Domain IV − Financial Management - Section B.2 Costing Systems

Question 1

Process costing

Answer 1

is a costing system for firms that employ assembly line

production with a continuous flow of goods (e.g., oil refining and steel production).

Question 2

Equivalent units (EU)

Answer 2

are units in the WIP that are theoretically converted to equivalent units of finished goods (e.g., if there are 10,000 units in the WIP that are 30% complete, they would be considered equivalent to 3,000 units of completed units).

Question 3

Job‐order costing

Answer 3

is a costing system that accumulates costs for production on a job‐by‐job basis. A job would be defined by management and may be a customer, an order, a batch, etc.

Question 4

Job‐order costing

Answer 4

is typically used when distinct and identifiable products or services are produced that are usually customized for the customers.

Question 5

Process costing

Answer 5

is typically used when masses of identical or similar products or services are produced that are the same for all customers.

Question 6

Operation costing

Answer 6

is a hybrid of process costing and job‐order costing.

• Operation costing is used when a batch of similar units are processed in the same manner, however, using different components.
• Operation costing typically allocates the costs of direct materials using job‐order costing and uses process costing for allocating conversion costs.

Question 7

Backflush Costing

Answer 7

is a costing system usually associated with a just‐in‐time inventory system whereby costs are accumulated once production is complete.
- Backflush costing is usually used when tracking WIP is insignificant and the production life‐cycle is short.

Question 8

Activity‐Based Costing (ABC) (transaction‐based costing)

Answer 8

is a cost accounting system that accumulates costs for identified activities in the manufacturing process.
A cost driver would be associated with each activity, and costs are accumulated for each activity and allocated to the products passing through that activity.

Question 9

Variable (Direct) Costing

Answer 9

allocates to inventory products only variable costs of production. Fixed costs are deemed period costs and therefore expensed accordingly.

• While it is not acceptable under GAAP, the variable costing method is useful for management to calculate the contribution margin and breakeven and emphasize contribution in short‐term pricing decisions.
• The balance sheet effect of using variable costing is that inventory is always understated.
• The income statement effect of using variable costing is that net income is either overstated or understated depending on whether the inventory levels during the year increases or decreases.