Planning & Management Flashcards
Define “direct costs.”
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs.
Define “overhead allocation rate.”
The rate used to apply overhead to production; calculated by dividing the estimated total overhead costs by estimated normal volume of the allocation base (direct labor hours, machine hours, raw material weight, etc.).
Describe the accounting treatment of over-applied or under-applied overhead (e.g., the difference between actual overhead and overhead applied to production).
If immaterial, simply charge to Cost Of Goods Sold (COGS); if material, prorate to Work In Process (WIP), Finished Good (FG), and COGS.
Define “product costs.”
Cost that can be associated with making or acquiring goods for sale; product costs are held in inventory until the products are sold; also known as inventoriable costs.
List the three factors of production.
- Direct Material; 2. Direct Labor; 3. Factory Overhead.
Define “applied overhead.”
The estimated overhead charged to production: calculated by multiplying the overhead rate times the allocation base activity units (direct labor hours, machine hours, raw material weight, etc.).
Define “actual overhead.”
The amounts actually paid for indirect costs (utilities, maintenance, supervision, etc.).
Define “prime costs.”
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs; also known as direct costs.
Define “conversion costs.”
Costs necessary to convert raw materials into a finished product: comprised of direct labor costs plus factory overhead costs.
Define “period costs.”
Costs that cannot be matched with the production of specific revenues and so are expensed in the period incurred.
Define “indirect costs.”
Manufacturing costs which cannot easily be traced to specific units; also known as manufacturing overhead.
Define “abnormal spoilage.”
Unplanned but considered controllable, for example, spoilage due to natural disaster, carelessness, inefficiency, or accidents. Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.
Describe the accounting treatment of proceeds from sale of scrap.
Sale proceeds are used to reduce overhead (and consequently, COGS), they are not reported as revenue.
Describe the accounting treatment of normal spoilage.
Included with other costs as an inventoriable product cost.
Define “normal spoilage.”
Unavoidable as part of the manufacturing process. Normal spoilage is included with other costs as an inventoriable product cost.
Describe the differences between retail inventories and manufacturing inventories.
Retail = merchandising inventory; Manufacturing = raw materials, work-in-process and finished goods.
Describe the accounting treatment of costs of abnormal spoilage and scrap.
Separate costs and deduct as a period expense; do not include as part of product cost.
Define “fixed costs.”
Costs that remain constant in total regardless of production volume.
Define “mixed costs.”
Costs that have a fixed component and a variable component.
Define “variable costs.”
Costs that vary in total in direct proportion to changes in production volume.
Define “step-variable costs.”
Costs that remain constant in total over a small range of production levels, but vary with larger changes in production volume.
Define “relevant range.”
(1) the range of activity for which the assumptions of cost behavior reasonably hold true; AND (2) the range of activity over which the company plans to operate.
What is usually the main reason for outsourcing?
Outsourcing is often used to lower cost and increase quality by utilizing a vendor’s specialization.
What does process management do that activity-based costing (ABC) alone does not do?
Increase manager understanding of the cause-and-effect relationships involved between processes and the resources they consume, and promote the elimination of waste.
How is Business Process Reengineering (BPR) different from incrementally reducing non-value activities?
BPR often involves an extreme transformation by analyzing and making sweeping improvements to an entire process.
Define “shared services”.
An arrangement where one part of an organization provides an essential business process where previously it had been provided by multiple parts of that same organization.
Describe the differences between off-shoring and outsourcing.
Outsourcing is always outside of the company (but may or may not be outside the country). Off-shoring is always outside of the country (but may or may not be outside the company).
Define “direct costing”.
A product cost allocation method that assigns only variable manufacturing costs (i.e., direct material, direct labor, and variable manufacturing overhead) to products: fixed manufacturing overhead is written off as period expenses; not acceptable for external reporting.
Define “contribution margin”.
Sales revenue minus variable costs: the amount of sales revenue available to cover fixed costs and generate a profit.
Define “absorption costing”.
A product cost allocation method that assigns all manufacturing costs (i.e., direct material, direct labor, and both variable and fixed manufacturing overhead) to products; absorption costing is required for external reporting.
How is the contribution margin calculated using the direct costing method?
Contribution margin is equal to revenue minus all variable costs, including period costs.
What types of product costs are included in the direct costing model?
Only variable manufacturing costs are included in product costs.
Which costing method is required for compliance reporting (i.e., financial and tax reporting)?
Absorption costing.
What is the fundamental purpose of the calculations in process costing?
To determine the portion of costs that belong in Ending WIP inventory and the portion of cost that is transferred to Finished Goods inventory.
How should you think about transferred-in costs in process costing?
Transferred-in costs are viewed by the transferring department as “cost of goods transferred out,” while the receiving department should treat those costs in a manner similar to an additional category of direct materials used.
Define “process costing”.
Product costing method that spreads production costs across a large number of mass-produced units; used to accumulate costs for homogeneous items which are often small and inexpensive.
Describe how job order costing is used.
It is used to accumulate costs related to the production of large, relatively expensive, heterogeneous (custom ordered) items.
What are the three major steps involved with process costing?
(1) determine equivalent units; (2) determine cost per equivalent unit; and (3) Determine (a) cost of goods transferred out of WIP and (b) Ending WIP Inventory.
Define “process costing (weighted average method)”.
Product costing method that calculates a single equivalent unit price for goods manufactured during the period by adding beginning WIP costs to current period costs dividing the total by the total equivalent units for the period.
Define “job order costing”.
Product costing method that identifies costs associated with production of specific items; used for production of large, relatively expensive, heterogeneous (custom-ordered) items.
Define “transferred-in costs”.
Costs transferred from one department (process) to the next.
Describe the differences between normal spoilage and abnormal spoilage.
Normal spoilage occurs as a result of normal operating procedures and cannot be avoided under current technological conditions. Abnormal spoilage is the result of an unplanned or accidental event.
Define “equivalent units”.
In process costing, the number of whole units represented by the partially complete beginning and/or ending work-in-process inventory; for example, 100 units that are 50% complete equal 50 equivalent units.
Describe the relative physical volume allocation used in joint product costing.
Joint costs are allocated to products based on the quantity of products produced (units, gallons, feet, pounds, etc.).
How are by-products accounted for when produced?
The ultimate sales value of the by-product is deducted from the cost of joint products when the by-product is produced.
Define “joint products”.
Products which are produced from the same set of raw materials and which are not separately identifiable until a split-off point; only products with significant sales value are treated as joint products: products with little or no sales value are treated as by-products or scrap.
What is the accounting treatment of scrap and by-products in joint product costing?
Costs: Joint costs are not allocated to scrap or by-products; costs incurred to process scrap or by-products after split-off are offset against proceeds from the sale of the scrap or by-product. Proceeds: Proceeds from sale of the scrap or by-product are used to reduce joint product overhead costs (unless they can be identified with a particular direct material, in which case they may be offset against that cost).
List the methods of accounting for by-product sales.
The sales value of the by-product may be recognized (e.g., used to reduce the cost of joint products) either: 1. When the by-product is produced; or 2. When the by-product is sold.
Define “joint costs”.
Costs incurred prior to split-off that must be allocated to the joint products.
How are by-products accounted for when sold?
The net proceeds are used to reduce the cost of joint products when by-product is sold.
Describe the relative sales value allocation used in joint product costing.
Joint costs are allocated to products based on the relative sales values of the products either at split-off or after additional processing.
Define “strategic budgeting.”
Strategic budgeting is a top-down process, starting with the goals and mission the organization wants to achieve and allocating resources in proportion to priorities.
Define “zero-based budgeting.”
A process of starting over each budget period and justifying each item budgeted. This requires additional work over an incremental approach but may provide more accuracy.
Which budget must be done first - production or purchases?
Production must be done first. The production budget establishes how many units must be produced to achieve projected sales volume and inventory level targets.
Define “rolling budget.”
An incremental budget that adds the current period and drops the oldest period. Kaizen (continuous improvement) type companies typically use rolling budgets.
Define “participative budget.”
A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager’s supervisor, and any issues are resolved by mutual agreement. This method is widely considered a positive behavioral approach.
