Cost Accounting Chapter 1

Question 1

The function of cost accounting

Answer 1

is to provide the detailed cost data essential to management in controlling current operations and planning for the future. Cost accounting systems show what costs were incurred and how they were used.

Question 2

Unit costs

Answer 2

A) The cost procedures must be designed to permit the determination of unit costs as well as total product costs. B) Unit costs are also useful in making a variety of marketing decisions, such as determining the selling price of a product, deciding how to meet competition, arriving at a contract bid price, and analyzing profitability.

Question 3

Planning

Answer 3

is the process of establishing goals and objectives and determining the means by which they will be met.

Question 4

Cost accounting information

Answer 4

aids planning by providing historical costs that can be used to estimate future costs and operating results and to decide whether to acquire additional facilities, change marketing strategies and obtain capital.

Question 5

Control

Answer 5

is the process of monitoring the company’s operations and determining whether the objectives identified in the planning process are being accomplished.

Question 6

Effective control is achieved by

Answer 6

Periodically measuring actual operating results and comparing them to the plan; and taking necessary corrective action when the operating results deviate from the plan.

Question 7

Responsibility accounting

Answer 7

assigning responsibility for costs or production results to individuals who have the authority to influence them

Question 8

Performance reports

Answer 8

compare planned or budgeted amounts to actual operating results and identify the difference, or variance, as favorable or unfavorable.

Question 9

The Institute of Management Accountants (IMA)

Answer 9

is the largest organization of accountants in industry in the world. It awards the Certified Management Accountant (CMA) certificate and issued a Statement of Ethical Professional Practice (appearing in the Appendix to Chapter 1 in the text) that must be adhered to by its members. These standards address a member’s responsibility in areas such as maintaining appropriate levels of professional competence, refraining from discussing confidential information, avoiding conflicts of interest and communicating information fairly and objectively. The second part of the document provides guidance for resolving ethical conflicts.

Question 10

Sarbanes-Oxley Act of 2002

Answer 10

was written to protect shareholders and other stakeholders of companies whose stock is publicly traded by improving corporate governance

Question 11

Corporate governance

Answer 11

The means by which a company is directed and controlled

Question 12

Sarbanes Oxley Act Elements

Answer 12

• certification of the financial statements by the chief executive and financial officers
• establishment of the Public Company Accounting Oversight Board (PCAOB)
• severely limiting non-auditing services that an accounting firm provides to a company it audits,
• requiring companies to include a report on the effectiveness of its internal controls in its annual report
• making the Audit Committee of the Board of Directors responsible for decisions involving the company’s relationship with its audit firm
• severe criminal penalties for alteration of business documents and for retaliation against whistleblowers.

Question 13

Financial accounting

Answer 13

focuses on the gathering of information for use in the preparation of financial statements for external users.

Question 14

Management accounting

Answer 14

focuses on both historical and estimated data that management needs to conduct ongoing operations and do long-range planning.

Question 15

Cost accounting

Answer 15

includes those parts of both financial and managerial accounting that collect and analyze cost information. It provides the product cost data required for special reports to management (managerial accounting) and for inventory costing in the financial statements (financial accounting).

Question 16

Cost of goods merchandiser

Answer 16

a company that purchases merchandise for resale, computes cost of goods sold by adding the amount of merchandise it purchased to beginning merchandise inventory, then subtracting the amount of ending inventory.

Question 17

Cost of goods Manufacturer

Answer 17

a company that uses labor and technology to convert raw materials into goods, computes cost of goods sold by adding cost of goods manufactured to beginning finished goods inventory and then subtracting ending finished goods inventory.

Question 18

Manufacturer balance sheet

Answer 18

The balance sheet for a manufacturer includes the following three inventory accounts: 1) Finished goods 2) Work in process 3) Materials

Question 19

Finished goods

Answer 19

Its balance represents the cost to manufacture goods completed but still on hand.

Question 20

Work in process

Answer 20

its balance includes the manufacturing costs to date for unfinished goods.

Question 21

Materials

Answer 21

Its balance contains the cost of all materials purchased and still on hand.

Question 22

Perpetual inventory system

Answer 22

Provides a continuous record of purchases and issues. Inventory balances are available at any time. Generally, these balances are verified by periodic counts of selected items throughout the yea

Question 23

periodic inventory system

Answer 23

requires estimating inventory balances during the year and counting all inventory items at the end of the year.

Question 24

The three elements of manufacturing cost include:

Answer 24

1) direct materials, 2) direct labor, and 3) factory overhead.

Question 25

Direct materials

Answer 25

become part of and can be readily identified with the item being manufactured

Question 26

Indirect materials

Answer 26

are those that cannot be readily identified with the finished product or are insignificant in cost.

Question 27

Direct labor

Answer 27

Is the cost of labor for those employees who work directly on converting the raw materials to finished goods.

Question 28

Indirect labor

Answer 28

includes those who are essential to the manufacturing process, but who do not work directly on the units being produced.

Question 29

Factory overhead

Answer 29

includes indirect materials, indirect labor, and all other manufacturing costs incurred in production but not identifiable directly with a specific product.

Question 30

Prime cost

Answer 30

equals the combined cost of direct materials and direct labor

Question 31

conversion cost

Answer 31

equals the sum of direct labor plus factory overhead.

Question 32

Purchased materials on account.

Answer 32

Debit: Materials Credit: Accounts Payable

Question 33

Issued direct and indirect materials into production

Answer 33

Debit: Work in process, & Factory overhead Credit: Materials

Question 34

Recorded and paid payroll

Answer 34

1) Debit: Payroll Credit: wages payable 2) Debit: Wages payable Credit: Cash

Question 35

Distributed payroll to appropriate accounts

Answer 35

Debit: Work in Process (Direct Labor), Factory Overhead (Indirect Labor) Selling and Administrative Expenses Credit: Payroll

Question 36

Recognized various factory overhead expenses for the period.

Answer 36

Debit: Factory Overhead Credit: Accounts Payable Accumulated Depreciation Prepaid Insurance

Question 37

Transferred balance in factory overhead to work in process

Answer 37

Debit: Work in Process Credit: Factory Overhead

Question 38

Transferred cost of goods completed.

Answer 38

Debit: Finished Goods Credit: Work in Process

Question 39

Recorded sales and transferred cost of goods sold

Answer 39

1) Debit: Accounts receivable Credit: Sales 2) Debit: Cost of goods sold Credit: Finished goods

Question 40

process cost system

Answer 40

generally is used when a manufacturer maintains a continuous output of homogeneous products for stock, such as cement and chemicals

Question 41

job order cost system

Answer 41

is used when the output consists of special or custom-made products, such as books or furniture. In a process cost system, costs are accumulated by department or process, whereas in a job order cost system they are accumulated by job or lot. Some companies’ costing systems utilize elements of both job order and process costing

Question 42

standard cost system

Answer 42

may be used with either a job order or process cost system and focuses on standard costs that would be incurred under the most efficient operating conditions

Question 43

Variances

Answer 43

represent differences between actual costs and standard costs and aid management in identifying and eliminating inefficient operating conditions.

Question 44

schedule from raw materials through cost of goods sold

Answer 44