Cost Management

Question 1

Explain the cost behavior for fixed costs and how assumptions & relevant ranges affect it

Answer 1

Within in the relevant range they remain constant regardless of activity. However fixed cost put unit decreases as the level of activity increases w/in the relevant range.

Question 2

Explain the cost behavior for variable costs and how assumptions & relevant ranges affect it

Answer 2

With in the relevant range they change directly with the level of input, however the cost per unit remains constant. All costs are long-term

Question 3

Identify cost objects and cost pools and assign costs to appropriate activities.

Answer 3

Cost Object: Anything which a cost is assigned

Cost Pool: Where costs are grouped by type, origin, etc

Cost Driver: Measures that cause cost to increase, these are used to assign the costs appropriate activities.

Question 4

Explain the nature of the Structural Cost Driver

Answer 4

A type of cost driver that whereas changes are related to the company’s operational structural cost increase ( i.e. scale, company experience level, technology)

Question 5

Explain the nature of the Executional Cost Drivers

Answer 5

A type of cost driver that changes with the processes or activities performed (i.e. inspections, production runs)

Question 6

Explain the relationship between cost drivers and costs

Answer 6

Cost drivers measures causes to cost increases and have a cause-and-effect relationship with how costs are accumulated. (Increase in production = Increase in utilities)

Question 7

Explain the methods for measuring costs

Answer 7

1) Actual Costing: Actual DM, Actual DL & Actual MOH
2) Normal Costing: Actual DM, Actual DL & STD. MOH
3) Standard costing: Std, DM, Std DL & Std MOH

Question 8

Explain the Cost Accumulation Methods for accumulating WIP and Finished Goods

Answer 8

1) Job-Order Systems are used for specific identifiable jobs (i.e. professional firms, specialized manufacturing)
2) Process costing is used for identical or similar products. Costs are charged as they move through production

Question 9

Calculate and describe the benefits/limitations for the Actual Costing Method

Answer 9

Fx = Actual Direct Cost Rate x AQ for all costs

Benefit: Accurate cost

Limitation: Costs not immediately available and timeliness of financials may be affected.

Question 10

Calculate and describe the benefits/limitations for the Normal Costing Method

Answer 10

Fx = Actual Direct Cost Rate x AQ for DM/DL + Std Cost rate x AQ for OH

Benefit: Smooths out fluctuations in OH costs, and cost reports are quicker to produce

Limitations: Significant deviations in applied vs actual OH may affect pricing/profitability.

Question 11

Calculate and describe the benefits/limitations for the Standard Costing Method

Answer 11

Fx = Std Direct Cost Rate x AQ for all costs

Benefits: Assigns cost expectation, providing a way to control costs, encourages mgmt. by exception

Limitations: Mgmt. may tend to overemphasize costs stds w/o considering qualitative aspects (low quality material)

Question 12

Explain variable (direct) costing and the benefits/limitations

Answer 12

Costs & OH are separated into VC & FC. All Manufacturing Cost except FOH are product costs. All other expenses and FOH are period costs.

Benefit: useful for decision making

Limitation: Not US GAAP and can’t be used for Tax, and it’s difficult/costly to separate mixed costs.

Question 13

Explain absorption (full) costing and the benefits/limitations

Answer 13

Costs & OH are separated into VC & FC. All manufacturing costs are product cost and all other expenses are period costs.

Benefit: Confirms with US GAAP

Limitation: doesn’t enable reliable cost volume profit analysis compared to direct costing.

Question 14

Explain the affects of Absorption & Variable Operating Income is on inventory/sales

Answer 14

A>V, P>S

Absorption OI > Variable OI when Production > Sales

Absorption OI < Variable OI when Production < Sales

Question 15

Explain the appropriate use of joint product and by product costing.

Answer 15

Joint products are 2+ products that come from the same process. They are separated at the split off point when they become easily recognizable.

By-products are accidental products from a process that have little or no value and must be accounted for.

Question 16

Explain the allocations of joint & by-product costs using the physical measure method, along with benefits and limitations.

Answer 16

Costs are allocated proportionately to the total quantity produced.

Benefits: Simple & easy to calculate

Limitations: joint products may have different physical measurements and physical measure is not value based.

Question 17

Explain the allocations of joint & by-product costs using the Sales Value @ Split-off method, along with benefits and limitations.

Answer 17

Costs are allocated using the proportion of the market value of a joint product to the total market value at split-off.

Benefits: Simple & easy to compute and it’s value based

Limitations: Not easily measured due to unavailability of market value at split-off if joint product requires additional processing.

Question 18

Explain the allocations of joint & by-product costs using the Constant Gross Profit (Gross Margin) method, along with benefits and limitations.

Answer 18

Cost are assigned by applying the overall gross profit margin to the market values after each split-off.

*Gross Margin = Gross profit/Total market value

Benefits: Allocates cost based on a unified gross profit rate

Limitations: Joint products have different actual gross profits making allocations not as useful in pricing decisions.

Question 19

Explain the allocations of joint & by-product costs using the Net Realizable Value method, along with benefits and limitations.

Answer 19

Costs are allocated using the relative proportion of the market value of joint product to the total market value after additional processing.

Benefits: Considers the probable value of joint product after additional processing rather than split-off

Limitations: Other joint products may not be processes further.

Question 20

Define the natures of the costing systems and when to use them

Answer 20

Job-order costing: Accumulates costs to a specific job. Used for more tailored products/services

Spoilage, Re-work, Scrap: Costs related to normal spoilage is included in COGS, & abnormal spoilage is expensed. Cost related to normal re-work are applied to the job and abnormal re-work is charged to a separate loss account. Scrap has little value and is included in the standard cost.

Process costing: Accumulates cost for identical/similar products. Costs are charged as a process is completed.

Activity Based Costing: Allocation of OH costs based on the activity performed that drive the activity.

Life-Cycle Costing: Cost for the life of the product. AKA Cradle-to-grave

Backflush Costing: Costs are recorded after goods are sold. Often used in a just-in-time environment.

Question 21

4 Steps to calculate process costing problems

Answer 21

1) Determine the numerator to be used in computing the EUC (FIFO will be costs added for the period, WAVE will be the total costs to account for)
2) Calculate for the denominator or EUP for DM and Conversion Cost
3) Compute the EUP (Divided Step 1 by Step 2)
4) Reconcile cost to account for (double -check)

Question 22

Discuss the strategic value of cost information

Answer 22

Must be both useful & timely

Must support planning for the future

Pricing is key for decision making

Cost is key for pricing

OH allocations affect performance management

Question 23

Identify & describe the benefits & limitations of each cost accumulation system.

Answer 23

Job order costing is best for tracking cost around specialized products and allows for better analysis and cost control. However you have to track each cost, which may cost more to do, and isn’t good for high-volume.

Process costing is good for high-volume identical products and is compatible with standard costing systems. However estimates are used for % complete which could lead to inaccuracies, and not good for customized products.

ABC Costing is most accurate OH allocations, giving better analysis and you can see the cause/effect relationship. However, it’s costly to implement and not compliant with GAAP.

Life-cycle considers both product & period costs while emphasizing LT profitability. However it can only be used for internal reporting.

Question 24

Calculate equivalent units

Answer 24

Equivalent Units (EUP) is equal to the total number of unfinished units multiped by their percentage of completion.

Question 25

Define the elements of ABC

Answer 25

Cost pool - where homogeneous costs are grouped together. Usually and operating/service dept. Cost Drivers - resource/activity that caused direct/indirect changes to cost (ie. inspections, setups) Resource Drivers - quantify resources used such as sqft used for rental space Activity Driver - quantifies activities a cost uses, such as direct labor hours Value-added - activities that increase the perceived value

Question 26

Discuss Life-cycle costing including upstream/downstream and manufacturing costs.

Answer 26

An internal reporting of a product from conception to completion. Upstream costs included R&D, engineering & design. Manufacturing costs include labor, materials and Manufacturing OH. Downstream costs are support & customer support costs, distribution and warranty costs.

Question 27

Determine the appropriate time from for classifying Variable and fixed overhead costs.

Answer 27

VOH are short-term because they change w/level of activity FOH are long-term because they don't respond to change in activity

Question 28

Demonstrate an understanding of the different methods of determining overhead rates

Answer 28

Plant-wide rates: use total OH cost to determine OH rates. (Total OH cost/ single cost driver i.e. DL hours) Departmental Rate: OH broken down by single cost driver per dept. (Dept. OH/ Dep.t cost driver) Individual cost: Each driver is broken down individually

Question 29

Describe the benefits & limitations of each methods used to determine overhead rates.

Answer 29

Plant-Wide: Benefit: Applicable for companies w/ low OH or subunits have similar drivers. Easy/fast to calculate Limitation: Not applicable w/ significant OH as it leads to inaccuracy. Dept: Benefit: More accurate than plant-wide as it considers different drivers Limitation: Doesn't take into account varying activities that relate to OH. Individual (Activity based): Benefit: Most accurate Limitation: Obtaining OH cost can be costly

Question 30

Identify the components of variable overhead expense and the appropriate allocation base

Answer 30

1) Indirect Materials: traceable to product but immaterial 2) Indirect Labor 3) Other VMO such as rent or unities that aren't directly traceable. Allocation based must be based on the cause/effect relationship of cost and cost drivers.

Question 31

Identify the components of fixed overhead expense and the appropriate allocation base

Answer 31

1) Fixed rent & utilities 2) Fixed production cost (labor, insurance etc.) 3) Depreciation/Amortization 4) other FOH Allocation based could be direct labor hours, machine hours or other drive that is deemed appropriate. FOH Application rate = Budgeted FOH/budgeted level of activity - DLH or machine hours etc...

Question 32

Describe how FOH can be over/underapplied and how it should be accounted for in COGS, WIP finished goods

Answer 32

Overapplied FOH: TFOH Std rate applied > AFOH Incurred. Underapplied FOH: TFOH std rate applied < AFOH If significant - allocated over COGS, WIP, & Finished goods based on balance before allocation Not significant - applied 100% to COGS

Question 33

Compare & Contrast traditional OH allocation with Activity Based OH Allocation

Answer 33

Cost Drivers: Traditional has 1, AB has multiple Implement: Traditional is easier, AB is more difficult Accuracy: Traditional is less, AB is more Costs: Traditional related to volume, AB related to activities Value chain analysis: Traditional is difficult to conduct due to single cost driver, AB is suitable where activity can be identified that increase value

Question 34

Calculate OH Expense in ABC

Answer 34

Calculate OH Rates (i.e cost/driver) OH rate x Actual Activity

Question 35

Identify and describe the benefits derived from Activity based OH allocations

Answer 35

Enhanced Accuracy: due to cause & effect relationship between cost and cost drivers Analyze value & non added value: OH cost change as activities change Provides mgmt. with relevant cost information for strategic decisions such as pricing, sales mix etc...

Question 36

Explain why companies allocate the cost of service depts such has HR or IT to divisions, dept or activities.

Answer 36

1) For product costs: To measure income & assets for external reporting 2) For period costs: for better decision making

Question 37

Explain the Direct Method of overhead allocations.

Answer 37

Regardless of the order which service costs are allocated, the costs will be the same for each dept. No allocation between service departments Each service department is equally allocated between operating departments.

Question 38

Explain the Direct Method of overhead allocations.

Answer 38

Sequential process of service costs which results in varying costs being allocated. 1) Identify the service dept that provides the most service. 2) Allocate cost to other service depts. and all operating departments proportionately. 3) Allocate other service depts. to operating depts. (not back to the main service dept.)

Question 39

Explain the Reciprocal Method of overhead allocations.

Answer 39

Uses an algebraic method and is the most accurate Allocations goes between each service dept as well as to all operating depts. 1) Determine how much is allocated from each service dept. ( Service Dept Cost Driver/ Sum of all other dept cost drivers) 2) Solve for each M = Dept Cost + allocation ratio (I) I = Dept cost + allocation ratio (M) *M dept cost will be different from *I dept. cost

Question 40

Explain the Dual Rate cost of overhead allocations.

Answer 40

Categorized costs into 2 cost pools, VC & FC

Question 41

Estimate Fixed costs using the High-low method

Answer 41

1) Compute VC per unit Difference in of cost between High & low activity / difference of the high & low activity level 2) Compute Total Fixed Cost Total cost = VC + FC FC = TC - Cost driver x VC per unit 3) Input into regression analysis formula ``` y= a + bx y= FC+VC(x) ```

Question 42

Explain supply chain management

Answer 42

* Managing all internal/external activies relating to flow of products to end users * Maximized Products value to customer * Includes product R&D, purchasing, production and other product cots * Coordination & communication are keys for response

Question 43

What is the supply chain roadmap

Answer 43

Alignment ->Mange risk -> Add value -> Metrics/measure success

Question 44

Define Lean resource mgmt. techniques

Answer 44

To manufacture the product at the lowest possible cost while maximizing customer value in the fastest time possible.

Question 45

Identify benefits of lean resourcese

Answer 45

* Avoids machine downtimes * Reduced inventory costs * Simplification of manufacture of complex good * Increased ROI * Enhanced customer satisfaction * Efficient distribution * Improved supplier relationship

Question 46

Explain the various benchmarking comparisons

Answer 46

Internal benchmarking is a comparison of a business process to a similar process inside the organization. Competitive benchmarking is a direct competitor-to-competitor comparison of a product, service, process, or method. Functional benchmarking is a comparison to similar or identical practices within the same or similar functions outside the immediate industry. Generic benchmarking broadly conceptualizes unrelated business processes or functions that can be practiced in the same or similar ways regardless of the industry.