Decision Making

Question 1

Total Cost Equation

Answer 1

TC = Fixed + Var (x) RELEVANT RANGE

1) TC = Dependent variable
2) Fixed = constant at any volume (fixed in total, variable per unit)
3) Var = variable cost (variable in total, fixed per unit)
4) X = volume/independent variable (cost driver)

Question 2

Mixed Cost

Answer 2

Semi-variable (fixed and variable component)

Question 3

High-Low Method

Answer 3

1) Figure out slope of the variable component based on highest and lowest observations
2) Take highest - lowest cost/difference in activity at those points
3) Intercept - where slope crosses Y axis

Question 4

Cost Classifications (Product Costs)

Answer 4

Product costs are matched to product and not expensed until product is sold

1) Direct materials - materials physically included in final manufactured product (normal spoilage included)
2) Direct labor - wages paid to employees working with the direct materials to change them from raw state to finished goods
3) Overhead - all other costs related to manufacturing (indirect materials and indirect labor)

Question 5

Prime Costs

Answer 5

Direct materials + direct labor

Question 6

Conversion Costs

Answer 6

Direct labor + overhead

Question 7

Period Costs

Answer 7

Expensed in the period incurred

1) Non-manufacturing costs
2) SG&A
3) Marketing, freight-out, re-handling costs
4) Abnormal spoilage

Question 8

Cost Systems

Answer 8

1) Actual cost system
2) Standard cost system - all costs based on standards
3) Normal cost system - (DM & DL based on actual, MFG O/H based on standards)

Question 9

Predetermined Overhead Rate

Answer 9

Estimated OH costs/Estimated DL $/hr =

Predetermined OH rate X actual production =

Applied OH into WIP

Debit: WIP Control
Credit: Factory OH Applied

Actual OH

Debit: Factory OH Control
Credit: Cash

Underapplied/Overapplied (Factory OH Applied & Control are closed out at the end of the period)

Debit: Factory OH Applied
Debit: COGS (plug) or Credit: COGS if overapplied
Credit: Factory OH Control

Question 10

Flow of a Cost System (Cost of Sales calculations) (Merchandising Company)

Answer 10

BI + Purchases = COGAFS - EI = COGS

Question 11

Flow of a Cost System (Cost of Sales calculations) (Manufacturing Company)

Answer 11

1) Raw Materials –> WIP –> Finished Goods –> COGS
2) Raw materials

Beg RM + Purchases = Available - Ending RM = Materials Used (DM used)

3) WIP

Beg WIP + DM Used + DL + Applied Mfg OH (from the WIP Control debit entry from applied OH) = WIP Avaliable - Ending WIP = Cost of Goods Manufactured/Completed (COGM)

4) Finished Goods

Beg FG + COGM = FG Available - Ending FG = COGS

5) COGS

COGS + Underapplied - Overapplied (based on difference between Factory OH applied and control entries closed out) = COGS

Question 12

Most Common Base Selected

Answer 12

1) Direct labor hours ($ applied per direct labor hour)
2) Direct labor dollars (% of direct labor dollars)
3) Machine hours

Question 13

Absorption/Full Costing/GAAP

Answer 13

Sales 
(Var COGS)
(Fix COGS)
= Gross Margin
(Var SGA)
(Fix SGA)
= Operating Income

1) Under absorption, the fixed mfg overhead for whatever units aren’t sold are absorbed into inventory as product costs (or are expensed in the period in which the units to which fixed overheadhas been applied are sold)
2) Production > Sales = Higher operating income under absorption
3) Production < Sales = Lower operating income
4) Income difference will be number of units produced not sold x fixed overhead per cost driver

Question 14

Direct/Variable/Prime/CM/Internal Costing

Answer 14

Sales
(Var COGS)
(Var SGA)
= Contribution Margin (CM)
(Fix Mfg Costs)
(Fix SGA)
= Operating Income

1) Fixed overhead is a sunk cost and is expensed in period incurred
2) Under both methods, DM, DL, and V OH are inventoriable costs
3) F OH included in absorption but not Variable

Question 15

Cost-Volume-Profit (Break-Even in Units)

Answer 15

(FC + Profit/Loss)/(SP - VC(CM))

1) Break even when FC = CM
2) The SP - VC(CM) here is CM per unit
3) To find units at desired profit/loss is when you add or subtract profit or loss

Question 16

Cost-Volume-Profit (Break-Even in Sales Dollars)

Answer 16

(FC + Profit/Loss)/CM Ratio (cm/sales price)

1) CM ratio is CM expressed as a percentage of sales
2) Can also find break-even units and multiply by sales price per unit
3) To find units at desired profit/loss is when you add or subtract profit or loss (in this case, it is the desired return on sales, express as a percentage of sales x sales needed for that return)

(FC + % of sales x sales) / CM ratio = sales (sales is the x variable)

Question 17

Margin of Safety

Answer 17

Total sales - break even sales = margin of safety

1) Amount by which sales can drop before losses begin to be occurred
2) If operating at a profit and experience increase in costs (VC and/or FC) –> break-even point increased and margin of safety decreases

Question 18

Standard Costing

Answer 18

1) Standard cost (DMPV)
2) Standard quantity (DMUV)
3) Standard rate (DLRV)
4) Standard hours (DLEV)
5) Predetermined overheadrate (SFR)

SQ X SP = Standard allowed for actual production

Question 19

Variance Analysis (DM)

Answer 19

1) DM Price Variance (purchasing) = AQ (SP - AP)

2) DM Usage Variance (production) = SP (SQ - AQ)

Question 20

Variance Analysis (DL)

Answer 20

1) DL Rate Variance (personnel) = AH (SR - AR)

2) DL Efficiency Variance (production) = SR (SH - AH)

Question 21

Overhead Variances (OA)

Answer 21

Overhead Applied = SDLH (at actual) x POHR

Question 22

Overhead Variances (OSV)

Answer 22

Overhead Spending Variance = (ADLH x PVOHR + Budgeted FO) - Actual OH (or FBE @ Actual - Fixed OH @ Actual)

Question 23

Overhead Variances (OEV)

Answer 23

Overhead Efficiency Variance = PVOHR x (SDLH - ADLH) (or variable parts of FEB @ Standard - FEB @ Actual)

Question 24

Overhead Variances (OVV)

Answer 24

Overhead Production Volume Variance = (SDLH x PFOHR) - Budgeted FO (or fixed part of Applied - Budgeted FO)

Question 25

Types of Variance Methods

Answer 25

1 variance method (Net OH variance)
2 variance method - Budget (controllable - both)/Volume (Non-controllable - fixed)
3 Spending/Efficiency/Volume
4 Fixed/Variable Spending/Efficiency/Volume

Compare Fixed and Variable OH for:

1) Actual
2) FBE @ Actual
3) FBE @ Standard
4) Applied

Question 26

Costing Systems (Job Order Costing)

Answer 26

1) Expense, heterogeneous

2) Cost per job

Question 27

Costing Systems (Process Costing)

Answer 27

1) Inexpensive, homogeneous

2) Costs per PERIOD

Question 28

Costing Systems (Process Costing - Weighted Average)

Answer 28

1) Total Costs/Total Equivalent Whole Units

Beg Units + Started = Units to account for
- Completed - Spoilage = End
(Completed + End = Units to account for

Multiply Completed, and End x % completed to get equivalent whole units (what did you finish? - doesn’t matter where it came from)

Total costs/Total equivalent whole units = cost/unit

Multiply equivalent whole units at Completed and End to get costs at that level (total should = total costs)

Question 29

Costing Systems (Process Costing - FIFO)

Answer 29

1) Costs incurred THIS PERIOD/Units actually worked on THIS PERIOD)

Get equivalent whole units at Completed by separating total into Beg Units completed and started units completed and multiple by percentage completed THIS PERIOD (For Beg Units, number of units completed x % needed to complete, for the rest, it’ll be 100%)

Equivalent whole units for End is the same as weighted average

Take costs for Started Units only/Total equivalent units = price/unit

Costs at Completed is equivalent whole units of Beg Units x price/unit + equivalent whole units started and completed x price/unit and costs for Beg Units

Costs at End is equivalent whole units x price/unit (same)

Summing these costs should equal total cost

Question 30

Equivalent Production

Answer 30

1) Costs incurred at beginning of period - partially completed units treated as equivalent whole units
2) At specific time during the process - partially completed units treated as 0 whole units until they reach that point and then become whole units
3) At end of process - partially complete treated as 0 whole units until completed
4) Evenly throughout the process - % of completion x # of partially completed units = equivalent whole units

Question 31

Joint Product Costing

Answer 31

1) Two or more products produced together up to a split-off point where they become separately identifiable

2) Get sales value for each joint product = amount produced x sales price/unit
3) Reduced sales value by separable costs = relative sales value at split-off point
4) Take sales value at split-off/total sales value at split-off x joint product costs
5) For by-products:
- Find sales value at split-off and then subtract this from joint costs and allocated between main products (break-even method)
- Treat by-product like main product
- Allocate no costs to by-product