Lecture 4

Question 1

Weighted average vs FIFO

Answer 1

Under weighted average, all costs were mixed together

Under FIFO we trat old units and new units separately

Dont mix old costs and new costs
Find out how many equivalent units of work done this period

Question 2

FIFO overview

Answer 2

Under the FIFO method, we assume that the old units are finished before the new units

Therefore, we have to keep track of cost and units separately

-Costs from B WIP
-Costs to finish B WIP
-Costs for the units that we start and finish
-Costs for the units in E. WIP

Question 3

Fudging the numbers

Answer 3

What would happen to COGS if we overstated how far along ending WIP was

Question 4

Income shifting

Answer 4

Moving income or expenses from one period to another. Earning management one period will come back to bite you the next

Question 5

academic white tower (materiality approach)

Answer 5

Everything matters! be exact! every single partial unit should be correctly accounted for

Question 6

materiality approach

Answer 6

When managers ignore partially completed units. They say that the effect is immaterial relative to the whole so we just ignore them

This approach is often used when the production time is very short and there are very few in progress units at the end of the year

Question 7

joint products

Answer 7

Are products that are produced together. Producing one alwaays gives you the other

Question 8

Joint costs

Answer 8

Are the shared costs of the joint product – costs that occur before the split-off point

Question 9

Splitt off point

Answer 9

The point when the products become separately identifiable

Question 10

Separate costs

Answer 10

Are costs that can be attributed to an individual product

Question 11

Physical measures (allocation methods)

Answer 11

joint costs are allocated based on physical measure (weight, volume) of products at the split off point

Question 12

Relative sales value (allocation methods)

Answer 12

joint costs are allocated based on the relative sales value of the two products

Question 13

Net realizable value (NRV) (allocation methods)

Answer 13

Joint costs are allocated based on the values of the products after additional processing

Question 14

Constant gross margin(allocation methods)

Answer 14

Joint costs are allocated based on the gross margin of products after additional processing

Question 15

problems with physical units method

Answer 15

Not fair

Just because something has a large number of units doesnt mean its worth a lot

Fertilizer is losing money

But method can be useful if the different objects have similar values

Question 16

Problems with relative sales value

Answer 16

Not fair
Just because something has a large sales revenue doesnt mean its profitable

Fertilizer is losing money

BUT method can be useful if the different objects have similar values (e.g. ferilizer were just as valuable per kilo as milk is, after taking into account additional processing costs)

Question 17

Why is NRV method good?

Answer 17

Fair allocation

Fertilizer isnt our main thing. its almost like a by product, barely scrapping by at all and shouldnt be charged as much of the joint costs

Question 18

Why is constant gross margin method good

Answer 18

Fair allocation

Fertilizer isnt our main thing. Its almost like a by product, barely scrapping by at all. Shouldnt be charged much of the joint costs

Though to say whether rnv or constant gross margin is “more fair”

Question 19

By products

Answer 19

A by-product has little or no value relative to the main product

Question 20

Scrap

Answer 20

Technically has sales value, but its very small compared to the main product

Eg Scratched/dented products

Bruised/defective fruit

Question 21

Waste

Answer 21

Is stuff that has a negative NPV. You have to pay to get rid of it

E.g. MIlk from sick cows that have been treated with antibiotics

Question 22

Accounting for By-Products

Answer 22

If the bi-products have a negative NPV

Add the negative NPV to the joint costs that is allocated to the main products

IF the bi-products have a positive but small NPV you have three options:

1) treat the bi-products as though it were a main product and allocate a small amount of joint costs to it

2) Dont allocate any joint costs to it. Just take the small NPV as extra earning

3) Deduct the NPV from the joint cost allocated to the other products (i.e. treat the by-product not as its own product line, but more like a negative expense)

Usually it doesnt matter which option you choose. Its a bi-product so the NPV is very small

Question 23

Further processing

Answer 23

Sometimes products can be sold as is or developed further

To decide whether or not to further process something, compare the marginal cost to the marginal revenue