Cost Measurment Methods And Techniques

Question 0

What is the focus of cost objectives?

Answer 0

Cost control: cost comparison to standards and budget

Question 1

What are cost objects?

Answer 1

Resources or activities that serve as the basis for management decisions. It requires separate cost measurement.

Question 2

Can a single cost object have more than one measurement?

Answer 2

Yes, inventory costs for f/s are usually different from cost reported for tax purposes.

Question 3

What is prime cost?

Answer 3

Direct materials + direct labor

Question 4

What is conversion costs?

Answer 4

Direct labor + overhead applied

Question 5

What is product costs?

Answer 5

All cost related to the manufacturing of the product- not expensed until product is sold- matching principle.
They are inventoriable ( considered as asset before the product is sold) and consist of direct materials, direct labor, manufacturing overhead applied.

Question 6

What is period costs?

Answer 6

Income statement only- expensed in the period I which they are incurred and are NOT inventoriable
Expenses: include selling and admin expenses, interest expenses.
Components: selling the product and administering and managing the operations of the firm

Question 7

What are manufacturing costs?

Answer 7

Include all costs associated with the manufacturing of a product
Inventory and cost of goods manufactured and sold & both direct and indirect costs

Question 8

What are direct costs?

Answer 8

Prime= direct materials + direct labor

Question 9

What are indirect costs?

Answer 9

Overhead= indirect materials + indirect labor + Factory costs

Question 10

What are the most frequent objectives for cost accounting?

Answer 10

PIE
P- product costing ( inventory and cost of goods manufactured and sold)
I- income determination ( profitability)
E- efficiency measurements (comparisons to standards)

Question 11

What are the three ways to trace costs to cost objectives?

Answer 11

Direct costs
Indirect costs
Overhead allocations using cost drivers

Question 12

What are direct costs?

Answer 12

Easily traced

1. Direct raw materials: cost of materials purchased to be used in production ( including freight in)+ reasonable amount for normal scraps
2. Direct Labor: directly related to the production of the product or the performance of a service + reasonable amount of expected down time for labor.

Question 13

What are the two areas associated with indirect costs?

Answer 13

In the factory- manufacturing overhead ( product costs)

In the office building- SG& A (period costs)

Question 14

What are indirect materials costs?

Answer 14

Factory overhead- Materials that were not used specifically or could not be traced to the completed product with ease.

Question 15

What are indirect labor costs?

Answer 15

Factory overhead- Cost of labor that is not easily traceable to a particular product, service, etc. this type of labor supports the manufacturing process but does not work directly on the specific job.

Question 16

When Traditional costing is used, the application of overhead is accomplished in two steps. What are the two steps? ** important to memorize**

Answer 16

1. Calculated overhead rate= budgeted overhead costs➗ estimated cost driver
2. Applied overhead= actual cost driver ✖ overhead rate (step 1)

Question 17

What is cost behavior?

Answer 17

The degree to which the costs are either fixed or variable

Question 18

What are variable costs?

Answer 18

Behavior: change total proportionally with the cost driver
Amount: change in total, but remain constant per unit
Long- run characters: the range of production over which cost behavior assumptions are valid.

Question 19

What are fixed costs?

Answer 19

Behavior: cost does not chance when the cost driver does
Amount: constant in total, but vary per unit
Long-run characteristics: given enough time any cost can be considered variable.

Question 20

What is semi- variable costs?

Answer 20

Mixed costs- both fixed and variable components

Ex: manufacturing overhead

Question 21

What is cost accumulation systems?

Answer 21

The manner in which the accounting system assigns costs to products.

Question 22

What are the four main cost accumulation systems that are tested on the CPA exam?

Answer 22

Job cost: cost object is a custom order
Mass-produced: process costing is used
Operations costing: uses both job order & process costing
Back flush costing: used at the end of the process for valuation of the entire process

Question 23

What is cost of goods manufactured?

Answer 23

The manufacturing costs of the products completed during the period.

Question 24

How to calculate direct material used?

Answer 24

Beginning raw materials
\+ net purchases
-—————————
Material available
- ending raw material
-—————————
Raw (direct) material used

Question 25

How to calculate cost of goods manufactured?

Answer 25

Work in process inventory, beginning
\+ direct material used
\+ direct labor
\+ manufacturing overhead applied
-————————————————
Total manufacturing costs available
- work in process inventory, ending
-————————————————
Cost of goods manufactured (completed this period)

Question 26

What is the cost of goods sold?

Answer 26

Very similar to one prepared for a retailer except that cost of goods manufactured is used in place of purchases

Question 27

How to calculate the cost of goods sold?

Answer 27

Finished goods inventory, beginning “retailer”
+ cost of goods manufactured (or net purchases)
-——————————————————————
Cost of goods available for sale
- finished goods inventory, ending
-——————————————————————
Cost of goods sold ( which is located in the income statement)

Question 28

What is job order costing? See page B1-44 for a picture overview

Answer 28

Part of cost accumulation system.
Used when there are relatively few units produced and when each unit is unique or easily identifiable.
Cost is allocated to a specific job as it moves sequentially through the manufacturing process

Question 29

What is process costing?

Answer 29

A method of product costing that average costs and applies them to large numbers of homogeneous items.

Question 30

What ate the five steps in the central product costing issue in process costing environments?

Answer 30

1. Summarize the floe of physical units (beginning with the production report)
2. Calculate “equivalent unit” output
3. Accumulate the total costs to be accounts for (product report)
4. Calculate the unit costs based on total costs and equivalent units
5. Apply the average costs to the units completed and the nits remaining in ending work in process inventory.

Question 31

What is equivalent units?

Answer 31

An equivalent unit of direct material, direct labor, or conversion costs (direct labor plus factory overhead) is equal to the amount of direct material, direct labor, or conversion costs necessary to complete one unit of production.

Question 32

What is cost flow assumptions?

Answer 32

Cost averaging computations depend upon FIFO and / or weighted (or moving) average cost flow assumptions.

Question 33

What is the calculation of cost flow assumptions using FIFO?

Answer 33

Calculation:
beginning WIP ✖ % to be completed
+ units completed - beginning WIP
+ ending WIP ✖ % completed

Three components:
1- completion of units on hand at the beginning of the period
2- units started a d completed during the period ( units completed- beginning WIP)
3- units partially completed at the end of the period

Question 34

What is the calculation using the weighted average for cost fl ow assumptions?

Answer 34

Calculation:
Units completed
+ ending WIP ✖ % completed

The equivalent units are compose of two elements:
1- units completed during the month (regardless of when the work was done)
2- units partially complete at the end of the period

Question 35

How do you calculate the Weighted average per unit?

Answer 35

Beginning cost + current cost
-——————————————————————
Weighted average equivalent units of production

Question 36

How do you calculate the FIFO cost per unit?

Answer 36

Current cost (only)
-————————
FIFO equivalent units of production

Question 37

What is Normal spoilage and where is it located?

Answer 37

Inventory cost
Regular operating conditions
Included in the standard cost
Found on the balance sheet

Question 38

What is abnormal spoilage and where is it located?

Answer 38

Period expense
Found on the income statement
Period expense
Should not occur under normal operating conditions & should not be included in the standard cost

Question 39

What is a cost driver?

Answer 39

A factor that has the ability to change total costs

Question 40

What is a cost pool?

Answer 40

A group of costs or specially defined cost center in which costs are grouped assigned or collected.

Question 41

What are the characteristics of activity based costing? (ABC)

Answer 41

More focus and detail approach for gathering costs. Multiple causes and effects and then assigned cost to them.

Question 42

Another name for ABC?

Answer 42

Transaction based costing

Question 43

What is managements focus with ABC?

Answer 43

Value chain- direct cost

Non value added activities - surplus inventory

Question 44

What are the advantages of ABC?

Answer 44

Removes cost distortion caused by traditional, volume based overhead systems.
Applies high amounts of overhead to a product that places high demands on expensive resources.

Question 45

What is join product costing?

Answer 45

Outputs of significant value that are the object of a manufacturing process.

Question 46

What are the two types of joint products?

Answer 46

1. Allocation by unit volume relationship
2. Relative net realizable values at split off
   - sales price quotations available at split-off (no separate costs)
   - sales values not available at split-off (must consider separable costs to finish)

Question 47

What do by products represent?

Answer 47

Outputs of relatively minor value tat are incidental to a manufacturing process.
They can be applied to the main product or miscellaneous income.