Revised 1 - Cost Accounting

Question 1

What are Product Costs (aka Inventory Costs)?

Answer 1

Prime Costs

Conversion Costs

Question 2

What is included in Fixed Factory Overhead?

Answer 2

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes

Under/Over-applied Fixed OH always goes to COGS

Question 3

What is included in Variable Overhead?

Answer 3

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

Question 4

What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?

Answer 4

Under-applied overhead.

If it’s Fixed OH- under-applied goes to COGS.

If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.

Question 5

What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?

Answer 5

A credit balance indicates over-applied overhead.

If Fixed overhead- it is corrected from COGS.

If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.

Question 6

What is the Direct Method for allocating service department costs?

Answer 6

No services allocated between service departments- even if they serve each other. Only allocate to product(s)

Question 7

What is the Step Method for allocating service department costs?

Answer 7

Services can be allocated to both other service departments and the product(s)

Question 8

What is the focus of Activity Based Costing (ABC)?

Answer 8

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

Question 9

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

Answer 9

Cost Pools and Allocations increase compared to a traditional costing system

Question 10

What is Backflush Costing?

Answer 10

Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)

• Works backward to flush out COGS
• Mostly GAAP

Question 11

What are the characteristics of By-Products?

Answer 11

Usually immaterial and common costs aren’t allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products