Cost Accounting Chapter 1 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 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
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)
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.
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.
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)
CR COGM
DR Factory Overhead Applied (Conversion Cost)
= 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 Accounting 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
o You’re likely going to be solving for the last job in the queue
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 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 Equivalent Finished Units calculated for Direct Materials?
Units Completed and transfered \+ EI x % Completed DM = EFU (Weighted Average Method) - Beginning Inventory x % Completed = EFU (FIFO)
book example
600 completed and transfered
BI = 100, 25% completed / complete
EI = 200, 40% completed / complete
Equivalent units would be 600 \+ 80 = 680 >> Weighted avg method - 25 = 655 >> 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 and WA method?
Current Costs / EFU FIFO
Note: FIFO method uses Current Period costs only and ignores Beginning Inventory
WA Method
Beg costs + current costs/ EU - WA
How are Conversion Costs calculated under the FIFO and WA method?
Current Costs / EFU FIFO
FIFO method uses Current Period costs only and ignores Beginning Inventory
WA Method
Beg costs + current costs/ EU - WA
How are Conversion Costs calculated under Weighted Average Method?
Beginning Inventory + Current Costs / EFU WA
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)?
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
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?
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
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 are the characteristics of ABC - Activity Based Costing?
Applies a more focused and detailed approach
Multiple causes and effects and then assign costs
Can be a part of a job system or a process cost system
Can be used in manufacturing or service businesses
Takes a long-term viewpoint and treats production costs as variable
Cost driver is often a non-financial variable
may be used for internal but not for external purposes
What is ABC also referred as?
Transaction-based costing
What is the effects of ABC costing?
An ABC system will apply high amounts of overhead to a product that places high demands on expensive resources.
This removes much of the cost distortion caused by a traditional, volume-based overhead systems.
What are Standard Cost Systems?
SCS are a natural extension of ABC. Standards are set at activity levels based on cost drivers. Useful variances are calculated by comparing actual and standard costs that consider levels of activity
What is the Direct Method in ABC?
The Direct Method is the most widely used and least complex method to allocate service costs.
Each service department’s total costs are directly allocated to the production departments without recognizing that service department themselves may use the service from other service departments.
What is the Step-Down Method in ABC?
The step-down method or sequential method is a more sophisticated approach to allocate service costs in more complex situations.
Svc depts costs are also allocated to other svc depts as well as production depts. Step-down allocations assume that once a svc depot’s costs have been allocated to another svc dept, there can be no subsequent costs allocated back to the other svc dept.
What are joint products?
JP are two or more products that are general from a common input.
What are by-products?
BP are minor products of relatively small value that incidentally result from the manufacture of the main product.
What is a cost driver?
A cost driver is a factor that has the ability to change total costs.
What is the “Relative Net Realizable Value at Split-off point”?
NRV = Sales - cost of completion and disposal.
Relative sales value at split-off point is used purely for inventory costing and is of little use for cost planning and control purpose.
How relative sales value a split-off point can be used?
It can be used to allocate joint costs if sales price quotations are known or can be determined.
The relative sales value approach assigns costs to the separate joint products in relation to their market value.
Ho can sales value a split-off point can be computed if sales values are not available?
Computation of sales values at split-off are derived on the ultimate sales value a point of sale.
1 - Work backward estimating NRV @ split-off point
2 - Separate costs - Identifiable costs incurred after the split-off point must be subtracted from the final selling price to arrive @ NRV.
