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CPA - BEC > Operations Management > Flashcards

Operations Management Flashcards

1
Q

What is quality of design?

A

Meeting or exceeding the needs and wants of your customers.

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2
Q

What is quality of conformance?

A

Degree to which a product meets its specifications.

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3
Q

What is the best method to minimize failure costs?

A

Prevention costs.

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4
Q

What is the JIT inventory method?

A

Just in time. Company purchases inventory only when necessary and arrives JIT for its use of production or sales. There is a lower level of inventory maintained by the firm - therefore inventory turnover increases and inventory as a percentage of total assets will decrease.

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5
Q

What is an internal failure cost?

A

An internal failure cost is incurred when a product that does not conform to its design specification is detected before shipment to customers. An example would be rework.

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6
Q

What are statistical quality control programs?

A

They are preventative programs to detect/investigate/determine/solve issues with operations.

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7
Q

What is the only well-recognized quality program used to minimize defects while reducing costs?

A

Six Sigma

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8
Q

What are the performance measures for Financial Perspective of the Balanced Scorecard?

A

Economic profit, income from operating, working capital, operational cash flow, inventory turns.

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9
Q

What are the performance measures for Customer Perspective of the Balanced Scorecard?

A

Rank in customer surveys, market share, product returns as a % of sales, # of new customers, repeat order rate, complaints.

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10
Q

What are the performance measures for Internal Business Process Perspective of the Balanced Scorecard?

A

Reduction in process cycle time, # of engineering changes, capacity of utilization, order response time, process capability.

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11
Q

What are the performance measures for the Learning and Growth Perspective of the Balanced Scorecard?

A

Leadership competence, % of patent protected turnover, training days for employees.

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12
Q

What does benchmarking provide?

A

A relevant comparison when trying to achieve the optimal outcome by comparing to others.

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13
Q

What is comparing and contrasting financial info to published information reflecting optimal amounts an example of?

A

Benchmarking.

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14
Q

What is the formula fo economic value added? (EVA)

A

Net operating profit after tax

-(WACC)(Total Assets - Total Liabilities)

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15
Q

What is the WACC calculated as with the following information?

Firm has $40m in debt costing 10%, $60m in owners equity costing 14%, and a marginal tax rate of 40%.

A

WACC = (40m/100m)(10%)(1-.4) + 60/100(14%)
= .024 + .084
= 10.8%

The 100m is the total debt and equity

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16
Q

What is the equation for price elasticity of demand?

A

% Change in Quantity Demanded/% Change in Price

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17
Q

How do you calculate Residual Income?

A

Operating income - (Required Rate of Return x Invested Capital)

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18
Q

How do you calculate Return on Investments?

A

NI/Total Assets

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19
Q

What is the DuPont equation for ROI?

A

PM x Asset Turnover

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20
Q

Describe value based management.

A

Accrual based metrics are discredited, cost of capital is emphasized, shareholder and shareholder value are the primary elements of interest in common

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21
Q

What is the ROI with the following information?

Sales: $311,000
Variable Costs: $250,000
Traceable Fixed Costs: $50,000
Average Invested Capital: $40,000
Imputed Interest Rate: 10%
A

ROI = NI/Total Assets

Net Income = $311,000 - $250,000 - $50,000
= $11,000

ROI = $11,000/$40,000 
ROI = 27.5%

Note: “Corporate” Fixed Costs would not be deducted.

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22
Q

Calculate residual income.

Asset (investment) turnover: 1.5 times (Sales/Investment)
Sales: $750,000
Return on Sales: 8%. (Profit/Sales)
Imputed Interest Rate: 10%

A

First solve for the asset turnover to get the total investments:
1.5 = $750,000/Investments, Investments = $500,000

Then, determine total profit (I.e. income) by using the return on sales.
8% = (Profit/$750,000) = $60,000

Then you can solve for the residual income:

$60,000 - (12% x $500,000) = $0

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23
Q

Gross Margin?

A

Revenue - COGS (used for traditional external reporting)

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24
Q

Contribution Margin?

A

Revenue - Variable Costs (used for planning purposes)

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25
Q

What is a Traditional Income Statement?

A 
Sales
(COGS)
GM
(SGA Exp)
EBIT
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26
Q

What is a Contribution Margin Statement?

A 
Sales 
(Variable Costs)
CM
(Fixed)
EBIT
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27
Q

Operating Profit Margin?

A

Operating income/Sales

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28
Q

Profit Margin (Return on Sales)?

A

Net Income/Net Sales

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29
Q

Return on Investments (ROI)?

A

Net income/Avg. Total Assets

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30
Q

Return on Equity (ROE)?

A

Net income/Common SH Equity

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31
Q

Asset Turnover?

A

Sales/Total Assets

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32
Q

Receivable Turnovers?

A

Sales on Account/Avg AR

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33
Q

Days’s Sales in Receivables

A

Avg AR/Avg Sales Per Day

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34
Q

Inventory Turnover?

A

COGS/Avg Inventory

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35
Q

Fixed Asset Turnover?

A

Sales/Avg Net Fixed Assets

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36
Q

Current Ratio?

A

CA/CL

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37
Q

Quick/Acid Test Ratio?

A

(CA - Inventory)/CL

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38
Q

Debt to Total Assets

A

Debt/Total Assets

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39
Q

Debt to Equity

A

Total Debt/ Total Owner’s Equity

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40
Q

Times Interest Earned Ratio

A

Operating Income/Interest Expense

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41
Q

Price/Earnings Ratio

A

Market Price Per Share/EPS

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42
Q

Market to Book Ratio

A

Market value per share/Book value per share

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43
Q

Book value per share

A

Common Stock Owner’s Equity/# of common shares outstanding

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44
Q

What is the inventory turnover?

Current Year Annual Sales: $2,525,000
Prior Year Annual Sales: $2,125,000
GP % Current Year: 40%
GP % Prior Year: 35%

Beg FG inventory for CY is 15% of PY annual sales
Ending FG inventory CY is 22% of CY annual sales.

A

Inventory Turnover = COGS/Avg Inventory

Beg Inventory = 15% x $2,125,000 = $318,750
End Inventory = 22% x $2,525,000 = $555,500

COGS = $2,525,000(1-.40) = $1,515,000

Inventory Turnover = $1,515,000/[(318,750+555,500)/2]
= $1,515,000/$437,125
= 3.47

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45
Q

Possible solution for COGS?

A

Annual sales x (1-GP%)

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46
Q

Solve for the amount of sales:

EBIT: $5,000,000
Jan 1 BV of Assets: $22m
Dece 31 BV of Assets = $18m
2.5 Investment turnover

A

Investment TO = Sales/Avg Investments

2.5 = Sales/[($22m + $18m)/2]
2.5 = Sales/$20,000,000
Sales = $50,000,000

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47
Q

What does the quick ratio measure?

A

Relationship between current assets that are cash or can be converted to cash quickly and then to current liabilities.

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48
Q

Why are inventories removed from CA in the quick ratio?

A

Current assets in the quick ratio include A/R and Marketable Securities because they can be converted quickly. Inventory cannot be converted quickly.

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49
Q

What is strategic risk?

A

L/T - and is best control through forecasting, planning and optimizing operating leverage

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50
Q

What is market risk?

A

Can be hazardous/natural disaster risk or economic risk. Can be controlled by insurance for specific hazards. However, economic risks cannot be controlled - they can assess exposure to economic downturns and use sensitivity analysis to evaluate their position.

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51
Q

What is operational risk?

A

S/T, daily implementation and best controlled by good execution of the firm’s strategic plan- particular attention to customer credit checks, quality, employee training, and management expertise.

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52
Q

What is systematic risk?

A

Also known as market risk or nondiversifiable risk - associated with large scale economic events or natural disaster typically affecting all companies to some degree.

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53
Q

What is the theory of constraints?

A

Determining where bottlenecks (constraints) exist and optimizing output by relaxing that constraint.

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54
Q

What can constraints result from?

A

Labor hours, machine hours, or square feet.

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55
Q

What is the optimization rule?

A

Maximize the CM/unit of the constrained resource

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56
Q

What is lean manufacturing?

A

Typically characterized by lower setup times, flexible equipment, and a high variety of unique products with highly skilled, cross-trainined labor.

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57
Q

What is mass production?

A

Typically characterized by higher set up times, dedicated equipment, and low skilled workers with a high degree of specialization.

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58
Q

What is the objective of demand flow/demand flow technology?

A

Is to link process flows and manage those flows based on customer demand.

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59
Q

What is Six Sigma similar to?

A

TQM (Total quality management)

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60
Q

What types of TQM tools does Six Sigma use?

A

Control charts, run charts, Pareto histograms, fish bone diagrams.

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61
Q

For short run profit maximization, a company should try to do what when it comes to manufacturing?

A

Manufature the product with the greater CM/hour of manufacturing capacity.

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62
Q

What does maximizing CM/hour also maximize?

A

Maximizes profits and cash flow as Fixed Costs remain the same.

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63
Q

What is the theory of constraints?

A

Determining where bottlenecks (constraints) exists and optimizing output by relaxing that constraint.

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64
Q

What can restraints result from?

A

Labor hours, machine hours of square footage limitations.

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65
Q

What is the optimization rule?

A

Maximize the CM/unit of the constrained resource.

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66
Q

What is Lean Manufacturing?

A

increasing quality, reducing waste, and minimizing resource consumption through eliminating steps in production that do not increase customer value and streamlining the prices.

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67
Q

What is lean manufacturing typically characterized by?

A

Small batches of high variety of unique products with highly skilled, cross trained labor, lower set up times and flexible equipment.

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68
Q

What is mass production typically characterized by?

A

Higher setup times, dedicated equipment, and low skilled workers with a high degree of specialization.

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69
Q

What is the objective of demand flow/demand flow technology?

A

Link process flows and managed more flows based on customer demand.

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70
Q

What are the 5 processes of Six Sigma approach for continuous improvement to systematically reduce defects?

A
  1. Define
  2. Measure
  3. Analyze
  4. Improve
  5. Control
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71
Q

What is Six Sigma very similar to?

A

TQM - Total Quality Management - it uses TQM tools like control charts, run charts, Pareto histograms, and fish bone diagrams.

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72
Q

What should a company try to do in order to maximize short run profits?

A

Manufacture product with the greater CM/hour of manufacturing capacity.

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73
Q

Maximizing CM/hour also maximizes what?

A

Profits and cash flow since fixed costs remain the same.

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74
Q

What are prime costs?

A

Direct Materials and Direct Labor

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75
Q

What are conversion costs?

A

Direct Labor and MOH

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76
Q

Is indirect labor also a conversion cost?

A

Yes.

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77
Q

What is manufacturing overhead?

A

Cost of labor and supplies that support production process but are not easily traceable to the finished product.

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78
Q

What are period costs/selling and administrative costs?

A

Cannot be matched with specific revenues (I.e. accountant’s salary) and are expensed in the period incurred.

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79
Q

What is the complete flow for goods to end up in COGS?

A

DM, DL, MOH -> WIP -> FG -> COGS

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80
Q

What are product costs assigned to?

A

Goods that were either purchase or manufactured for resale.

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81
Q

In a traditional job order cost system, the issue of indirect materials to a production department increases what?

A

Factory OH control.

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82
Q

In a process cost system, the application of factory OH usually would be recorded as an increase in?

A

WIP Inventory. When overhead is applied:
Debit WIP
Credit OH

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83
Q

What is beginning balance of direct materials at March 1st if the total purchases for the month were $350,000, used RM were $300,00 and Ending Direct Materials were $50,000?

A

Beg DM ?
+Purchases. $350,000
- Used RM. $(300,000)
End DM. $50,000

Beginning DM is 0 after solving for the missing piece.

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84
Q

How is normal spoilage accounted for?

A

Spread over the good units products.

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85
Q

How is abnormal spoilage accounted for?

A

Removing from the costing system and treated as a period cost.

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86
Q

How are the sales from normal scrap accounted for?

A

Used to reduce factory overhead costs, and thereby reduces COGS.

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87
Q

If there is significant sales from scrap accounted for?

A

Can be treated as other sales in Revenue. (rare)

88
Q

Scraps and normal spoilage are included in?

A

Cost of units produced - except not abnormal spoilage.

89
Q

Calculation of Direct Materials?

A 
Beginning DM
\+ DM Purchase
= DM Available
   (DM Used)
= Ending DM
90
Q

Calculation of Manufacturing Costs?

A

DM Used
+ DL
+ MOH
= Total Manufacturing Costs

91
Q

Calculation for Costs of Goods Manufactured?

A 
Beginning Inventory WIP
\+ Total Manufacturing Costs
= WIP Available 
  (WIP Used)
= Costs of Goods Manufactured
92
Q

Calculation of Finished Goods Inventory (you can find COGS using this equation as a plug)

A 
Beg FG Inventory
\+ Cost of Goods Manufactured (or purchases)
= Goods Available for Sale
- COGS
= Ending FG Inventory
93
Q

Example of Past CPA Question: Find Gross Profit

Sales: $600,000
Net RM Purchases: $600,000
COGM: $800,000
Marketing + Admin: $250,000
Indirect Manufacturing Costs: $500,000

Beg WIP: $500,000
Ending WIP: $400,000
Beg FG Inv: $100,000
End FG Inv: $500,000

A
  1. Find COGS

Beg FG: $100,000
+ COGM: $800,000
(COGS): ( ? )
End FG: $500,000

COGS = $400,000

Sales: $600,000
(COGS): ($400,000)
Gross Profit: ($200,000)

94
Q

What do mixed costs have?

A

Fixed component and a variable component.

95
Q

How do step variable costs remain constant?

A

In total over a small range of production levels.

96
Q

How do step variable costs vary?

A

With large changes in production volume.

97
Q

What is the high-low method?

A

Calculate change in costs from 2 productions volume extremes (high/low values). Fixed costs are determined by removing the variable cost component.

98
Q

Solve for Fixed costs/month and the average VC/month.

July OH Costs: $58,000
July units made: 6,200
Dec OH Costs: $40,000
Dec units made: 3,200

A

Equation: High - Low Costs/High - Low Units

$58,000 - $40,000/6,200 - 3,200 = $6/unit variable cost

TC in July (you can pick whatever month):
$58,000 = FC + ($6 x 6,200)
$58,000 = FC + $37,200
$20,8000 = FC

99
Q

Draw a rise/run diagram and describe what is on the y axis and what is on x axis.

A

High/low points are on the x axis. Rise is Y. Run is X.

100
Q

What happens to variable costs and fixed costs when production levels are expected to increase within a relevant range and a flex budget is being used?

A

Fixed Cost/unit will decrease. However, the variable cost/unit will not change.

101
Q

How does the CPA exam typically tests cost volume profit (CVP)?

A

By asking the BE point, income, or the effect on one or both of those. In general, the effect on income is the opposite of the effect on the break even point.

102
Q

What is the CM Ratio?

A

CM per unit/price. Represents the percentage of each sales dollar that is available to cover fixed costs.

103
Q

What is the BE point in units?

A

Fixed costs/(Price - VC per unit)

104
Q

What is the BE point in dollars?

A

(CM/unit)/price

105
Q

What is the basic BE formula?

A

(Quantity x Sales Price) = FC + (Quantity x VCunit)

106
Q

At the BE point, the CM equals what?

A

Fixed Costs.

107
Q

A ceramics manufacturer sold cups last year for $7.50 each. Variable cost was $2.25/unit. They needed to sell 20,000 to break even. Net income was $5,040.

This year’s price per cup is $9. Variable manufacturing cost to increase by 33.3%. Fixed costs to increase by 10%.

How many cups (rounded) dos the company need to sell back this year to break even?

A

Variable Cost: $2.25 x 33.3% = $3.00
Fixed Cost: To find the increase in fixed costs, you need to solve for fixed costs for the prior year:

$7.50 sales price x 20,000 = $150,000
$2.25 VC x 20,000 = ($45,000)
Contribution Margin = $105,000
Fixed Costs were then $105,000

$105,000 x 1.10 = $115,500

Now solve for fixed costs per unit for this year:
$9.00 sales price
$(3.00) variables cost
$6.00 CM

Since CM = Fixed costs at the breakeven point, divide $115,500/6 = 19,250 cups

108
Q

Same facts as above, expect adding the following information:

Sales tax rate is 40%. Sales in the coming year are expected to exceed last years sales by 1,000 units. How many units to they expect to sell next year?

A

Net income after tax: $5,040
EBIT = $5,040/(1-.40) = $8,400
(check -> $8,400 - ($8,400 x .40) = $5,040

Break even was 20,000 cups at $7.50/cup

Now you need to work backwards from EBIT and up to find out how many cups they actually sold last year.

Total Sales Total Sales Unknown. $7.50/unit
(Variable Costs). Total VC Unknown. (2.25)/unit
=CM Total CM Unknown $5.25/unit
-Fixed Costs* (105,000)
=Income 8,4000

*Fixed Costs are known from the previous example by finding the break even point.

To find, CM - add 8,400 + 105,000 = 113,400
$113,400/5.25 = 21,600 cups + 1,000 = 22,600 they plan to sell this year.

109
Q

10,000 Units
Fixed Costs: $300,000
Variable Cost: $50/unit
Sales Price: $85/unit
Variable cost to increase by 20%. ($50 x 1.20 = $60)
Planning to increase production to 12,000 units. What will happen?

A

If it remained at $10,000:

Sales $85: $850,000
VC $50:     $500,000
CM:            $350,000
FC:             $300,000
Income:     $50,000

Up to 12,000

Sales $85:  $1,020,000
VC $60:      $(720,000)
CM:              $300,000
FC:              $300,000
Income:       $0

Income would decrease by $50,000

110
Q

What is the contribution margin ratio is the Contribution Margin is $100,000 and the Sales are $800,000?

A

CM Ratio = $100,000/$800,000 = 12.5%

111
Q

If the contribution margin is 12.5% and sales are $1,200,000, what is the contribution margin?

A

12.5% x $1.2m = $150,000

112
Q

Liability insurance would be an example of what type of cost?

A

Fixed Cost

113
Q

What is most likely the strategy to reduce the BE point?

A

Decrease Fixed Costs and Increase CM

114
Q

What will happen to the budgeted BE point if variable costs increase?

A

If a variable cost increase and all other budgeted costs and revenues remain unchanged, a budgeted BE point will increase the budgeted margin of safety will decrease.

115
Q

How do you calculate the budgeted margin of safety?

A

Budgeted Sales - Breakeven Sales

116
Q

What is a calc that you can find the Breakeven Sales?

A

Fixed costs/CM%

117
Q

What does breakeven analysis assume?

A

That over a relevant range, unit variable costs are constant.

118
Q

What is absorption costing?

A

Assigns all 3 factors of production (DM, DL, and both fixed and variable MOH) to inventory. This is required for external reporting purposes and the IRS.

119
Q

What is direct costing?

A

Also known as variable costing. Assigns only variable manufacturing costs (DM, DL, VMOH) to inventory. Used for internal/budgeting purposes.

120
Q

What are some examples of Variable MOH?

A

Supplies, utilities, repairs, etc.

121
Q

What is the absorption costing Income Statement?

A 
Sales
-VMOH for units sold
-FMOH for units sold
=Gross Margin
-V SG&A - for units sold
F SG&A - always for total costs
=Operating Income
122
Q

What is the direct costing Income Statement?

A 
Sales
-VMOH - only for units sold
-V SG&A - only for units sold 
=CM
-FMOH - always total cost 
-F SG&A - always for total cost
=Operating Income
123
Q

What is the calculation for the income reconciliation rule (that is widely tested on the CPA Exam)?

A

(End Inventory x Fixed Cost per unit)

-(Beg Inventory x Fixed Cost per unit)

124
Q

Ending inventory is 5,000 units with a fixed cost per unit at $10/unit. Beginning inventory is 2,000 units with fixed cost per unit at $10/unit. What is the difference between income between direct costing and absorption costing?

A

5,000 x $10 $50,000
(2,000 x $10) ($20,000)
$30,000

Absorption costing income is greater than direct costing income. (if this was negative, direct costing would have higher income)

125
Q

What is the rule when it comes to determining whether absorption net income or direct costing net income is higher?

A

Units sold = units produced - AC = DC
Units Sold>units produced - AC < DC
Units sold DC

126
Q

If actual income under direct costing (variable costing) so internal reporting, is greater than is greater than what was budgeted, this usually would mean?

A

SG&A Fixed expenses decreased. (use income statement above for direct costing)

127
Q

If actual income under direct costing (variable costing) is less than what as budgeted, this would usually mean?

A

SG&A Fixed expenses increased. (use income statement above for direct costing)

128
Q

Is the current ratio under absorption or direct costing higher?

A

Absorption

129
Q

Why is the current ratio higher under absorption?

A

Absorption (for external reporting purposes) allocated both variable and fixed costs to inventory. Therefore Ending inventory (and thus current assets) are HIGHER under absorption costing by the amount of fixed assets allocated to inventory - which increases the current ratio.

130
Q

Why is the return on SE (which is NI/avg owner’s equity) smaller under absorption costing?

A

R/E (which is in the denominator) will be higher b/c total expenses recognized for the life of the firm are less than for variable costing by the amount of FOH remaining in inventory at Y/E.

131
Q

At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable and fixed MOH costs were $90 and $20. If Killo uses absorption costing rather than direct (variable) costing, the resulting higher pretax income would be?

A

Absorption includes bother variable and fixed MOH as product costs:
1,000 x $90 = $90,000
1,000 x $20 = $20,000
= $110,000

Direct costing includes only variable MOH as production costs and expenses Fixed MOH has a period expense:
1,000 x $90 = $90,000

Inventory valuation under absorption costing is MORE than inventory valuation under direct costing. Since absorption costing has a higher inventory valuation, COGS under absorption costing will be higher, and income will be lower (by $20,000) vs. direct costing.

132
Q

What is job costing used for?

A

Used for production of large, relatively expensive, custom items. At the end of a period, applied OH is compared to actual OH and an entry is made to adjust any difference.

133
Q

What are the three steps to adjust overhead?

A
  1. Calculate the pre-determinied OH rate = (Budgeted Factory Overhead Costs)/(Estimated cost Driver Activity Level) (so budgeted cost/budgeted units)
  2. Apply overhead by multiplying Step 1 by the actual units of the allocation base.
  3. Dispose of over/under applied overhead.
134
Q

Budgeted direct labor hours: 500,000
Budgeted OH dollars: $250,000
Actual DL hours: 600,000

What are actual overhead dollars?

A
  1. Computer POR= $250,000/500,000 = $0.50/DLH
  2. Apply the OH = $0.50 x 600,000 = $300,000
  3. $300,000 - $250,000 = $50,000. The $50,000 difference needs to go to COGS.
135
Q

Example: Birk Co. uses a job order cost system.

April 1 - Inv Balance $4,000
April 30 - DM $24,000
April 30 - DL $16,000
April 30 - FOH $12,800
April 30 - To FG. ($48,000)

Birk applies OH to production at a pre-determined rate of 80% of DL cost.

Job #5, the only job still in process on 4/30 was charged with DL of $2,000.

What was the amount of DM charged to Job No 5?

A 
Step 1:  
Beg Bal: $4,000
\+DM:      24,000
\+DL:       16,000
\+FOH:    12,800
-FG:        (48,000)
=             8,800 remaining in WIP

$8,000 remaining in WIP
(2,000) DL
(1,600) OH = 80% x $2,000
=5,200 Materials charged to Job #5

136
Q

What is another term of OH?

A

Indirect cost - cannot be traced to specific jobs, but they are a necessary ingratiate to the total production cost.

137
Q

If a customer’s requirement for the early completion of a job causes overtime, how is the overtime cost recognized?

A

Premium is incremental to that job and therefore charged to it.

138
Q

What does it mean when OH was under applied.

A

Actual overhead was greater than the applied overhead.

139
Q

What will the CPA Exam focus on when it comes to process costing?

A

Mainly focus on the calculation of equivalent units under different cost flow options (I.e. FIFO vs Weighted Avg)

140
Q

What are the steps to allocate manufacturing costs to ending WIP and cost of goods transferred out of WIP?

A
  1. Determine equivalent units
  2. Comput cost per EU
  3. Determine (a) cost of goods transferred out of WIP and (b) ending WIP inventory
141
Q

What are equivalent units?

A

In process costing, the # of whole units represented by the partially complete units in terms of cost. For example: 100 units that are 50% complete (in terms of cost) = 50 equivalent units.

142
Q

What does the weighted average cost flow assumption assume?

A

prior period costs and current period costs are being averaged together. Beginning inventory costs are average with the current period.

143
Q

What does the FIFO cost flow assumption assume?

A

Assumes prior period costs and current period costs are treated separately. Beginning inventory value is rated as slump sum and added to current period costs.

144
Q

In computing the current period’s manufacturing cost per equivalent unit, what does the FIFO method of process costing consider?

A

Current period costs only.

145
Q

Beginning WIP: 15,000 Cost of Materials: $5,500
Started in April: 40,000 Cost of Materials: $18,000
Uniteds Completed: 42,500
Ending WIP: 12,500

What is the EU using the weighted average method?

A

Under the weighted average method, the cost per EU includes all the work done through the end of the current period, including work performed on the beginning inventory during previous periods.

  1. Sum of the units completed + United in End Inventory
    42,500 + 12,500 = 55,000
  2. Total cost incurred on the material: $23,500
  3. cost per EU = 55,000/$23,500 = $0.43
146
Q

Beginning WIP: 10,000 units 70% complete
Units started in producing during the year: 150,000
Uniteds completed during the year: 140,000
Ending WIP: 20,000 unite 25% complete

What are the equivalent units produced using FIFO?

A

Find units started and finished:
Units Started + Beg WIP = Beginning WIP + Units Started and Finished + Ending WIP

150,000 started + 10,000 beg WIP = 160,000

160,000 = 10,000 + Units Started and Finished + 20,000. Working backwards you get 130,000 units started and finished.

Beginning WIP EU under FIFO:
10,000 x 30% incomplete = 3,000 EU
Remember EU’s are the partially complete products

Add the 130,000 units started and finished.

Add the 25% completed Ending WIP.

3,000 + 130,000 + 5,000 = 138,000 EU

147
Q

What do joint costs result from?

A

A single manufacturing process that yields multiple products. Products are produced from the same set of RM and are not identifiable until the split off point.

148
Q

What is the split off point?

A

Point at which products manufactured through a common process are differentiated and process separately.

149
Q

What are joint costs?

A

incurred prior to split off - and must be allocated to joint products.

150
Q

What are separable costs?

A

Additional processing costs incurred beyond the split off point. They are NOT allocated to the joint products. The are only attributable to individual products.

151
Q

What are the 3 cost allocations to joint products?

A

Relative Physical Volume - proportionate share based on volume.

Relative Sales Value at Split off - proportionate share based on sales value

Net Realizable Value
=Final sales value - any additional separable process cots
or =Ultimate salves value - additional costs = NRV
Then, the proportion of the NRV

152
Q

What are by products?

A

Relatively insignificant sales value compared to main product and are normally not allocated a share of joint costs of production. No revenue is recognized. Net proceeds are used to reduce cost of main projects.

153
Q

What are scraps?

A

Used to reduce overhead costs, credit to factory OH control. Unless identified with a particular Direct Material, it may be offset against that cost.

154
Q

There are two products from a chicken manufacturing:

Breast Meat and Chicken Legs have a joint cost of $600,000.
100,000 pounds of breast meat was produced and selling at $2/lb.
50,000 pounds of chicken legs was produced and selling $1/lb.

No further processing costs after split-off, what amount of the joint costs would be allocated to to the breast meat on a NRV basis?

A

Joint Cost = $600,000
Breast meat sales value = 100,000lb x $2 = $200,000
Chicken legs = 50,000 x $1 = $50,000

Total sales value = $250,000
$200,000/$250,000 = 80%

80% x 600,000 = $480,000

155
Q

What is affected when accounting for a by product by deducting the sales against COGS to the major product?

A

Gross Margin

156
Q

If a by product is accounted for as a joint product, what happens?

A

The cost associated with each until would be classified as a sales expense and is subtracted below gross margin. So the gross margin would increase should you decided to expense it.

157
Q

10,000 units of product L is produced. 9,500 units were sold. Separable cost is $20,000. Selling price/unit is $8.

5,000 units of product M is produced. 4,000 units were sold. Separable cost I $40,000. Selling price/unit is $20.

Joint costs are $36,000.

What are the costs allocated to M using NRV?

A

L: 10,000 x $8 = $80,000 - $20,000 =$60,000
M: 5,000 x $20 = $100,000 - $40,000 = $60,000

50% of joint costs should be allocated to M.
$36,000 x 50% = $18,000

158
Q

How do you calculate the price/rate variance?

A

Different in rates (standard - actual) x Actual quantity

159
Q

How do you calculate the usage/efficiency variance?

A

Different in quantities (standard - actual) x Standard rate

160
Q

Company used 80 hours of labor at a cost of $15/hour to complete 40 steel doors. Based on the company’s labor standards for the door, they should have used 85 hours of labor at a cost of $13 to complete the 40 doors.

A

Standard Amount - Actual Amount = Difference/Variance

Quantity = 85-80 = 5 (efficiency variance is favorable)
Rate = $13 - $15 = -$2 (rate variance is unfavorable)
Total Variance = (85 x $13) - (80 x $15) = -$95 (total variance is unfavorable)

161
Q

Standard materials usage cost of one unit of Product A is 6lbs at $2.00/lb. Actual units produced were 20 units; 100lbs of RM at a total cost of $225 were used in production. Calculate the materials price and usage variances for Product A.

A

Price/Rate Variance ($2.00 standard - $2.25 actual) x 100lbs actual = -$25. This is unfavorable. The $2.00/lb budget was lower than actual cost.
$2.25 = $225/100lb

Usage Variance (120lbs standard - 100lbs actual) x $2.00 standard rate = $40 favorable. Only 100lbs were actually used over the 120lb budgeted based on the amount of pounds per unit.
120lbs = 20 units x 6lbs/unit
162
Q 
Labor Price Variance example: 
Total standard hours for units produced: 5,000
Total actual DL cost: $111,625
Actual per hour labor rate: $23.50
Standard per hour labor rate: $24.00
A

Determine the amount of hours: Actual $111,625/$23.50 = 4,750 hours.

Labor Rate Variance: ($24.00 standard - $23.50 actual) x 4,750 actual hours = $2,375 favorable because the actual per hour rate was less.

163
Q

Selling Price Variance Example:

Estimated demand: 10,000
Est SP: $6.00
Actual Demand: 8,000
Actual price: $6.20

A

Selling Price Variance: ($6.00 standard - $6.20 actual) x 8,000 actual demand = 1,600 favorable

The item so for more, therefore the selling price variance is variable.

164
Q

Material efficiency variance:

Budgeted 8,500 ft of board
Actual was 9,000 ft of board
Budgeted cost is $2.000
Actual cost is $3.00

A

Material efficiency variance: (8,500 standard - 9,000 actual) x $2.00 budgeted-standard price = $1,000 unfavorable because more board was used than planned.

165
Q

Overhead variance analysis questions on the CPA exam are mainly:

A

conceptual rather than computational.

166
Q

What is the calculation for the overhead application rate?

A

(Budgeted VOH + Budgeted FOH)/Budgeted Units

167
Q

Example tip for overhead variance:

A

Know variances for variable overhead and whether they are controllable or uncontrollable.

168
Q

Is OH spending variance controllable?

A

Yes

169
Q

Is OH efficiency variance controllable?

A

Yes, as long as the underlying allocation base is under control of the production manager.

170
Q

Is OH volume variance controllable?

A

No.

171
Q

What is the calculation for Fixe OH volume variance?

A

Budgeted Fixed OH - (Stnd Fixed OH Rate x Actual Quantity)

172
Q

What is the calculation for Fixed OH Budget Variance?

A

Actual - Fixed

173
Q

Standard variable OH/Standard direct labor hour $3
Actual VOH: $28,000

Standard DL hours/unit: 2 hours
Actual DL hours: 10,500
Number of units produced: 5,000 x 2hours = 10,000 hours

What is the variable efficiency variance?

A

(Standard - Actual) x Standard Rate

(10,000 hours - 10,500hours) x $3 = (1,500) - additional needs to be applied to COGS

174
Q

Spending variances unaffected by what?

A

Volume used for allocated to Fixed OH.

175
Q

What type of costs are joint costs?

A

Sunk costs that are unavoidable, regardless fo whether the item is sold at split off or processed further.

176
Q

What are the relevant costs when deciding to produce a product further?

A

Differential future costs and benefits

177
Q

What is transfer pricing?

A

Price charged by the selling division to the buying division.

178
Q

What are three methods of transfer pricing?

A

Cost based - cost of production
Negotiated - price that is mutually agreeable
Market based - price in an open market

179
Q

What is goal congruence?

A

Department and division managers make decisions that are consisted with those of the organization as a whole.

180
Q

What is the calculation for transfer price/unit?

A

Additional outlay cost/unit (I.e. incremental product costs incurred by selling unit) + Opportunity cost/unit (I.e. the benefit forgone as a result of selling internally rather than externally).

181
Q

At full capacity, what is the transfer price?

A

Market Price

182
Q

At excess capacity, what is the transfer price?

A

Additional costs incurred to produce each unit.

183
Q

When negotiated, what will the selling division’s minimum price be?

A

Direct costs if has excess capacity

Market price if it does not have excess capacity.

184
Q

What determines the transfer price when the cost based method is used?

A

Transfer price = production costs associated with selling division.

185
Q

How do company’s use transfer pricing to reduce their tax liability?

A

Transfer pricing does reduce tax liability by declaring profits in a country/state with the lowest marginal tax rates.

186
Q

What is dual pricing?

A

Top management provides a different, preferred price for buyer and seller.

187
Q

In transfer price negotiations, what does the seller need to cover?

A

Seller needs to cover their incremental outlay costs as a floor in transfer price negotiations.

188
Q

What is the general rule for transfer pricing?

A

Minimum transfer price (floor) is equal to the avoidable outlay costs. Maximum transfer price (ceiling) is equal to market price.

189
Q

What is generally preferable under stable economic conditions for transfer pricing?

A

Standard variable costs.

190
Q

Case #1 vs Case #2
Strudel Division:
Capacity in units of Strudel: 1,000 1,000
# of units demanded
externally/sold: 600 1,000
Market Selling Price: $2 $1.50
Avoidable Outlay Costs/Unit: $1.50 $1.30
Unavoidable costs/unit
based on capacity $0.20 $0.20

Bean Division:
# of units of strudel needed: 400 400
Budgeted price per unit: $1.95 $1.45

Strudel can either be sold to outside customers or to the Bean Division. Will the transfer take place? Case 1 vs Case 2.

A

Case 1 - YES. Floor of $1.50 (avoidable costs) and a ceiling of $2 (market price) provides a variable range for transfer to take place - and the excess capacity allows for no service disruption too customers.

Case 2 - NO Units demanded would be denied from regular customers since no excess capacity exists. Where there is no idle capacity, as in Case #2, the market value services as both the ceiling and the floor price @ $1.50.

191
Q

Organizations that adopt ABC (Activity Based Costing) have what type of results?

A

More precise measures of cost, most cost pods, and more allocation bases.

192
Q

Where can ABC be used?

A

Job order/process costing, standard costing/variance analysis, service business

193
Q

What does ABC do?

A

Shifts costs away from high volume, simple products to lower volume, complex products.

194
Q

In ABC, what are activities?

A

procedures that cause work.

195
Q

In ABC, what are cost drivers?

A

Measures that are closely correlated in the way in which an activity actuates costs.

196
Q

In ABC, what is a cost center?

A

Area where costs are accumulated and then distributed to products (I.e. A/P, product design, and marketing)

197
Q

In ABC, what are cost pools?

A

Group of costs associated with a specific cost center.

198
Q

In ABC, what is a value adding cost?

A

Contribute to product’s ultimate value.

199
Q

What 4 levels are activities grouped into?

A
  1. Facility level
  2. Product sustaining level
  3. Batch level
  4. Unit level
200
Q

What was ABC result in?

A

A larger # of smaller cost pools that can be more closely aligned to products.

201
Q

What is Business Process Re-Engineering (BPR)?

A

Analysis approach to make an extreme transformation.

202
Q

When would a company most benefit from using ABC?

A

When indirect costs are a high percentage of total costs. Due to the fact that indirect costs must be allocated while directs costs assignments are traceable.

203
Q

Behavioral effects, cost of measurement, and degree of correlation are all considered in the selection of appropriate cost drives of what?

A

ABC

204
Q

What is the budgeted GM fro Year 1 with the following information?

Cash disbursement to candle manufacturer: $300,000
Target AP balance for Year 1 is 150% of A/P
Sales price is set at a markup of 20% of candle purchase price
A/P Balance is $100,00 at beginning of Year 1

A

Need to Find Purchases by Working Backwards:

Beginning A/P: $100,000
Purchases: $350,000
Cash Payments: ($300,000)
Ending A/P: $150,000 -> Target A/P = $100k x 150%

150,000 + 300,000 - 100,000 = 350,000 (to purchases)

Sales -> 20% x $300,000 = $420,000

Sales: $420,000
(Purchases/COGS): $(350,000)
Gross Profit $70,000

205
Q

What is the required unit production level based on the following?

Projected sales in units: 1,000
Beginning inventory in units: 85
Desired ending inventory: 100

A

Solve for Goods Manufactured

Beg Inventory: 85
+Goods Man: ?
(Goods sold) (1,000)
End Inv 100

Goods manufactured: 100 + 1,000 - 85 = 1,015

206
Q

What is the estimated gas disbursements for inventories based on the following information?

Sales: $2.8m
Decrease in inventories: 70,000
Decrease in A/P: 150,000
Gross Margin: 40%

Decrease in A/P is a cash disbursement.

A

Purchases = Costs of sales - inventory decline.

Gross Margin = (Revenue - COGS)/Revenue
.4 = (2.8m - COGS)/2.8m
1,120,000 = 2,800,000 - COGS
1,680,000 = COGS

OR

2.8m(1-.4) = $1,680,000

Purchases = $1,680,000 - $70,000 = $1,610,000

Estimated cash disbursements = $1,610,000 + 150,000 = $1,760,000.

207
Q

If A/P decreases, then payments on A/P must what?

A

Exceed purchases.

208
Q

How would you describe probability and expected values?

A

Probability is always between (o) ever and (1) always. The weighted average of outcomes is the expected values.

209
Q

What is joint probability?

A

Probability of an event occurring given that another event has already occurred.

210
Q

What are the 4 steps to solve joint probability?

A
  1. Probability of first event x conditional probability of 2nd event = combined rate
  2. Total the combine rates
  3. Divide individual combined rate by total combined rate.
  4. Make sure the sum is 100.
211
Q

What is the probability there will be an error in each of the new offices with the following information?

Northwest handles 30% of orders, has a 4% chance of errors. Central office handles 50% of orders, has a 2% chance of errors. Southwest office handles 20% of orders, has a 8% chance of errors.

A

Northwest: .30 x .04 = .012
Central: .50 x .02 = .010
Southwest: .20 x .08 = .016

Total combined rate: .012 + .010 + .016 = .038

Divide individual rates by total:
Northwest: .012/.038 = .316 (31.6%)
Central: .010/.038 = .263 (26.3%)
Southwest: .016/.038 = .421 (42.1%)

212
Q

What is a variance analysis?

A

Dispersion of values around expected value. The smaller the variance, the less amount of risk.

213
Q

What is the correlation coefficient?

A

R
1 = perfect positive correlation between dependent and independent variables.
-1 = perfect negative correlation between dependent and independent variables.
0 = no correlation

214
Q

What is the coefficient of determination?

A

R squared.
Degree to which the behavior of independent variable predicts dependent variables. The closer Rsquared is to 1, the better the independent variable predicts the behavior of dependent variable. The closer to 1, the best predicts the manufacturing costs and constructs regression equation.

215
Q

What is the regression analysis equation and the breakdown?

A

y = A + Bx

y = dependent variable
A = y-intercept
B = slope of the line
x = independent variable
216
Q

What is the cost analysis regression equation?

A 
y = Total costs (dependent variable)
A = Fixed costs (y - intercept)
B = Variable cost/unit (slope)
X = Number of units (independent variable)

Total costs = Fixed Costs + (VC x units)

217
Q

What does the coefficient of determination measures what?

A

Goodness of fit.

CPA - BEC (5 decks)

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