhead
Underapplied fixed overhead means that less overhead is applied than incurred due to the following:
- Overhead costs were underestimated
- Actual activity was less than normal capacity
- Actual overhead costs were more than expected
What do you do with Under or Over-applied Variable overhead that is immaterial?
Under or over-applied variable overhead that is immaterial is written off to COGS
What do you do with Under or Over-applied Variable overhead that is Material?
If the amount of under- or overapplied variable overhead is significant, then an adjustment must be made to all goods which were costed at the erroneous application rate during the current period. An adjustment will need to be made to the following accounts with incorrect costs:
- Work in process
- Finished goods control
- Cost of goods sold
What are Value-added activities?
Value-added activities are those which customers perceive as increasing the worth of a product or service and for which customers are willing to pay
They include only production activities
What are Nonvalue-added activities?
Nonvalue-added activities increase the cost of a product but do not increase its value to customers (i.e. material handling & rework & inventory)
In Activity-Based Costing, what are examples of activities and related cost drivers?
The following are related activities and cost drivers, which have a cause-and-effect relationship:
1. Purchase or materials (Activity) # of purchase transactions (Cost driver)
2. Receiving (Activity) # of shipments received (Cost driver)
3. Disbursing (Activity) # of checks issued (Cost driver)
4. Setup costs (Activity) # of setups or setup hours (Cost driver)
5. Machining (Activity) # of machine hours (Cost driver)
6. Repair costs (Activity) # of machine hours (Cost driver)
7. Engineering changes to products (Activity) # of engineering change notices (Cost driver)
When looking at cause-and-effect relationship between cost drivers and activities; try to think of things that will increase the cost of running a particular activity as this will like be the cost driver
What are the 4 different basic approaches to cost estimation?
The 4 different basic approaches to cost estimation are:
- Industrial engineering (work-measurement) method
- Conference method
- Account analysis method
- Quantitative methods
What is the Industrial engineering (work-measurement) method?
(Type of Cost Estimation approach)
Industrial engineering (work-measurement) method estimates of cost functions are derived from analyzing the physical relationships between inputs (i.e. direct labor hours) and outputs
This method of developing cost functions is time-consuming and costly
What is the Conference method?
Type of Cost Estimation approach
Conference method estimates of cost functions are derived from analysis and opinions about cost relationships by individuals from various departments
This method can be done quickly but may not be as reliable as those that are based on quantitative methods
What is the Account analysis method?
Type of Cost Estimation approach
Account analysis method estimates of cost functions are derived by analyzing ledger accounts and designating them as containing fixed costs, variable costs, or mixed costs
This is a widely used method but to be reliable it must be performed by individuals who understand operations
What are Quantitative methods?
Type of Cost Estimation approach
Quantitative methods estimates of cost functions are derived using formal mathematical models
Using quantitative methods, management identifies a cost and one or more cost drivers to be used to predict the cost
Then they collect historical data to estimate the cost function. The following are examples of quantitative methods commonly used:
- Scatter-graph method
- High-Low method (most important)
- Regression analysis (most important)
- Correlation analysis
What is the Coefficient of determination (R^2)?
The coefficient of determination is the goodness of the least squares fit (i.e. how well the regression line fits the observed data)
The better the line fits the observed data points (i.e. the closer the observed data points are to the line), the closer R^2 will be to 1.00.
This concept relates to regress analysis, which is one type of quantitative cost estimation approach
What is the Coefficient of correlation?
The coefficient of correlation is the degree and direction of correlation measured from -1 to +1.
Correlation could be positive, negative, or no correlation at all.
This concept relates to correlation analysis, which is one type of quantitative cost estimation approach
What is the Reciprocal method?
Method of allocating costs from service to production department
The reciprocal method is a full recognition of all the services provided between the service and production departments through the use of simultaneous linear equations
How do you calculate cost of goods purchased (COGP)?
Flow of Costs
Cost of goods purchased is calculated as follows:
Gross purchases
- Purchase discounts
- Purchase Returns & Allowances
= Net purchases
+ Freight-in
= COG Purchased
What are the advantages of using the Direct Method as opposed to the Step Method & Reciprocal Method?
The direct method has the following advantages over the step method & reciprocal method:
- The direct method is more managerially expedient
- Less subject to error due to less complexity
What are the advantages of using the Step Method & Reciprocal Method vs. the Direct Method?
The step method & reciprocal method has the following advantages over the direct method:
- Both are more accurate
- Reciprocal method has full recognition of the services provided to other service departments
Disadvantage:
- There is an increased level of complexity when you go from the step method to the reciprocal method
- Not as intuitive as the direct method
- More subject to error
How is UNDER-applied manufacturing overhead (MOH) characterized?
The under-applied amount is ALWAYS on the DEBIT side; to close it, you have to credit the amount. Under-applied manufacturing overhead means that not enough costs were applied to production during the year
Note: You must always get rid of these under-applied balances because you always have to bring these to zero at the end of the accounting period
OH will end up in our cost flow of WIP inventory, FG inventory and COGS. So, you have to allocate the VARIABLE under-applied OH to these accounts IF its MATERIAL
Fixed under-applied OH is written off to COGS immediately (no matter if it’s immaterial or material)
How is OVER-applied manufacturing overhead (MOH) characterized?
The over-applied amount is ALWAYS on the CREDIT side; to close it, you debit the amount. Over-applied manufacturing overhead means that to much costs were applied to production during the year
Note: You must always get rid of these over-applied balances because you always have to bring these to zero at the end of the accounting period
OH will end up in our cost flow of WIP inventory, FG inventory and COGS. So, you have to allocate the VARIABLE over-applied OH to these accounts IF its MATERIAL
Fixed over-applied OH is written off to COGS immediately (no matter if it’s immaterial or material)
What are the steps to calculate Equivalent units of production (EUPs) or Equivalent finished units (EFUs) in process costing?
There are 4 steps to calculate EUPs and EFUs:
- Calculate the number shipped (in whole units) - always in whole units
- Calculate the equivalent finished units - for items that are partially complete. Note that there are 2 different methods for calculating this: FIFO and Weighted-average
- Calculate the cost per EFU - Note that there are 2 different methods for calculating this: FIFO and Weighted-average
- Complete the WIP t-accounts. Using the number of Ending Inventory EFUs from Step 2 and Cost per EFU in Step 3, calculate the $ value of ending inventory in WIP and plug COGM (you need this in order to calculate COGS)
Note: The whole point of this is we are figuring out the ending balance in WIP and what leaves WIP (COGM)
How do you calculate the number of items shipped (for partially completed items) in process costing?
(1st step in calculating EUPs and EFUs - Process costing)
Calculate the number shipped (in whole units):
Beginning inventory
+ Units started
= Units to be accounted for
- Ending inventory
= Units shipped
How do you calculate equivalent finished units (EFUs) using the FIFO method?
(2nd step in calculating EUPs and EFUs - Process costing)
Calculate the equivalent finished units:
Units shipped (whole units) - calculated in step 1
+ Ending inventory (EFUs)
- Beginning inventory (EFUs)
= FIFO EFUs
Note: For this step, you will have to distinguish between direct materials and conversion costs. Conversion costs (DM used + OH applied) are incurred evenly throughout the production process. However, DM are lumpy - as these are added at various points in the production process. As a result, EUP and EFU will need to be calculated differently
How do you calculate equivalent finished units (EFUs) using the Weighted-average method?
(2nd step in calculating EUPs and EFUs - Process costing)
Calculate the number shipped (in whole units):
Units shipped (whole units) - calculated in step 1 \+ Ending inventory (EFUs)
= W/A EFUs
Note: For this step, you will have to distinguish between direct materials and conversion costs. Conversion costs (DM used + OH applied) are incurred evenly throughout the production process. However, DM are lumpy - as these are added at various points in the production process. As a result, EUP and EFU will need to be calculated differently
Note: W/A EFUs will ALWAYS be HIGHER than FIFO EFUs because FIFO subtracts beginning inventory. However, both would be equal if beginning inventory is zero
How do you calculate the cost per equivalent finished units (EFU) using the FIFO method?
(3rd step in calculating EUPs and EFUs - Process costing)
Calculate the cost per EFU:
Cost per EFU = Current cost ONLY / EFUs (calculated in step 2)
Note: Current costs are the costs considered in the current accounting period only. DO NOT consider the beginning inventory
How do you calculate the cost per equivalent finished units (EFU) using the Weighted-average method?
(3rd step in calculating EUPs and EFUs - Process costing)
Calculate the cost per EFU:
Cost per EFU = Beg. Inv. + Current costs / EFUs (calculated in step 2)
How is the Backflush costing method with vendors, suppliers and customers characterized?
Backflush costing method II - JIT Inventory Methods with Vendors/Suppliers and Customers:
Combine DM and WIP (materials and in-process costs) and combine DL and OH (conversion costs). This is the same as the backflush method with vendors and suppliers; however, there is no finished goods inventory. The cost flow starts with materials & in-process + conversion cost control and these cost flow directly to COGS when items are sold
Note: The FGI t-account is gone because you’re no longer making a pit-stop to the warehouse where FG inventory sits until sold. Instead, your delivering and shipping FGs directly to your customer
This is full JIT inventory method with your suppliers, vendors and customers
What is the purpose of the High-Low method?
The purpose of doing the high-low method analysis is to estimate total costs, total fixed costs and total variable costs
There are 3 steps to doing the high-low method:
- First, need to set up the High and Low table. Remember to select high and low amounts based on activities and NOT dollars
- Subtract the Low activity and dollar values from the high points
- Divide the net dollar amount (calculated in step 2) by the net activity amount (calculated in step 2) to arrive at a variable cost per unit. You then put this variable cost per unit into the cost formula (y = a + bx) to solve for total fixed costs. Once you have your total cost formula, then you can put in any unit of activity (within the relevant range - which is the low and high points used in the high-low method) to obtain the total cost
Note: We do this analysis to estimate the cost function and can take all of our costs and divide them between their fixed and variable components
How do you calculate the ending balance of Direct Materials?
Flow of Costs
Ending direct materials balance is calculated as follows:
Beginning balance
+ COG Purchased
= Available for use
- DM USED
= Ending Balance
Note: Think of this as your supply chest in the factory
How is the Backflush costing method with vendors and suppliers characterized?
Backflusch costing method I - JIT Inventory Methods with Vendors/Supplier:
Combine DM and WIP (materials and in-process costs) and combine DL and OH (conversion costs). The cost flow starts with materials & in-process + conversion cost control; these go to FG inventory and when the inventory is sold it goes to COGS
Note: Your vendors and suppliers delivers through directly to the factory floor. They use more frequent deliveries of smaller amounts and use very high quality materials so you don’t waste time inspecting items
You only deal with very few suppliers, so you’re willing to pay suppliers a little more for higher quality materials
How do you calculate the ending balance of Work in Process (WIP) inventory?
(Flow of Costs)
Ending WIP inventory balance is calculated as follows:
Beginning balance \+ DM used \+ DL used \+ OH Applied = Total cost to account for - COGM = Ending Balance
Note: Think of this as your factory floor - where all manufacturing takes place
Note: DM used, DL used and OH applied is deemed to be the total manufacturing costs for the period
How do you calculate the ending balance of Finished goods inventory?
(Flow of Costs)
Ending Finished goods inventory balance is calculated as follows:
Beginning balance
+ COGM
= Cost of goods available for sale (COGAS)
- COGS
= Ending balance
Note: Think of this as your warehouse. You store your goods in the warehouse until you sell them
