EXAM 2- Ch. 4 & 7 (2/29)

Question 1

Product (manufacturing) cost:

Answer 1

ANY cost the company incurs to acquire raw materials and convert it into a product

Ex: aluminum, glass, etc.

Question 2

2 types of product (manufacturing) costs

Answer 2

Direct Materials and Direct Labor

DM and DL

Question 3

Direct Materials:

DM

Answer 3

materials easily and directly identified/traced to the final product

the main ingredients

Question 4

Direct Labor:

DL

Answer 4

wages paid to the workers that transform direct materials into a finished product

easily traceable!!

the salary paid to those that actually work directly on the product

Question 5

Manufacturing Overhead:

MOH

Answer 5

all the manufacturing costs that CANNOT be easily traced to the product

anything that happens in the factory that isn’t DM or DL

think: electricity, security guards, insurance, supervisors (consists of both indirect materials and indirect labor!)

Question 6

Period (nonmanufacturing) cost:

Answer 6

costs asssociated with the selling and administration of the business

basically any cost that’s incurred AFTER the product has been completed

think: shipping (selling & admininistrative expenses)

Question 7

period costs are expensed when

Answer 7

incurred

Question 8

product costs become an expense when

Answer 8

they are sold

think: cost of goods sold (COGS)

Question 9

for manufacturing companies, there are 3 types of inventory:

Answer 9

raw materials, work in process, and finished goods

RM, WIP, and FG

Question 10

raw materials:

RM

Answer 10

the cost of everything that’s not yet started

includes DM (direct materials) and IM (indirect materials)

ex. of IM (indirect materials) would be oil and grease to repair machines

Question 11

work in process

WIP

Answer 11

the cost on the literal assembly line/all products started but not yet complete

consists of DM used, DL and applied OH

Question 12

finished goods

FG

Answer 12

product that is complete and ready for sale

final inventory account

Question 13

for merchandising companies, only 1 type of inventory:

Answer 13

finished goods

they don’t go through the entire manufacturing process

they buy from manufacturing companies and then sell it

Question 14

total manufacturing costs=

TMC

Answer 14

DM + DL + MOH + WIP during the period (excludes beginning WIP)

Direct Materials+Direct labor+Manufacturing overhead+Work in process

Question 15

cost of goods manufactured=

COGM

Answer 15

the cost of everything that’s finished during the period (regardless of when started)

Question 16

product costs are capitalized to inventory..

Answers the question: “Are product or period costs “inventoriable”?

Answer 16

& not expensed until sold

expensed when sold=COGS

Question 17

job order costing

Answer 17

products are manufactured in batches/jobs and product costs are accumulated for each batch/job

used when dealing with products that are unique, custom or distinct

Question 18

3 costs found on the job cost sheet:

Answer 18

DM, DL and MOH

also found in the WIP account!

Question 19

overhead application

Answer 19

dividing or allocating overhead to various jobs

Question 20

applied/allocated/assigned overhead

Answer 20

the amount of overhead allocated to each job

Question 21

predetermined overhead rate=

POHR

Answer 21

estimated total MOH/estimated total allocation base

*the allocation base will likely be given (ex: machine hours, MH)

Question 22

Applied MOH=

Answer 22

POHR x ACTUAL allocation base

Question 23

3 common allocation bases (denominators)

Answer 23

-total est. DLH (direct labor hours)
-total est. DLC (direct labor costs)
-total est. MH (machine hours)

however, a company can use any item that’s common to all goods/services

Question 24

journal entry for purchase of RM:

Answer 24

-debit raw materials/inventory
-credit cash/acc. receivable

Question 25

journal entry for placing RM into production (all direct):

Answer 25

-debit work in progress (WIP)
-credit raw materials inventory

Question 26

journal entry for direct labor cost:

Answer 26

-debit WIP
-credit cash/salaries and wages payable

Question 27

journal entry for MOH-incurred:

Answer 27

-debit MOH
-credit acc. depr.
-credit RM/Inventory
-credit cash/S&W payable
-credit cash/ acc. payable

Question 28

journal entry for MOH-applied:

Answer 28

-debit WIP
-credit MOH

Question 29

journal entry for when goods are completed:

Answer 29

-debit finished goods/inventory
-credit WIP

Question 30

journal entry for when goods are sold:

Answer 30

-debit cash/acc. receiv.
-credit sales revenue
AND
-credit COGS
-debit FG

Question 31

journal entries for non-manufacturing (period) costs:

think: depr. on equip, paying salesmen, advertising

Answer 31

-debit: depr. exp
-credit acc. depr.
OR
-debit s&w exp
-credit s&w payable
OR
-debit advertising exp
-credit cash/acc. payable

Question 32

traditional costing

Answer 32

typically use one allocation base

ex: machine hours, direct labor hours, direct labor costs

Question 33

activity based costing

Answer 33

typically use multiple “allocation bases” or activities to assign the overhead costs

Question 34

5 steps to implement activity-based costing:

Answer 34

1. identifiy activities
2. develop activity cost pools
3. calculate activity cost pool rates (AR)
4. allocate costs to products/services
5. calculate unit product costs

Question 35

costs are typically divided into these 5 cost pools:

step 2

Answer 35

unit level, batch level, product level, customer level and organization level

Question 36

unit level:

Answer 36

incurred per production of a single product. Each unit of a particular product requires the same level of activity, and thereby, consumes the same amount of resources that provide the activity

ex: labor, supplies

Question 37

batch level:

Answer 37

incurred by a group of similar products (like a machine set up)

consumes the same amount of resources if there are 200 or 20 in a batch

ex: forklift

Question 38

product level:

Answer 38

incurred by the development, production and acquisition of a product and support the products or services a company provides

performed for entire product line, regardless of how many units/batches produced (ex: design or pattern)

Question 39

customer level:

Answer 39

related to specific customers and does NOT affect product costs

ex: sales calls, catalogs

Question 40

organization level:

Answer 40

required to provide productive capacity and to keep the business running

carried out regardless of customers or production

ex: accounting, management salaries, property taxes

Question 41

activity rate=

AR

Answer 41

est. MOH/total cost driver

*calculated on a company-wide basis!

Question 42

allocated cost=

AC

Answer 42

activity rate x activity driver consumption

AR x ADC

*this step is product specific!

Question 43

MOH/unit=

Answer 43

total MOH/# units produced

Question 44

total product cost=

Answer 44

MOH+DM+DL

Question 45

activity based costing will typically shift costs from

Answer 45

high volume (standard) products to low volume (complex) products

b/c more complex products usually consume more activities per unit than standard products

Question 46

machine setup pool is based on

Answer 46

the number of setups, not on number of units produced

*this is an example of a batch level activity, not a unit level activity!

Question 47

value-added activities:

Answer 47

activities that create the product the consumer wants to buy

Question 48

non-value-added activities:

Answer 48

activities that consume resources but don’t contribute to the value of the product