P1SD Cost Management Flashcards
In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would
A. Not be used
B. Be treated as the same as variable selling and administrative expenses
C. be used in the computation of operating income but not in the computation of the contribution margin
D. Be used in the computation of the contribution margin
C. Be used in the computation of operating income but not in the computation of the contribution margin
Which of the following is a limitation of an Activity-Based costing system?
A. Restricts blanket allocation of overheads
B. ABC system has proved to be unreliable and incorrect in the past
C. It makes overheads more difficult to manage
D. The system is very costly to implement
D. The system is very costly to implement
Activity-Based Costing, or ABC, follows the idea that products consume activities. ABC’s purpose is to assign costs to activities performed in an organization and then assign them to product according to each products’ use of the activities.
ABC involves tracing overhead and identifying cost drivers, cost pools, and cost center for each activity. As such, it is very time-consuming and expensive to implement.
A basic assumption of activity-based costing (ABC) is that
A. All manufacturing costs vary directly with units of production
B. Products or services require the performance of activities, and activities consume resources
C. Only costs that respond to unit-level drivers are product costs.
D. Only variable costs are included in activity cost pools
B. Products or services require the performance of activities, and activities consume resources
ABC assumes that creating products or services requires activities that consume resources. ABC allows for more complex relationships to be included in costing than traditional methods. An ABC system may use unit-, batch-, and plant-level drivers and both variable and fixed costs.
The Forming department is the first of a two-stage production process. Spoilage is identified when the units have completed the Forming process. Costs of spoiled units are assigned to units completed and transferred to the second department in the period in which spoilage is identified.
The following information concerns Forming’s conversion costs in May:
- Beginning work in process (50% complete): 2,000 units, $10,000 conversion cost
- Units started during May: 8,000 units, $75,000 conversion cost
- Spoilage - normal: 500 units
- Units completed & transferred: 7,000 units
- Ending work-in-process (80% complete): 2,500 units
Using the weighted average method, what was Forming’s conversion cost transferred to the second production department?
$67,500
The weighted average method treats partially completed units in the beginning work-in-process inventory as if they were started and completed in the current period.
Normal spoilage is treated as normal cost of production, and the cost of spoilage is transferred to the second production department.
The equivalent units (EUs) of production for purposes of determining the costs to be transferred also include the spoiled units. The conversion cost per EU is $9.00 (that is total production cost $85,500 divided by equivalent units of 9,500).
$9.00 x 7,500 = $67,500
Equivalent units
The expression of the units produced in terms of complete units.
Equivalent units manufactured are calculated by multiplying units in production by the percentage of work done.
Dowell Co. manufactures a wooden item. Which of the following is included with the inventoriable cost under absorption costing and excluded from the inventoriable cost under variable costing?
a. Cost of electricity used to operate production machinery
b. Straight-line depreciation on factory equipment
c. Cost of scrap pieces of lumber
d. Wages of assembly line personnel
b. Straight-line depreciation on factory equipment
Under direct (variable) costing only variable manufacturing costs are inventoried. Fixed manufacturing costs are expensed in the period incurred. Absorption costing includes all manufacturing costs in inventory.
The following information is given to you at different levels of production:
*units produced: 40,000 / 75,000
* Variable costs: $240,000 / $450,000
* Fixed Costs: $85,000 / $85,000
* Semi-variable costs: $105,000 / $175,000
Ascertain the total fixed costs of the entity.
a. 85,000
b. 110,000
c. 25,000
d. 55,000
b. 110,000
semi-variable costs are those costs that are both variable and fixed in nature, depending upon the volume or lots of production. The variable and fixed component in a semi-variable cost can be bifurcated by the following formula:
- variable cost per unit: change in cost / change in volume
*fixed cost = total semi-variable cost - total variable cost
In the given case, variable cost per unit = ($175,000-105,000)/($75,000-40,000) = $2/unit
Fixed costs component at 40,000 volume = 105,000 - (40,000 x 2) = $25,000
total fixed costs = $85,000 + 25,000 = 110,000
the fixed costs will be the same for 75,000 units as well
A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?
a. Electricity expense
b. Repair and maintenance expense
c. Employee benefits expense
d. Depreciation expense
c. Employee benefits expense
Electricity expense, repair and maintenance expense, and depreciation expense should have a high correlation with total machine hours. Employee benefits expense has a low correlation to machine hours.
Atlas Food produce the following three supplemental food products simultaneously through a refining process costing $93,000.
- ALFA: 10,000lbs of Alfa
- BETTERS: 5,000lbs of Betters
- MOREFEED: 1,000lbs of Morefeed
The joint products, Alfa and Betters, have a final selling price of $4/lb and $10/lb respectively, after additional processing costs of $2/lb of each product are incurred after the split-off point. Morefeed, a by-product, is sold at the split-off point for $3/lb.
Assuming Atlas Food does not inventory Morefeed, the by-product, the joint cost to be allocated to Betters using the net realizable value method is:
a. $31,000
b. $30,000
c. $60,000
d. $62,000
$62,000
If Atlas does not inventory the by-product, it implies that the by-products are first recognized in the accounting records when the by-products are sold. Thus, the entire amount of the joint costs ($93,000) will be allocated between the two products that are inventoried (Alfa and Betters).
Net Realizable Value = (Selling Price - Separable Costs) x Units Sold
Alfa: 10,000 units sold, selling price $4, Separable Costs $2
NRV = (4-2) x 10,000 = 20,000 (33.33% NRV)
Better: 5,000 units sold, selling price $10, Separable Costs $2
NRV = (10-2) x 5,000 = 40,000 (66.67% NRV)
Total = 60,0000 (100%)
*Total Joints Costs to be allocated: $93,000
*%NRV of Betters: 66.67%
*Joint Costs allocated (rounded off): $62,000
