Cost measurement methods and techniques Flashcards
Name the three components of Product Cost and identify which of these components are categorized as Prime Cost and Conversion Costs.
Direct Materials (DM) Direct Labor (DL) Manufacturing Overhead (MO) Prime Cost = DM+DL Conversion Costs = DL + MO
Distinguish between product and period cost
Product Costs- Inventoriable; they become cost of goods sold when sold
Period Costs- Expensed in the period incurred as they are not inventoriable.
Name the Three most frequent objectives of an entity’s cost accounting system(s)
- Product costing(inventory and cost of goods manufactured and sold)
- Efficiency measurements(comparison to standards)
- Income determination (profitability)
Determine the traditional overhead rate
Traditional overhead rate= budgeted manufacturing overhead costs/ Estimated cost driver
Define relevant range
The relevant range is the range of volume for which the assumptions of the cost driver (i.e. linear relationship with the costs incurred) are valid and in which the actual value of the cost driver exists.
Compare and contrast the direct method and step-down method for allocating service costs in activity-based costing
Under the Direct Method, each department’s total costs are directly allocated to the production departments without recognizing that the service departments themselves may use the service from other service department
Under the Step-Down Method, a sequential approach is used to allocate service department costs to production departments as well as other service departments
With joint products, what is the treatment of costs incurred before the split-off point?
Costs incurred before the split-off point are sunk costs, not relevant to further processing decisions.
Joint costs are allocated by an arbitrary means such as by unit volume relationships or relative net realizable values as the split-off point
What is the formula for cost of goods manufactured?
Work in Progress (WIP)-beginning Add: Direct Materials (DM) -Direct Labor (DL) -Manufacturing Overhead(MO) Less: WIP (Ending) =Cost of Goods Manufactured
What is the formula for cost of goods sold?
Manufacturing Entity- Finished Goods(Beginning) Add: Cost of Goods Manufactured Less: Finished Goods (Ending) =Cost of Goods Sold
Alternative Formula- Beginning Inventory Add: Purchases Less: Ending Inventory =Cost of Goods Sold
What is the difference between Job and Process Costing
Job Costing - With Job Costing, each unit/batch is unique and easily identifiable costs are determined by each job
Example: We print your resume in our print shop
Process Costing - With Process Costing, continuous mass-produced identical units are manufactured, and costs are determined by activity/department.
Example: We process crude oil into Gasoline
What is an equivalent unit and how are the costs applied?
Used in process costing, equivalent units are fully completed and partially completed units during the period.
In apply costs, determine the units, then costs, then apply the cost flow assumption for cost per unit and allocation of costs.
How are equivalent units and total cost calculated using the FIFO method?
Equivalent Units = (Beginning WIP x % to be completed) + units started and completed + (Ending WIP x % completed)
Total Costs = Cost incurred during the current period
How are equivalent units and total cost calculated using the weighted average method?
Equivalent Units = Units completed and transferred out + (Ending WIP x % completed)
Total Costs = Costs in beginning WIP + Costs incurred during the current period
Name the Types of Spoilage and indicate the appropriate accounting treatment
Abnormal: Charge to income of the current period
Normal: Increase the cost of the product produced (i.e., Inventory)
Define Activity-Based Costing (ABC)
ABC is a costing theory that assumes that resource consuming activities cause costs and that costs should be assigned to benefiting products based on the activities performed and the resources consumed
ABC systems often divide costs into multiple activity centers and identify the activities that drive the costs in each cost center. Costs are then assigned based on the volume of cost drivers and the determined rate per cost driver.
