Week 5 Review

Question 1

Evaluate the primary faults of absorption cost systems (job, process and activity based costing)

Answer 1

Absorbtion costs are based on historical data and not current cost.
They don’t establish benchmarks
Historical absorption costs provide useful benchmarks ONlY if future costs are similar to past costs

Question 2

Explain the approach used in direct (variable) costing system

Answer 2

All fixed costs are written off against income in the year they are incurred

Fixed manufacturing costs are NOT absorbed into product costs and don’t flow into inventory

Fixed costs are period costs and written off

Variable costing only pertains to product costs

Question 3

Compare and contrast absorption costs and direct (variable costs)

Answer 3

Absorbtion costs
Fixed manufacturing costs included in product costs

Direct (variable costs)
Fixed manufacturing cost written off as period expenses (not included in product costs

Eliminates distortion in income and product cost when volume changes

Reduces excessive overproduction

Question 4

Discus objectives of standard costing system

Answer 4

Standard costing establishes benchmarks

Managers can gauge performance by comparing actual operating results vs benchmarks

Variances in actual operating results can be used for performance evaulation

Standard costs help in product pricing decision making, outsourcing and resource allocation

Question 5

Cost and benefits of standard costing systems

Answer 5

Standard costing are based on normal operations
Doest account for fluctuations in economic growth or depression
Standard costs are short lived

Question 6

Pricing variance equation (DM and DL)

Answer 6

Class
Actual quantity of product * actual price paid (AQ* AP= __)

Vs
Actual quantity * Standard price paid
(AQ*SP=___)

Question 7

Quantity Varience formula (DM & DL)

Answer 7

Actual quantity * Standard price paid
(AQ*SP=___)

Vs

Standard Quantity (total product that should of been used) * Stanard Price
(SQ*SP=\_\_)

Question 8

Favorable verses unfavorable variances?

Answer 8

If the price or quantity variances is a positive number, then that is unfavorable

If the price or quantity variance is a negative number, then that is favorable

Question 9

Overhead variance formula

Answer 9

1) Determine predetermined rate

Pre Det O/H rate = estimated total O/H costs for the year/ estimated total activity base

2) standard App. O/H = pre det O/H rate* std activity base used to produce the volume
3) determine over/ under

Actual overhead cost for year- std applied O/H during year