Cost Accounting: Part 3_M3 Flashcards
What are the 4 costing methods?
- Activity-based costing uses cause and effect relationships to capitalize costs to inventory. This is not acceptable for external reporting and IS useful for internal reporting to management.
- Variable costing does not capitalize fixed factory overhead into inventory. It is not acceptable for external reporting but IS often used for internal purposes.
- Job costing (a simple accumulation of cost associated with a specific job) is acceptable for both internal and external purposes.
- Process costing is acceptable for both internal and external purposes. It is an averaging of actual costs.
How to Calculate ABC?
Total cost per unit would be equal to the overhead allocated in accordance with the activity based cost object associated with each activity and the direct cost per unit.
(Given x Actual Activity/Tot. Cost Driver)/ pounds to solve
(Cost × Premium/Total) ÷ Pounds = Cost/Pound
Separ and roasting ($3,500 × 550/700) ÷ 500 = $5.50
Packing and shipping ($1,500 × 500/1,000) ÷ 500 = 1.50
Direct Labor (given) 1.25
Direct Materials (given) 1.50
Total cost per pound for premium coffee $9.75
What does ABC help managers analyze?
- Whether a particular department should be expanded.
- Whether a product line should be discontinued.
- Whether a particular manager earns a bonus.
What are the factors to consider when determining what to use as a cost driver?
- Behavioral effects.
- Costs of measurement.
- Degree of correlation.
What type of industries should use ABC and Traditional Costing?
ABC Costing
- ABC costing is recommended when more than one product is produced and those products do not uniformly consume indirect resources (heterogeneous consumption).
- Example: Suppose 50 kilowatts of electricity are used to produce a single unit of item A and 500 kilowatts of electricity are used to produce a single unit of item B.
- ABC costing is most beneficial when multiple products are
produced. - ABC costing is used to assign indirect costs based on the product’s demands for resource-consuming activities.
Traditional Costing - Single Cost
- If resources are consumed in a homogeneous or uniform
manner. A traditional cost system that uses a single cost
driver would be recommended.
What does Activity Based Costing (ABC) do?
(ABC) Cause and effect method.
- Divides the production process into activities where costs are accumulated.
- The production process assumes activities and resources (direct materials, direct labor, and manufacturing overhead), and that the outcome of the production process requires performance of the activities.
- Both variable and fixed manufacturing costs are accumulated in the activity-cost pools.
- The use of activity-based costing normally results in substantially greater unit costs for low-volume products than is reported by traditional product costing.
- Increased set-up costs are charged to low-volume products under activity-based costing.
- Cost should be based on each department’s appropriate share of costs, based on cause and effect.
- The essence of activity-based costing is determining the activities that are involved in producing a product.
What is a traditional cost system?
- If the majority of the costs are direct, in a traditional cost system that uses a single cost driver would be appropriate in this situation.
- If resources are consumed in a homogeneous or uniform manner, a traditional cost system that uses a single cost driver would be appropriate in this situation.
- A traditional cost system would use one cost and one allocation base (i.e., for factory overhead).
What are allocating joint cost to joint production characteristics?
- Sales price less the cost to complete is defined as the net sales value at split-off.
- The additional contribution to income generated by completing the product.
What are measures used in allocating cost in joint cost situations?
- Relative unit volume, physical measures.
- Relative sales value at split off.
- Net realizable value.
- Constant gross margin percentage.
