Midterm (Chapters 4, 5, 6, 7, 11) Flashcards
1
Q
What are the two main types of costing systems?
A
Job costing and Process costing
2
Q
What costs are included in job costing?
A
Direct materials, direct labor, and applied manufacturing overhead
3
Q
How is factory overhead applied in a job costing system?
A
Using a predetermined overhead rate based on an allocation base
4
Q
What happens if actual overhead differs from applied overhead?
A
It results in overapplied or underapplied overhead
5
Q
Where are costs recorded in a job costing system?
A
On a job cost sheet and Work-in-Process Inventory
6
Q
What industries commonly use job costing?
A
Construction, custom furniture, shipbuilding, medical services, accounting firms
7
Q
How do you calculate the predetermined overhead rate?
A
Estimated total overhead / Estimated allocation base
8
Q
What is normal costing?
A
Using actual costs for direct materials and labor, but estimated overhead
9
Q
What is standard costing?
A
Using pre-determined costs for all cost elements, including labor and overhead
10
Q
How does ABC differ from volume-based costing?
A
ABC assigns costs based on activities, while volume-based assigns overhead using one cost driver
11
Q
What are the four levels of cost hierarchy in ABC?
A
Unit-level, batch-level, product-level, facility-level
12
Q
Why is ABC more accurate?
A
It traces indirect costs based on resource consumption
13
Q
What is the main disadvantage of ABC?
A
It requires detailed data collection and is costly to implement
14
Q
What is a cost driver?
A
A factor that causes changes in the total cost of an activity
15
Q
What is the two-stage cost assignment in ABC?
A
Resource costs are assigned to activity cost pools, then to cost objects
16
Q
How does ABC improve decision-making?
A
By identifying non-value-added activities and improving cost control
17
Q
When is process costing used?
A
For mass-produced, homogeneous goods
18
Q
What are equivalent units?
A
A measure of partially completed units converted into fully completed units
19
Q
What are the two process costing methods?
A
Weighted-average and FIFO
20
Q
What is the purpose of a Production Cost Report?
A
To summarize the flow of units and costs in a department
21
Q
How do direct materials and conversion costs differ?
A
Direct materials are added at the beginning, while conversion costs are incurred throughout
22
Q
What is transferred-in cost?
A
Costs transferred from a previous department to the next stage of production
23
Q
How does FIFO differ from weighted-average in process costing?
A
FIFO separates beginning inventory costs from current costs, while weighted-average averages all costs
24
Q
What are production and service departments?
A
Production departments make products, service departments support them
25
What are the three methods of service department cost allocation?
Direct, step-down, and reciprocal methods
26
Why is cost allocation important?
It ensures accurate product costing and performance evaluation
27
What ethical issues arise in cost allocation?
Shifting costs to manipulate pricing or taxes
28
What is the step-down method?
Allocating service department costs sequentially, recognizing one-way interactions
29
What is the reciprocal method?
Allocates costs between service departments before assigning to production departments
30
What is a relevant cost?
A future cost that differs between decision alternatives
31
What is a sunk cost?
A past cost that cannot be changed and is irrelevant for decision-making
32
What are common relevant cost decisions?
Make-or-buy, special orders, sell before or after processing, discontinuation
33
What is an opportunity cost?
The benefit lost when choosing one alternative over another
34
What is constrained optimization?
Maximizing profit while dealing with limited resources
35
What is a special-order decision?
A one-time order outside normal sales that requires relevant cost analysis
36
How does strategic analysis differ from relevant cost analysis?
Strategic analysis considers long-term impacts, while relevant cost analysis focuses on short-term financial data
37
Normal spoilage is defined as:
Spoilage that occurs under efficient operations.
38
How is unit product cost calculated?
Dividing process costs in each department by the number of equivalent units produced during the period.
39
In process costing, unit product cost is calculated by dividing process cost in each department by the equivalent units produced:
During the period.
40
In calculating unit cost in a process costing system, "conversion cost" is defined as the sum of:
Direct labor and factory overhead costs.
41
The key difference between weighted-average and FIFO process costing methods is the handling of the partially completed:
Beginning work-in-process inventory.
42
Which of the following statements best describes a by-product? A) A product that is produced from material that would otherwise be scrap.
B) A product that has a selling price similar to that of the main product.
C) A product created along with the main product whose sales value does not cover its cost of production.
D) A product that usually produces a small amount of revenue when compared to the main product's revenue.
E) A product that has a lower unit selling price than the main unit.
D) A product that usually produces a small amount of revenue when compared to the main product's revenue.
43
The cost allocation method most widely used because of its accuracy and ability to provide a detailed level of analysis is:
B) Activity-based approach.
44
The departmental approach of cost allocation recognizes that the typical manufacturing operation involves which type(s) of departments?
A) Service departments and production departments.
45
The two approaches used for by-product costing are:
C) Asset recognition approach/revenue approach
46
How is the department to be allocated first usually chosen in the step method?
C) It provides the highest percentage of service to other service departments.
47
How are reciprocal flows determined?
A) Simultaneously in a system of equations.
48
In what situations is job costing used?
In cases where the products being produced are unique
49
In what situations is process costing used?
It is used for producing standardized products, when the manufacturing process is continuous
50
What are examples of products that would be used in process costing?
Golf balls, cereal, ice cream, gasoline... all of these are standardized and continuous
51
What is product costing
It is the process of classifying and assigning direct materials, direct labor, and factory overhead costs to cost objects (products or services most commonly)
52
What are the two options for cost accumulation method when developing product costing?
Job or process costing
53
What are the three methods for cost measurements when developing a product costing system
Actual, normal, or standard costing
54
What are the two overhead assignment methods when developing a product costing system?
Volume based overhead assignment
Activity-based overhead assignment
55
What does a firms choice of costing system depend on?
The firms industry or product/service
Firms strategy
The cost and benefits of designing, modifying, and operating a particular system
56
Why is job costing used in manufacturing where there are customized products beind produced
this is so costs can be identified with specific customers / jobs and charged in the right place
57
What type of costing system would you use for a construction job?
Job costing
58
What type of costing system would you use for a chemical industry?
Process costing
59
What type of costing system would you use for a custum furniture manufactuer?
Job costing
60
What is actual cost measurment type?
it uses the actual costs incurred to measure the product cost
61
How often is actual cost measurement used?
Rarely because unit costs fluctute significantly, and factory overhead costs are only known at or after the end of the period (not available in a timely fashion)
62
How does a standard cost measurement work?
It uses a standard costs for all elements, both direct and indirect
There is an applied rate for direct materials, direct labor, and factory overhead, then at the end of the year the actuals are applied (the correct amount is then recorded)
63
What does ABC stand for
Activity-based costing
64
How do volume based costing systems allocate overhead?
Using a volume-based cost driver such as units produced, direct labor-hours, direct labor costs, or machine hours
65
How does activity-based costing (ABC) allocate overhead?
It is allocated to products using a cause and effect criterion with multiple cost driver, both volume-based and non-volume based
66
Why does product costing matter?
to have accurate information for:
- product pricing
- product profitability analysis
- customer profitability analysis
- evaluation of management performance
- refinement of strategic goals
67
What is a job-cost sheet?
Records / summarizes the costs of direct materials, direct labor, and factory overhead for a particular job
68
What is 'overhead'?
Indirect costs that cannot be directly applied to a specific job but need to be allocated
Indirect materials (ex: lube for machines, screws)
Indirect labor (ex: factory supervisors)
Other factory overhead costs: (ex: factory rent, utilities, properthy taxes, insurance,...)
69
What does the flow of materials look like? (for direct and indirect materials)
Direct materials: Materials inventory --> WIP inventory --> finished goods inventory --> COGS
Indirect materials: materials inventory --> factory overhead --> WIP inventory (predetermined overhead rate)
70
What is an example of direct labor?
assembly line workers, carpenters building a home
71
What is an example of indirect labor?
Supervisors salaries
72
How is direct and indirect labor recorded?
Direct labior is recorded on the job cost sheet (time each employee worked, pay rate, total labor cost per job)
Indirect labor is recorded as factory overhead
73
What accounts are direct and indirect labor put into?
Direct is put into WIP inventory
Indirect is put into factory overhead
74
What are the three approaches of allocating overhead?
Actual, normal, and standard costing
75
How is the actual application method for overhead costs used?
overhead costs are trackers per job and transferred to WIP and finished goods in the exact amounts that are incurred
76
How is the normal application method for overhead costs used?
Overhead costs are applied to various jobs usesing a predetermined factory overhead rate
77
How do you get the predetermined factory overhead rate?
1) estimate total overhead costs
2) select the appropriate cost driver
3) estimate the total amount or activity level
4) Divide #1 by #3
78
When is a plantwide predetermined overhead rate appropriate?
When production departments are similar with respect to the amount of overhead and cost driver usage
79
When are departmental rates more appropriate for predetermined overhead rates?
When departments differ significantly in the amount of overhead cost and driver usage
80
What is operation costing (example)?
A hybrid costing system that uses job costing to assign direct material costs to jobs and uses departmental approach to assign conversion costs
Direct material costs are traced directly to jobs while conversion costs (direct labor and factory overhead) are traced to departments and than to jobs
81
What are conversion costs?
Direct labor and factory overhead
82
What account is closed out at the end of a the period?
Factory overhead
83
What are the three potential errors in overhead applications?
Aggregation error - using plantwire rate or departmental rate in the wrong situation
Specification errors - using the wrong cost driver
Measurement errors - estimation or calculation error
84
When is process costing used?
When outputs are from repetitive processes
Examples: chemicals, oil refining, rubber, steel, glass
85
What does 'equivalent units' mean?
it is a expression of partically completed units (as shown below) plus fully completed units for the period. used to measure the output for the period
4 units that are 25% complete are "equivalent" to 1 unit fully complete
86
What are transferred-in costs?
They are costs of work performed in earlier departments that are transferred into the present department
They are treated like direct materials added at the beginning of a process
87
Why would you use activity-based costing (ABC)?
When product and process variety arises, as sometimes process-based manufacturers have very different products going through different processes
88
Are you able to identify the most profitable product mix in process costing?
No.
89
What is backlash costing?
it is an alternative to process costing, it is a simplified cost accounting method that is used in just-in-time manufacturing where costs are recorded at the end of production rather than at each stage.
It bypasses work-in-process (WIP) inventory and directly assigns costs to finished goods or COGS
90
What is better, activity-based costing or volume-based costing?
Volume based costing may be distorted as indirect costs aren't always proportionate to output volume. It can cause some products to be overcasted and others undercosted
activity based costing (ABC) has more detailed information so outputs are charged for the resources they consumed by the activities needed to perform them
91
