Lecture 2 Flashcards
When is job costing used
Job costing is used when products or services are produced in distinct, individual batches or jobs
Where is job costing typically used
Job costing is typically used in industries where products or services are customized or produced in small quantities
What is cost tracking
Cost tracking is where costs are traced to specific jobs
What are the advantages of job costing
Advantages of job costing are:
- Provides detailed cost information for each job
- Helps in pricing individual jobs accurately
What are the disadvantages of job costing
The disadvantages of job costing are
- Can be labor-intensive to track and allocate costs accurately
- May become difficult to manage for businesses with many jobs at once
When is process costing used
Process costing is used when products are produced in a continuous flow
When is process costing typically used
Process costing is typically used in industries where products are standardized and produced in large volumes
how does process costing track costs
Instead of tracking costs for each job, process costing tracks costs for entire processes or departments over a period of time
What are the advantages of process costing
Advantages of process costing are:
- Easier to apply when production is continuous and uniform
- Costs are accumulated and averaged over large volumes, making it simpler for high-volume operations
What are the disadvantages of process costing
Disadvantages of process costing are:
- Less detailed cost information for individual products
- Difficult to track costs for specific units if products are not distinguishable
What are normal losses
Normal loss are expected or unavoidable loss that occurs during the production process
What are normal losses typically factored into in cost allocation
Normal losses are typically factored into the cost of the good units produced
In accounting what are normal losses absorbed into
Normal loss is absorbed in the cost of production
What are abnormal losses
Abnormal loss refers to losses that are unexpected and not a regular part of the production process
How might abnormal losses occur
Abnormal losses might occur due to accidents, machine breakdowns, human errors, or other irregular factors
How does cost allocation treat abnormal losses
Cost of abnormal loss is treated separately and shown as an expense in the profit and loss account
How does accounting treat abnormal losses
Abnormal losses are usually written off as an expense directly in the profit and loss statement
How do you calculate abnormal and normal losses
To calculate abnormal and normal losses you must:
Step 1: Calculate the Cost per Unit
Step 2: Allocate Costs to Normal Loss
Step 3: Handle Abnormal Loss
Cost per unit =
Cost per unit = Total cost / Total units produced
How does First in First out (FIFO) work
Under FIFO, the first items purchased are assumed to be the first ones sold or used
How does FIFO impact cost of goods sold
Since the older, typically cheaper inventory is sold first, COGS is lower in periods of inflation
How does FIFO impact ending inventory
The inventory on hand is valued at more recent (and typically higher) prices, resulting in a higher ending inventory value
How does FIFO affect profits
FIFO generally leads to higher profits in times of inflation because older, cheaper goods are recorded as the cost of goods sold
What is Last in First out (LIFO)
Under LIFO, the most recently purchased items are assumed to be the first ones sold or used
How does LIFO impact cost of goods sold
In times of rising prices, COGS will be higher because the latest, more expensive inventory is sold first
How does LIFO impact ending inventory
The inventory on hand is valued at older prices, resulting in a lower ending inventory value
How does LIFO impact profit
LIFO typically results in lower profits during inflationary periods because higher COGS reduce taxable income
How do costs work under the average cost method
Under the Average Cost method, all units in inventory are valued at a weighted average cost
How often is the average cost recalculated
The average cost is recalculated every time a new purchase is made
How does average cost impact cost of goods sold
The cost of goods sold is calculated using the average cost, which smooths out price fluctuations over time
How does average cost influence ending inventory
The value of ending inventory is also based on the average cost of all units
How does average costing influence profit
The impact on profit is more stable because fluctuations in the cost of goods sold are smoothed out
What is economic order quantity (EOQ)
EOQ is the optimal order quantity that minimizes the total cost of ordering and holding inventory
How does EOQ help businesses
EOQ is a calculation that helps businesses decide the most cost-effective quantity to order each time so that the sum of ordering costs and holding costs is minimized
EOQ=
EOQ= √2DS/H
- D = Demand for the product
- S = Ordering cost per order
- H = Holding or carrying cost per unit per year
What are the benefits of EOQ
Benefits of EOQ are:
- Helps minimize the total inventory-related costs
- Provides a clear guide for order quantities
- Helps organizations decide on the optimal frequency and size of orders
What are the limitations of EOQ
Limitations of EOQ are:
- Assumes constant demand and fixed costs
- Doesn’t consider discounts for bulk buying or variable lead times
What is reorder level
Re order level is the level at which a new order should be placed to avoid running out of stock
Reorder level =
Reorder Level=LeadTimeDemand=AverageDailyDemand × LeadTime(indays)
What is lead time
Lead time is the time taken from placing an order until it is received and available for use or sale
Average daily demand =
Average Daily Demand = Total annual demand (D) / 365 (days)
What are the benefits of knowing order level
Benefits of knowing order level are:
- Ensures that new orders are placed before inventory runs out
- Helps determine the ideal time to reorder
What are the limitations of the reordering level
Limitations of reorder level are:
- If demand is unpredictable or fluctuates widely, the reorder level may not be accurate
- If lead times are inconsistent, it can lead to stockouts or overstocking
What are the different types of labour costs
Different types of labour costs are:
- Direct Labour Costs
- Indirect Labour Costs
What are direct labour costs
Direct labour costs are wages paid to employees who are directly involved in the production process
What are indirect labour costs
Indirect labour costs are wages paid to employees who are not directly involved in the production process but are essential for supporting production
What are the different components of labour costs
The different components of labour costs are:
- Basic wages
- Overtime wage
- Bonuses and Incentives
- Payroll taxes
- Employee benefits
- Training costs
How would direct labour show in a journal entry
Debit/Credit
Direct labour in a journal entry is shown as:
- Debit - Work in Process (WIP) Inventory
- Credit - Wages Payable
What happens in direct labour costs in journal entries when goods are sold
When the goods are sold, the direct labour cost is transferred to the Cost of Goods Sold
What are indirect labour costs considered to be part of
Indirect labour costs are considered part of manufacturing overhead
When indirect labour costs are incurred what would the journal entry typically look like
When indirect labour costs are incurred, the journal entry would typically be:
- Debit: Manufacturing Overhead
- Credit: Wages Payable
How are indirect labour costs allocated
Indirect labour costs are allocated to the products based on an allocation base
What should employer-paid taxes and benefits should be added to
Employer-paid taxes and benefits should be added to the total labour cost
What would the payroll tax journal entry when payroll taxes are incurred
Payroll Tax Journal Entry: When payroll taxes are incurred:
- Debit: Labour Expense
- Credit: Payroll Taxes Payable
What are the overtime pay journal entry
Overtime Pay Journal Entry: If overtime is paid to a production worker:
- Debit: Work in Process or Manufacturing Overhead
- Credit: Wages Payable
When are direct labour costs included in COGS
Direct labour costs are included in COGS when the goods are sold
What is included as part of operating expenses
Indirect labour costs are included as part of operating expenses
