Cost Measurement and Assignment

Question 1

Cost Measurement and Assignment

State the relationship between variable costing (VC) income and absorption costing (AC) income.

Answer 1

Cost Measurement and Assignment

Sales=Production (no change in inventory) No diff in income

Sales > Production (inv decreases) VC inc > AC inc

Sales

Question 2

Cost Measurement and Assignment

Define Conversion Cost

Answer 2

Cost Measurement and Assignment

Conversion Cost = DML + Applied Factory Overhead

Question 3

Cost Measurement and Assignment

Define Prime Costs

Answer 3

Cost Measurement and Assignment

Prime Costs = Direct Materials + Direct Labor

Question 4

Cost Measurement and Assignment

State the difference between product cost and period cost

Answer 4

Cost Measurement and Assignment

Product cost- cost that attaches to the physical units
(Direct materials, direct manufacturing labor, manufacturing overhead)

Period cost - does not attach to the physical units

Question 5

Cost Measurement and Assignment

Define Total Cost (WIP balance)

Answer 5

Cost Measurement and Assignment

Total Cost= Direct Labor + Direct Materials + MOH

Question 6

Cost Measurement and Assignment

Define on how to determine the Fixed Cost Component from the High - Low Method.

Answer 6

Cost Measurement and Assignment

Fixed Cost Component= Total Costs (High)- Var Costs (Low)

Question 7

Cost Measurement and Assignment

Define the High- Low Method

Answer 7

Cost Measurement and Assignment

High Low Method- Computes the slope for the variable rate based on the highest and lowest observations.

Slope= Change in COST between high and low points / Change in activity between high and low points

Question 8

Cost Measurement and Assignment

Describe the Direct Method allocation of costs

Answer 8

Cost Measurement and Assignment

Direct Method allocation of costs

Service Department costs are allocated directly to the producing departments based on RELATIVE services provided. SERVICES to other SERVICE departments are ignored.

Question 9

Cost Measurement and Assignment

Define Throughput Contribution

Answer 9

Cost Measurement and Assignment

Throughput Contribution = Revenue - Direct Materials per unit

Question 10

Cost Measurement and Assignment

Define Cost of Goods Sold (Manufacturing Firm)

Answer 10

Cost Measurement and Assignment

Beginning Finished Goods
 Add:   Cost of Goods Manufactured
     BEG WIP
\+  Raw materials used (Beg Raw Mat+ Rw Mat Pur- ERW)
\+ Direct Manufacturing Labor
\+ Factory Overhead
- Ending WIP

Less: Ending Finished Goods

Equals : Cost of Good Sold (COGS)

Question 11

Cost Measurement and Assignment

True or False
Conversion Costs are the costs of converting direct materials into finished products.

Answer 11

Cost Measurement and Assignment

True
Conversion Costs are the costs of converting direct materials into finished products.

Question 12

Cost Measurement and Assignment

True or False
In conversion cost, only direct manufacturing labor is included.

Answer 12

Cost Measurement and Assignment

False
In conversion cost, direct manufacturing labor AND manufacturing overhead is included.

Question 13

Cost Measurement and Assignment

Define Applied Variable Overhead

Answer 13

Cost Measurement and Assignment

Applied Variable Overhead = (Estimated variable OH costs)/ (Estimated actual activity level)

Question 14

Cost Measurement and Assignment

Define Applied Fixed Overhead

Answer 14

Cost Measurement and Assignment

Applied Fixed Overhead= (Estimated fixed OH costs) / (Normal capacity)

Question 15

Cost Measurement and Assignment

Describe the Reciprocal method

Answer 15

Cost Measurement and Assignment

Reciprocal Method - Uses simultaneous equations to allocate costs to production departments, resulting in the most accurate allocation of costs when service departments provides services to other service departments.

Question 16

Cost Measurement and Assignment

Define the Step Method

Answer 16

Cost Measurement and Assignment

Step Method - Allocates service department costs to other service departments as well as the production departments, starting with the service departments that provide the most services to other service departments.

Question 17

Cost Measurement and Assignment

Define Direct Labor Usage (DLU)

Answer 17

Cost Measurement and Assignment

DLU = Standard Labor Rate x (Act. Hours- Std. Hours)

Question 18

Cost Measurement and Assignment

Define Traditional Costing

Answer 18

Cost Measurement and Assignment

Traditional Costing- Uses only variable and fixed or total overhead costs pools and allocates costs based on overall measures (DLH, DMH)

Question 19

Cost Measurement and Assignment

Define Activity Based Costing (ABC)

Answer 19

Cost Measurement and Assignment

Activity Based Costing

1) Activities consume resources and resources are consumed
2) Allocates OH costs to products on the basis of the resources consumed by each activity involved in design, production, and distribution of product.

Question 20

Cost Measurement and Assignment

List the advantages of Activity Based Costing (ABC)

Answer 20

Cost Measurement and Assignment

Advantages of ABC

1) Cost drivers: those activities that have a direct cause/ effect relationship to the incurrence of a particular cost.
2) Results in a more precise determination of product costs than traditional costing methods.
3) Better pricing and production decisions by management.

Question 21

Cost Measurement and Assignment

What are the important aspects of a good cost system?

Answer 21

Cost Measurement and Assignment

Importance of a good cost system

1) Cost system should reflect accurately the costs of production.
2) Cost information influences pricing, inventory levels, and allocation of productive resources
3) Direct method inaccurate when service departments provide significant amounts of services to other service departments.
4) Consider the use of step method or reciprocal method.

Question 22

Cost Measurement and Assignment

Describe the Net Realizable Value (NRV) method for joint costs.

Answer 22

NRV method for joint costs

ALLOCATE joint costs using the ESTIMATED SALES VALUES of the joint products after further processing, LESS the seperable processing costs.

Question 23

Cost Measurement and Assignment

Describe the FIFO method for determining Equivalent Units of Production (EUP)

Answer 23

FIFO method for determining Equivalent Units of Production (EUP)

Units Completed (units started and completed) - Equivalent Units in BI + Equivalent Units in EI = Equivalent unites using FIFO

Question 24

Cost Measurement and Assignment

Calculating FIFO EU (Method 1)

Answer 24

Calculating FIFO EU (Method 1)

Work to Complete BWIP
+ Units started and Completed
+Work to Date EWIP
= Equivalent Units (FIFO)

Question 25

Cost Measurement and Assignment

Calculating FIFO EU (Method 2)

Answer 25

Calculating FIFO EU (Method 2)

Work to complete BWIP
+ Units started
- Work to complete EWIP
= Equivalent Units (FIFO)

Question 26

Cost Measurement and Assignment

What are the two methods to account for Units to Account for?

Answer 26

Cost Measurement and Assignment

Two Methods to account for Units to Account for.

Method 1
BWIP + Units Started = Units to Account for

Method 2
Units Completed + EWIP = Units Accounted For

Question 27

Cost Measurement and Assignment

Describe the steps for Process Costing (FIFO/ Weighted Average)

Answer 27

Cost Measurement and Assignment

Process Costing (FIFO/ Weighted Average)

1. Visualize the physical flow of units
2. Compute the equivalent units of production
3. Determine the costs allocate
4. Compute unit costs
5. Allocate total costs to Goods Completed and Ending WIP

Question 28

Cost Measurement and Assignment

Describe the Relative Sales Value at split - off

Answer 28

Cost Measurement and Assignment

Relative Sales Value at Split Off

The sales price at point of sale reduced by cost to complete after split-off

Question 29

Cost Measurement and Assignment

Describe the Absorption method income statement

Answer 29

Cost Measurement and Assignment

Absorption method income statement

Sales
- Cost of goods sold (includes Fixed MOH)
= Gross Profit (margin)
-Sales and admin expenses
= Operating Income

Question 30

Cost Measurement and Assignment

Describe the Variable Costing Income Statement

Answer 30

Cost Measurement and Assignment

Variable Costing Income Statement

Sales
- Variable Expenses
= Contribution Margin
-  Fixed Expenses (includes Fixed MOH)
= Operating Income

Question 31

Cost Measurement and Assignment

Describe Equivalent Units of Production - FIFO

Answer 31

Cost Measurement and Assignment

Equivalent Units of Production - FIFO

Completed Units
+ Equivalent Units Ending Inventory
- Equivalent Units Beginning Inventory
= Equivalent Units of Production (FIFO)

Question 32

Cost Measurement and Assignment

Describe Equivalent Units of Production- Weighted Average

Answer 32

Cost Measurement and Assignment

Equivalent Units of Production- Weighted Average

Completed Units transferred to the next department
+ Equivalent Units in ending WIP inventory
= Equivalent Units of Production (Weighted Average)

Question 33

Cost Measurement and Assignment

Weighted-average method of process costing in the computation of manufacturing cost per equivalent unit considers:

Answer 33

Weighted-average method of process costing in the computation of manufacturing cost per equivalent unit considers:

Current Costs + cost of beginning WIP inventory

Question 34

Cost Measurement and Assignment

Describe the step method

Answer 34

Step Method

1. Figure which services are allocated first.
2. Connect the operating data with the service departments.
3. Perform first allocation using all operating data.
4. Perform allocation using only operating data from production departments AND ADDING SERVICE TO SERVICE COST TO THE BASE.

Question 35

Cost Measurement and Assignment

Describe Weighted Average Method (to determine cost per equivalent unit)

Answer 35

Equivalent units of production and cost per unit are based on all work (this periods and last periods) done on units completed PLUS all work done to date on the unit in EWIP.

1. Calculate Equiv Units (Units completed +EWIP)
2. Calculate Cost of Materials (Beg WIP + Units Started)
3. Total Costs incurred divided by Equivalent Units of Production = Cost per Equivalent Unit

Question 36

Cost Measurement and Assignment

Describe the difference between the weighted average method versus the FIFO method

Answer 36

Difference between the weighted average method versus the FIFO method.

Weighted Average- Determines EUP based on the work done on the units in ALL periods.

FIFO method- Uses only the work done in the current period.

Question 37

Cost Measurement and Assignment

Describe the Equivalent unit cost of materials using FIFO method

Answer 37

Equivalent unit cost of materials using FIFO method

Cost of materials used during the month/ # of equivalent units of production.

Question 38

Cost Measurement and Assignment

Joint Products- Sales Value @ Split Off

Answer 38

Product Sales Value @ Split Off Ratio x Joint Costs = Allocated JC
X1 $4,000.00 4000/5000 x $3,000.00 = $2,400.00
Y1 $1,000.00 1000/5000 x $3,000.00 = $600.00
Total $5,000.00 $6,000.00 $3,000.00

Question 39

Cost Measurement and Assignment

Describe the difference between By- product treatment vs. Joint Product treatment.

Answer 39

By- Product- the selling costs is netted against the selling price thus reducing gross margin

Joint- Product- selling cost would be deducted below the gross margin as a selling expense.

Question 40

Cost Measurement and Assignment

What is the predetermined OH rates for Variable OH costs?

Answer 40

Variable OH= Est. variable OH costs/ Estimated actual activity costs

Question 41

Cost Measurement and Assignment

What is the predetermined OH rates for Fixed OH costs?

Answer 41

Fixed OH= Est. fixed OH costs/ Normal capacity

Question 42

Cost Measurement and Assignment

Describe the value of by- products in the Production method.

Answer 42

Value of by- products in the Production method.

The NRV of the by- products produced is deducted from the cost of major products PRODUCED.

Question 43

Cost Measurement and Assignment

Describe the value of by- products in the Sale method.

Answer 43

Value of by- products in the Sale method.

Net revenue from by- products sold (gross revenue from by-product sales minus separable costs incurred) is deducted from the cost of major products SOLD.