M/A - Costing method Flashcards
How is processing costing used and the difference between job costing
Processed costing - allocates units of inventory whose products are continuous, homogenous fashion through one or more production process
(Continuous, mass production, for stock)
Job costing - used by an organization whose products or services are uniquely identified (customization) (Ex. construction, legal advice,
What are the similarities and differences between job and process costing
Similarities - assign a cost to the product
- focus on DM, DL< MOH cost flows through WIP account
Difference:
Job costs - are unique, cost are collected and recorded for each job, unit costs are calculated for each job
Process costing - is the same for every order, costs are collected and recorded by department, unit cost are calculated to each department
What are the processes for each department for making a soft drink
- Department to make syrup -
- Department to make can/bottles -
- Department for packaging
- Are operated under different division, when all are completed it is transferred for finished goods
-End of the period: categories - 1. WIP, 2. Transferred, 3. Spoilage
How are equivalent units used and two types of methods to calculate it
Equivalent unit - used in a way to understand the cost of WIP and finished
EU - referred to as all units about several fully completed units that are represented
Two methods: FIFO, Weighted Average
Conversion cost - DL & MOH would be used and transferred the cost to each department
What is the formula for calculating EU produced, DM cost per unit & Conversion cost per unit
For Weight average and FIFO
DM cost per unit= Total DM cost / (Completed unit + EU DM WIP)
Conversion cost per unit = Conversion cost / (Completed unit + EU CC WIP)
EU produced = Completed units (transferred to next process or finished goods) + EU ending WIP
What is the 5-step process to process costing method of weighted average & FIFO
- Compute the units to be accounted for
- Compute output in terms of EU
- Used for partially completed WIP at end of the accounting period
Types of consideration: Completed unit, WIP units - Compute cost to be accounted for
- Beginning WIP units, some costs will be transferred from previous period - Compute the cost per EU for each cost category
- Assign total to units completed, ending WIP, spoilage
How is FIFO calculated differently than the weighted average for EU
- Under FIFO, costs incurred during the current period are used to calculate the cost of units completed during the current period
The weighted average doesn’t separate the cost of works done in the previous period to the current period
- FIFO is theoretically superior
What is spoilage and the difference between normal and abnormal spoilage
What is the formula for spoilage
Normal spoilage occurs as a regular part of the operation
- Is included under inventory cost
Abnormal spoilage - occurs under atypical circumstances, such as when a new worker makes an error and an entire batch of dough must be discarded
- Is removed from inventory cost and expenses
WIP beginning + started in production - units transferred out - Normal spoilage - Ending WIP = Abnormal spoilage
Explain what traditional costing and activity-based costing is
Traditional costing method - costs are allocated using a predetermined overhead rate using a single cost driver
Advantage - Simplicity, easy to use and understand
Disadvantage - costs that are included
Activity-based costing - recognizes that the activities within a company mary vary and each activity typically has different driver that affect cost
More non-value-added activities
Advant: Used for many cost pools, different allocation basies, often treats idle capacity as a period cost
What is the step 5 application process of activity based costing method
- Identify the cost objective
- Not all costs related to the activities
- Management account must understand the focus of the cost analysis - Identify activities and cost driver
- Relevant costs, might be time-consuming and requires consideration and judgment - Assign indirect cost to cost pools
- DM, DL and shipping expenses can be traced directly to the cost objectives from the income statement
- Remaining costs are indirect and will be assigned to the activity cost pool - Calculate activity rates
- Cost for each activity is divided by the total volume of cost driver - Assign indirect cost to cost objective
- Volume of cost driver * Cost rate = total cost per activity
What are the benefits and drawbacks of activity-based costing
Benefits - Improved decision making with accurate products, increase understanding of overhead cost, focus on managing activities to control driver
Drawback - Implementation is expensive and costly, performance measures often remain tied to external report
What is joint product costing, byproduct, and split of point
Joint product cost - It shares one or more production processes that incur joint costs that can be traced to individual product
Byproduct - Joint product that has low value
Split off point - single raw material is rendered into joint & byproduct
What are 4 practical reasons for joint costing
- Can be used as it is required by regulators
- Joint cost allocations are required to pro-rate cost between inventory and COGS
- Joint cost allocated may be used for transfer pricing purposes with the organization
- Joint cost can be considered for insurance purposes when it is lost
What are the 4 methods to use for joint costing
- Physical output method
- Joint cost are allocated based on physical measures such as volume, weight, length or count
Advantage - simple and easy to understand
Disadvantages - May be unreasonable to measure all products using the same physical measure - Sales value at split-off point method
- Joint costs are allocated based on relative sales of split-off point
Advan: Simple and easy to understand
Disadvan: Can’t be used when some products are not sold at the split of point - Net realizable value
- Joint costs are allocated based on relative NRV, for each product is calculated as final selling price less related cost
Advantage - Focus management attention on each product ability to pay for joint cost
Disadvantage- Moderately complex, may give impression that one product is more profitable - Constant gross margin % of NRV method
- Simlilar to NRV method but in reverse - Calculate overall gross margin %
- Deduct the gross margin % from each product sales to determine the total cost each should bear
- Deduct separable cost to determine the amount of joint cost each product should bear
Explain how the byproduct is considered
- The 4 method does not take into account the production waste and by-product which can have significant effect on production activities
-Unusable material that are left over after processing - Processing ware can be sold or processed further, by product are joint products that are sold have relatively low value
Before split off point - cost of processing waste and by-products that occur before split off point include joint cost
After split off point - the cost of processing waste and by-products that occur are included as the separable cost
