Management Accounting midterm Flashcards
Define a cost object
Anything for which a separate measurement of costs is desired. It can be a product, a machine, a service, a process, or any other entity.
A structured method used by businesses to track and allocate costs associated with their operations is called a :
costing system
The process of gathering and organizing cost data according to specific categories such as materials, labor, fuel, advertising, or shipping is called :
cost accumulation
What are direct costs?
Costs that can be specifically traced to a particular cost object, such as materials and labor directly used in production.
What are indirect costs?
Costs that cannot be easily attributed to a specific cost object and are allocated based on a predetermined allocation method, such as overhead costs
The real costs incurred by a business in its operations, also known as historical costs, as opposed to budgeted or forecasted costs are called:
actual costs
If a company pays temporary wages only in periods of high production, then this is a _________ cost
variable
Define cost driver:
Also known as a cost generator or cost determinant, a cost driver is any factor that influences the total costs incurred by an organization. Changes in the level of the cost driver lead to corresponding changes in the total cost of a related cost object.
Give an example of a cost driver:
For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.
Why do managers consider direct costs to be more accurate than indirect costs?
Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions.
Name three factors that will affect the classification of a cost as direct or indirect.
the materiality of the cost in question
available information-gathering technology
design of operations
Describe the duties of a merchandising sector company?
These companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution.
Manufacturing companies have 3 types of inventory. What are they?
- Direct materials inventory. Direct materials in stock and awaiting use in the
manufacturing process. - Work-in-process inventory. Goods partially worked on but not yet completed. Also called work in progress.
- Finished goods inventory. Goods completed but not yet sold.
What are inventoriable costs?
Inventoriable costs are the expenses directly related to producing a product, like raw materials and direct labor, which are recorded as assets on the balance sheet until the product is sold.
What are period costs?
Period costs are expenses incurred in running the business that aren’t directly tied to producing specific goods, such as rent, utilities, and administrative salaries. These costs are expensed in the period they’re incurred.
When do inventoriable costs become expenses?
Inventoriable costs become expenses when the associated product is sold, at which point they’re recognized as part of the cost of goods sold (COGS) on the income statement.
In a bakery, what type of costs would expense of ingredients and direct labor when making cupcakes be?
They would be labelled as an inventoriable cost because they are directly assosciated with producing the cupcake and recorded as an asset until the cupcakes are sold. once sold , these costs become recognized as expenses under the COGS.
What are manufacturing overhead costs?
These are manufacturing costs that are related to the cost object but cannot be traced to that object in an economically feasible way
As the cost driver level increases, total fixed cost remains __________
unchanged
Formula for Prime Costs:
Direct Materials+Direct Manufacturing Labor+Additional Direct Costs
Unit costs must be interpreted with _________
caution; if they include fixed costs
per unit.
When an item is a fixed cost , unit costs _____ with changes in the level of the cost driver
increase
When item is a variable cost, unit costs ________ with changes in the level of the cost driver.
remain the same
Stock-related costs are also known as ________ costs
inventoriable
For service-sector companies, all costs in the income statement are considered ______ costs since there are no ________costs.
period; inventoriable
Formula for COGS:
Opening Finished Goods Stock+Cost of Goods Manufactured−Closing Finished Goods Stock
What does the useful life of an asset refer to?
The useful life of an asset refers to the period over which it is expected to be economically feasible to use the asset in business operations.
What does the Cost of Goods Manufactured refer to?
The cost of goods manufactured refers to the total cost of goods that have been brought to completion during a specific accounting period.
What does Cost of Goods Manufactured refer to?
This includes all manufacturing costs incurred, regardless of whether the goods were started before or during the current period.
Formula for budgeted indirect cost rate:
Budgeted Indirect Cost/Budgeted Direct Labour hours
Assigning direct costs to a cost object is called ________.
cost tracing
________ is the process of distributing indirect costs to products.
A) Cost allocation
B) Job cost recording
C) Cost pooling
D) Cost tracing
Cost allocation
A ________ links an indirect cost to a cost object.
A) cost-‐‑allocation base
B) cost pool
C) cost assignment
D) cost tracing
cost-allocation base
The cost allocation base ________.
A) is a grouping of individual indirect cost items
B) are costs related to a particular cost object that cannot be traced to that cost object in an economically
feasible way
C) is anything for which a measurement of costs is desired
D) is a systematic way to link an indirect cost or group of indirect costs to cost objects
D
Direct costs of a cost object are costs related to a particular cost object that can be allocated to that cost
object in an economically feasible (cost-‐‑effective) way. Why is this incorrect?
Because they are traced and NOT allocated
Process costing is used by business to ________.
to price identical products
Job costing is used by businesses to________.
to price unique products for different jobs
What differentiates job costing from process costing?
Process costing is used when each unit of output is identical, and job costing deals with unique products not produced in batches.Process costing uses conversion!
Which of the following companies will use a process costing system?
A) an oil refining company
B) a manufacturer of ships
C) a custom watch manufacturer
D) an advertising firm
an oil refining company
Oil refining companies primarily use _______ costing to estimate costs.
process; Process costing is used to estimate costs in oil refining companies as the same process is
used to extract oil.
Job costing is the logical choice when the production process has _______ jobs, while process costing is typically used when it is not necessary to keep separate cost records for individual jobs and the products are relatively ______
heterogenous; homogenous
The actual indirect-‐‑cost rate is calculated by ________.
dividing actual total INDIRECT costs by the actual direct labour hours
formula to calculate the indirect costs under normal costing
Budget-indirect cost rate * Actual direct labour-hours
How does normal costing allow for more timely reporting of job costs?
Normal costing involves allocating indirect costs to products or jobs using predetermined rates based on a standard cost system. This means that job costs can be calculated and reported immediately after a job is finished, without waiting for actual indirect costs to be determined.
What are some examples of revenue costs?
: Examples of revenue costs include salaries and rent. These expenses are directly related to the day-to-day operations of the business and are expensed in the period they are incurred.
Revenue costs are also known as ____ expenses and ______ expenses
period; operating
All direct production costs are called ____ costs
prime
Why are period costs treated as expenses of the accounting period in which they are incurred?
Because they are expected to not benefit future periods
What is a cost allocation base?
A cost allocation base is the unit, activity, or item that allocates costs in an organization. It can be used to measure and assign expenses to departments and activities accurately.
Overhead allocation rate (formula)
Budgeted overhead/ Budgeted cost allocation base
- where budgeted cost allocation base could be labour hours or machine hours
The overheaded allocation rate is given in percentage and represents the percentage of _____
either direct machine costs or direct labour costs !!!!
Underallocated manufacturing
overhead (formula)
Actual manufacturing overhead costs - Allocated plant overhead costs
Conversion costs =
Direct labour + Factory overhead
Direct materials + Conversion costs =
Total Production Costs
Under the weighted average method, we do NOT MAKE A DISTINCTION between wHAT?
Between opening work in progress and production in current month
How to calculate the amount of under or overallocated?
Underallocated = Actual overhead - Allocated overhead
, where allocated overhead = Expected overhead/expected hours * actual hours
Formula for manufacturing overhead:
Overhead costs/Cost of direct manufacturing
What is the primary purpose of allocating R&D costs?
A) To provide information for economic decisions.
B) To report to external parties when using generally accepted accounting principles.
C) To calculate costs of a government contract.
D) All of these answers are correct.
A - To provide information for economic decisions
In the context of R&D costs, why is it important to allocate expenses?
To accurately reflect the financial implications of research efforts.
10) Which purpose of cost allocation is used to cost products at a “fair” price?
A) to provide information for economic decisions
B) to motivate managers and other employees
C) to justify costs or compute reimbursement
D) to measure income and assets for reporting to external parties
C) to justify costs or compute reimbursement
Which purpose of cost allocation is used to decide on the selling price for a customized product or
service?
A) to provide information for economic decisions
B) to motivate managers and other employees
C) to justify costs or compute reimbursement
D) to measure income and assets for reporting to external parties
A) to provide information for economic decisions
What purpose of cost allocation involves costing inventories for the balance sheet?
To measure income and assets
When evaluating a make or buy decision, which purpose of cost allocation is typically employed?
To provide information for economic decisions
Which purpose of cost allocation aims to encourage the sales department to focus on high-margin products?
To motivate managers and other employees
What purpose of cost allocation involves costing inventories for reporting on a company’s tax return?
To measure income and assets
Distinguish between the single-rate and the dual-rate methods.
The single-rate (cost-allocation) method makes no distinction between fixed costs and variable costs in the cost pool. It allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base. The dual-rate (cost allocation) method classifies costs in each
cost pool into two pools—a variable-cost pool and a fixed-cost pool—with each pool using a different cost-allocation base
Why might a manager prefer that budgeted rather than actual cost-allocation rates be used
for costs being allocated to his or her department from another department?
The use of budgeted indirect cost allocation rates rather than actual indirect rates has several
attractive features to the manager of a user department:
a. The user knows the costs in advance and can factor them into ongoing operating
choices.
b. The cost allocated to a particular user department does not depend on the amount
of resources used by other user departments.
c. Inefficiencies at the department providing the service do not affect the costs allocated
to the user department.
How does the reciprocal method allocate costs?
The reciprocal (allocation) method allocates support-department costs to operating
departments by fully recognizing the mutual services provided among all support departments.
Absorption costing is also known as the _______ method
full costing
What are the two types of overhead costs?
Variable and fixed
Which costs are included in product cost (inventoriable cost) under the absorption costing method?
DM, DL, and Fixed Overhead
Define a joint cost:
The cost of a production process that yields multiple products or services simultaneously. For instance, the distillation of coal produces coke, gas, and other products concurrently, incurring joint costs.
Define split-off point:
The juncture in a production process where one or more products become separately identifiable, occurring in a joint-cost setting. An example is when coal is distilled to yield coke, gas, and other products, marking the split-off point.
Define seperable costs:
Costs incurred beyond the split-off point that are assignable to one or more individual products. After the split-off point in the coal distillation process, costs related to further processing of coke, gas, or other products are separable costs.
What is a by-product:
A product with a low sales value compared to the main or joint product(s) resulting from the same process. For instance, in the coal distillation process, if tar or ammonia is produced alongside coke and gas, and has lower sales value, it’s considered a by-product.
True or false: Joint costs are incurred beyond the splitoff point and are assignable to individual
products.
False
True or false:Separable costs are assignable after the splitoff point.
True
True or false: A byproduct has a minimal sales value.
True
: What criterion does the “sales value at splitoff” method align with? *with regard to joint costs
It aligns with the benefits-received criterion in cost allocation, which suggests that costs should be allocated in proportion to the benefits or value derived by each product or department.
How does the “sales value at splitoff” method allocate costs?
It assigns costs according to the revenue-generating potential of each product. Products with higher sales values receive a larger portion of the joint costs.
What are the 4 allocation methods for joint costs?
- Physical measures
- Output (market) value
- Taking into account additional steps after the split-off point: net realizable value
- Aiming for similar profit margins: constant gross margin
Why should joint costs be allocated?
- a company may want to measure its performance
- ## we may need to valuate inventory for reporting purposes
Total cost to account for (under WAVO)
Opening WIP (for materials) + Opening WIP (for conversions) + Material Costs + Conversion costs
Under weighted average method equivalent units (materials) =
Completed + Ending WIP
Under weighted average method equivalent units (conversion) =
Completed + Ending WIP * coversion rate
Cost of completed output (weighted average method) =
Completed units * average cost of equivalent unit (average of materials and conversion)
Cost of WIP End (weighted average method)=
Ending work in progress units * cost per equivalent unit (materials)
The difference between the weighted average and FIFO is that when calculataing total costs under FIFO
we don’t add the sum of WIP opening and completed; we look at them seperately
Formula for cost of completed output (materials) under FIFO =
Beginning WIP + Units started and completed * cost per equivalent unit of materials , where cost per equivalent unit of materials = Cost of completed materials/Equivalent unit of materials
Formula for started and completed (FIFO method) =
Completed - Beginning WIP
Formula for cost of completed output (FIFO method) =
Opening WIP cost + Started and Completed * cost per equivalent unit ,
where cost per equivalent unit = Costs added/ Equivalent unit (materials)
If the number you get when calculating underallocated is positive this means you are dealing with
underallocation
Elaborate what Method 1 : Proration based on overheads means?
So here this means that we calculate the share of overheads already included and multiply these calculated shares by the remaining overhead
Elaborate what proration based on year end values means?
It means that we look at share of value at year end and multiply these percentages by the under or overallocated amount
True or false: When input prices have decreased in a month, the ending work-in-process is valued higher under the weighted average method
than under the FIFO method
True
Which of the following allocation methods for joint costs most closely follows a cause-and-effect logic in allocating joint costs?
A Physical measures
B Constant gross margin
C Net realizable value
D No difference: all to the same extent
D
Define relevant costs. Why are historical costs irrelevant?
Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs
are irrelevant because they are past costs and therefore cannot differ among alternative future courses of action.
allocated overhead amount in end of year balances means you look at:
hours and not at sales
Cost per equivalent unit (FIFO)
Costs added/ equivalent unit
Equivalent units (conversion; FIFO)
Completed - BegWIP * conversion + Ending WIP *conversion
Write off method means that all overhead goes immediately to :
COGS
Break even point in terms of units:
Fixed cost / Contribution Margin , where contribution margin = price per unit - variable costs per unit
Contribution Margin ratio (per unit)=
contribution margin (=price - vc)/price
Break even point (in sales)=
Fixed Costs / Contribution Margin ratio
Contribution margin ratio (in sales)=
Sales - Variable costs/Sales
Target profit CPV =
FC + Target profit / Contribution margin ratio
When counting cost per equivalebt unit in FIFO we look at
Costs Added Only And divide by equivalent unit ( Complete + end - beg)
Units needed to sell to receive after tax profit:
Total fixed costs+(Target after tax profit/(1-tax rate)/ Unit contribution margin
: How to calculate the Contribution Margin (CM)?
Contribution Margin= Total Sales- Variable Cost
How to calculate the Contribution Margin (CM) ratio?
CM Ratio= Unit Contribution Margin/Unit Selling Price.
Break-Even Point in Units=F
=Fixed Costs/Unit Contribution Margin
Break-Even Point in Dollars=
Fixed Costs/Contribution Margin Ratio
How to calculate the required sales in units and dollars?
Required Sales in Units = (Fixed Costs+ Target Net Income) / Unit
Contribution Margin
Required Sales in Dollars = (Fixed Costs+ Target Net Income) /
Contribution Margin Ratio
To which function of management is CVP analysis most applicable?
planning
Cost of goods manufactured =
Manufacturing costs - Change in inventory (End - Beg WIP)
Formula for absorption profit=
Revenues - COGS + Production volume variance, where production volume variance = (actual production - budgeted production) * Fixed Costs
Production Volume Variance =
(actual production - budgeted production) * Fixed Costs
What are Denominator-level Capacity decisions?
Denominator-level Capacity decisions involve determining the capacity level for fixed manufacturing cost rates within a company’s operations.
What choices are available for Denominator-level Capacity decisions?
: The choices include theoretical, practical, normal utilization, and master-budget utilization.
What is Theoretical Capacity?
Theoretical Capacity represents the maximum possible output achievable under ideal conditions, without any downtime or interruptions.
What is Practical Capacity?
Practical Capacity considers real-world limitations and inefficiencies such as equipment downtime, maintenance, and employee breaks, providing a more realistic assessment of production potential.
What is Normal Utilization?
Normal Utilization refers to the level of capacity utilization that satisfies average customer demand over time, accounting for seasonal fluctuations or cyclical trends.
What is Master-budget Utilization?
Master-budget Utilization is the capacity level expected for the current budget period based on the organization’s strategic and financial plans, serving as a basis for budgeting fixed manufacturing costs.
How do Denominator-level Capacity decisions impact fixed manufacturing costs?
The choice of capacity level influences budgeted fixed manufacturing cost rates, affecting product costing, pricing decisions, and overall profitability.
In what kind of companies are variable costs per unit low and therefore the margin is just the selling pricr?
In a lot of online service settings, like streaming platforms, education etc.
CVP analysis assumptionss:
Fixed and variable costs can be distinguished; seperated
Cost and revenue behaviour is similar within a certain range (fixed costs do not change; no new machines or buildings)
No increase in price of labour
Concerns a single product/service or constant mix of products
we ignore the time value of money
What impacts the break even point?
- the extent to which costs are fixed
- ## relative importance of fixed and variable costs in a firm’s cost structure (this is called operating leverage)
Economies are good (with regard to fixed costs) if ____ is high
volume
What can economies of scale lead to? (a downside)
large losses
How can we estimate cost behaviour?
For cost-based decision making, we need to have a good idea of the cost driver,
Cost behaviour depends on the choice of _____ and ____ span and _____
cost object and time span, because in the long run all costs are variable
It also depends on company assets
The relevant range of cost behaviour refers to:
fact that company assets have a limited capacity
Most of the time we assume that cost behaviour is ______
linear
In what cases is cost behaviour not going to be linear?
- new production techniques with learning curves
- start up of new machines
*this is because we are changing our production inputs
Describe the assumptions underlying CVP analysi
Changes in the level of revenues and costs arise only because of changes in the number
of product (or service) units sold.
2. Total costs can be separated into a fixed component that does not vary with the units sold
and a variable component that changes with the number of units sold.
3. When represented graphically, the behaviors of total revenues and total costs are linear
(represented as a straight line) in relation to number of units sold within a relevant range
and time period.
4. The selling price, variable cost per unit, and fixed costs are known and constan
Contribution margin is the difference between______ and _________.
Contribution margin per unit is the difference between _________ and _______ per unit.
Contribution-margin percentage is the _______ per unit divided by _____.
total revenues; total variable costs
selling price; variable cost
contribution margin; selling price
With regard to making decisions, what do you think are the main limitations of CVP
analysis? Explain.
The CVP analysis is based on a simple assumption that focuses only on two factors: revenue and
cost. It assumes that the relationship between revenue and cost is linear. CVP analysis is
applicable within a relevant range of activity and it is assumed that productivity and efficiency of
operations will remain constant. CVP analysis also assumes that costs can be accurately divided
into fixed and variable categories and selling price and variable cost per unit remain constant
while these assumptions may not be true. CVP is limited in terms of the details and the amount
of information that it can provide, especially in a multi-product operation.
Is CVP analysis more focused on the short or the long term?
The CVP analysis is more focused on the short run because the variables cannot be influenced
(fixed costs, selling price, and variable costs per unit). So the only variable that can be altered is
the production and sales volume.
If actual units are greater than budgeted units our profit will ___ because PVV will ____
rise; rise
If actual units are less than budgeted units our profit will _____ because PVV will _____
decrease; decrease
What is the most fundamental difference between traditional costing and ABC?
Traditional costing uses one plant-wide overhead rate to allocate overhead. Contrarily ABC uses multiple activity rates. Therefore traditional costing is easier to implement, compared to ABC which is more difficult to implement.
Another difference is that traditional costing methods only allocate product costs, whereas ABC may also allocate period costs
Traditional costing is more commonly used for ____ than ABC
COGS
Activity based costing is a lot more ____ and thereby cannot be used for external reports
subjective
A company implementing ABC will also have to implement ____
traditional costing for external purposes
Why may a company prefer ABC over traditional costing?
Because it is more accurate
What kind of costs do we look at with activity based costing?
We look at costs of things that are not easily traceable, non-direct costs , basically overhead costs
What does overhead refer to?
Overhead refers to the ongoing business expenses not directly attributed to creating a product or service.
