2011 cpa chapter 20

Which of the following statements about activity-based costing (ABC) is false? Activity-based costing is useful for allocating marketing and A. distribution costs. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products. B. C. In activity-based costing, cost drivers are what cause costs to be incurred. Activity-based costing differs from traditional costing systems in that products are crosssubsidized

ABC determines the activities that will serve as cost objects and then accumulates a cost pool for each activity using the appropriate activity base (cost driver). It is a system that may be employed with job order or process costing methods. Thus, when there is only one product, the allocation of costs to the product is trivial. All of the cost is assigned to the one product; the particular method used to allocate the costs does not matter.

Step 3 Allocate activity cost pools to final cost objects

Activity Driver 1.product design number of products 2. production setup number of setups 3. machining number of unitsproduced 4. inspection & testing " " 5. customer maintenance number of units

Purchased direct materials are added in the second department of a three-department process. This addition increases the number of units produced in the second department and will

Always change the direct labor cost percentage in the ending work-in-A. process inventory When direct materials are added to the production process in the second department, thereby increasing the number of units produced, more units are available to absorb the direct labor and overhead costs. Accordingly, the labor and overhead cost percentages are reduced (relative to direct materials cost).

Descriptions of Variances Variable inputs

can be analyzed in terms of two component variances, a price variance and an efficiency variance.

standard direct labor hours per unit 2 Actual direct labor hours 10,500 Number of units produced 5,000 Standard variable overhead per standard direct labor hour $3 Actual variable overhead $28,000 Roe's unfavorable variable overhead efficiency variance was?

-and standard quantity is the standard hours for the production achieved (5,000 units at 2 hours per unit = 10,000 hours). Variable overhead efficiency variance (SQ × SP) - (AQ × SP) = (10,000 hours × $3) - (10,500 hours × $3) = $30,000 - $31,500 = $1,500 unfavorable

Job order cost accumulation

-direct costs are entered in actual amounts. WIP -job 1012 xxx Raw Materials xxx -Indirect are assigned to pools ex.. Manufacturing overhead control xxx raw materials xxxx *based on estimation

Peanut-butter effect of using traditional :volume based costing system can be summarized as follows.

1. DL and DM are traced to products or service units. 2. a single pool of indirect costs OH is accumulated for a given org unit 3. Indirect costs from the pool are assigned using an allocation rate (this effect avg costs making it inaccurate.

Step 1) Activities are classified in a hierarchy order accordingly. 1. unit level 2. batch-level 3. product-sustaining 4. facility sustaining

1. are performed for each unit output produced ex...dm and dl 2. batch-level activities occur for each group of output produced ex.. Materials ordering 3. product sustaining-activities support teh production of a particular product, irrespective of the level of production. ex are product design 4.

Service (support) Department costs. cant be traced to cost object and therefore must be allocated to the operating department the use the service. What four criteria are used to allocate costs:

1. cause and effect 2. benefit received 3. fairness 4. ability to bear.

Process Costing calculates avg costs of all units.

1. costs are accumulated for a cost object that consists of a large number of similar units of goods and services 2. WIP is stated in terms of equivalent units. 3. units cots are established

Process costing summary: 1. physical inputs Raw Materials xxx a/p xxx 2. Direct Materials used WIP XXX Raw materials xxx

3. conversion costs WIP Department A XXX Wages payable (direct and indirect) xxx Manuf sup (indirect materials) xxx property tax payable xxx prepaid insurance xxx accc dep-factory equipment xxx

4. Move from one department to the next WIP-department b xxx WIP-department a xxx

5. the second department adds more dm and more conversion costs --WIP department B XXX Raw Materials XXX --WIP Department B xxx wages payable XXX ect XXX

6. when processing is finished Finished goods XXX Department b XXX

7. As products are sold sales are recoreded and teh costs are transferred to cgs a/r XXX Sales XXX CGS XXX Finished goods XXX

For the current period production levels, Woodwork Co. budgeted 11,000 board feet of production and purchased 15,000 board feet. The material cost was budgeted at $7 per foot. The actual cost for the period was $8.50 per foot. What was Woodwork's materials price variance for the period?

= (AQ × SP) - (AQ × AP) = AQ × (SP - AP) = 15,000 board feet purchased × ($7.00 - $8.50) = 15,000 board feet purchased × -$1.50 = $22,500 unfavorable

EUP: ***c! EUP= What are two methods

= EUP is the number of complete goods that could have been produced using the inputs consumed during the period 1. Weighted avg 2. fifo

Under job order costing what is to be used to compute monthly expenses of a project. a. dm issued to production b. indirect materials used to prod c Manf oh incurred d. manf oh applied e. DL

A, D, E. The difference between overhead incurred and overhead applied, if material, is allocated among finished goods

Respond if the following are appropriate for 1. external reporting 2. internal reporting. A. Activity based costing B. job order costing C. Variable costing D. Process costing

A,B, D call all be used for ext/int C. can't be used for external but can be for internal.

The use of activity-based costing (ABC) normally results in what in regaurds to low volume products?

ABC differs from traditional product costing because it uses multiple allocation bases and therefore allocates overhead more accurately. The result is that ABC often charges low-volume products with more overhead than a traditional system. For example, the cost of machine setup may be the same for production runs of widely varying sizes. This relationship is reflected in an ABC system that allocates setup costs on the basis of the number of setups. However, a traditional system using an allocation base such as machine hours may underallocate setup costs to low-volume products. Many companies adopting ABC have found that they have been losing money on low-volume products because costs were actually higher than originally thought

A basic assumption of activity-based costing (ABC) is that

ABC identifies activities needed to provide products or services, assigns costs to those activities, and then reassigns costs to the products or services based on their consumption of activities. ABC helps to manage costs by providing more detailed analyses of costs than traditional methods. It also facilitates cost reduction by determining what activities do and do not add value to the product or service

A job-order cost system uses a predetermined factory overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations?

Actual Volume Actual Fixed Costs Less than expected Greater than expected If too little fixed overhead is applied at the predetermined rate (expected fixed cost ÷ expected volume), the result is underapplied overhead (actual factory overhead exceeds overhead applied).

The work-in-process account is

An inventory account indicating the beginning and ending inventory of goods being processed The work-in-process (manufacturing) account is an inventory account to which direct materials, direct labor, and overhead costs are charged as they are incurred in the production process. The sum of these costs plus the cost of BWIP is the total production cost to be accounted for in any one period. The total is allocated to goods completed during the period, i.e., to finished goods, and to EWIP. The manufacturing account may also be credited for abnormal spoilage.

A difference between standard costs used for cost control and budgeted costs

Can exist because standard costs represent what costs should be, whereas budgeted costs represent expected actual costs. Standard costs are predetermined, attainable unit costs. Standard cost systems isolate deviations (variances) of actual from expected costs. One advantage of standard costs is that they facilitate flexible budgeting. Accordingly, standard and budgeted costs should not differ when standards are currently attainable. However, in practice, budgeted (estimated actual) costs may differ from standard costs when operating conditions are not expected to reflect those anticipated when the standards were developed.

What are transferred-in costs in a process costing system?

Costs of the output of a previous internal process that is subsequently used in a succeeding internal process -Transferred-in costs are the costs of the output of a previous internal process that is subsequently used in a succeeding internal process. Transferred-in costs are similar to direct materials costs added at the beginning of the process

In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing considers

Current costs plus cost of beginning work-in-process inventory The weighted-average method of process costing combines the costs of work done in the previous period and the current period. Thus, the cost of the equivalent units is equal to the current cost (current period) plus the cost of BWIP (previous period).

A direct labor overtime premium should be charged to a specific job when the overtime is caused by the

Customer's requirement for early completion of the job. The reason is that the association of an overhead premium with a specific job may be attributable solely to random scheduling. Accordingly, the incurrence of the premium is usually regarded as a function of an abnormally large production volume, that is, as a condition affecting all jobs. However, if the premium directly results from the demands of a specific job, it should be charged as a direct cost to that job.

In a job-order cost system, direct labor costs usually are recorded initially as an increase in

Direct labor costs are inventoriable costs. They are initially debited to the work-in-process control account.

In a traditional job-order cost system, the issuance of supplies to a production department increases

Factory overhead control.

Variable factory overhead Budgeted based on standard hours allowed $80,000 Actual 85,000 Fixed factory overhead Budgeted 25,000 Actual 27,000 In a three-way analysis of variance, the department's unfavorable spending variance for July was

In three-way analysis, the spending variance is the sum of the variable overhead spending variance and the fixed overhead spending variance. The variable overhead spending variance equals the product of the actual number of overhead drivers consumed and the application rate, minus the amount actually incurred ($80,000 - $85,000 = $5,000 unfavorable); and the fixed overhead spending variance equals the budgeted amount minus the actual amount incurred ($25,000 - $27,000 = $2,000 unfavorable). The department's total unfavorable spending variance for July is thus $7,000 ($5,000 + $2,000)

Yola Co. manufactures one product with a standard direct labor cost of 4 hours at $12.00 per hour. During June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was

Labor efficiency variance = (SQ × SP) - (AQ × SP) = (4,000 hours × $12) - (4,100 hours × $12) = $48,000 × $49,200 = $1,200 unfavorable

EUP: How to compute FIFO

Under the fifo method units in beginning wip inventory are part of the EUP calculation. The calculation is thus more complex than weighted avg but tends to be more accurate.

EUP: How to compute under weighted avg

Under weighted avg, inventory is treated as if it was started and completed during the current period. Beg wip is therefore not included in the EUP

When are volume based systems appropriate?

Volume based systems were appropriate when direct costs were the bulk of manufacturing costs. ABC helps solve the problem of the ever increasing complexity of assigning costs to overhead.

Process costing pools cost under project or department.

the accumulation of costs under a process costing system is by department rather than by project. this reflects the continuous homogenous nature of the manufacturing process.

2. Step down method

the service departments are allocated in order form the one that provides the most service to the other service departments down to the one that provides the least.

3. the Reciprocal method.

-most complex, most theoretically sound the reciprocal method recognizes services rendered by all service departments to each other. See example in notes.

Variance analysis enables management-by-exception, describe this action?

-the practice of giving attention primarily to significant deviations from expectations.

Fixed overhead variances 1. FOH spending variance 2. FOH volume variance

1. difference between the actual total fixed h incurred and the expected amount of fixed oh spending used to calc alloc rate 2. is the difference between the expected volume of the driver used to calc alloc rate and the amount applied to production based on the standard volume driver.

Job order costing used when

1. each product is unique 2. tracking their costs are straight forward b/c there are so few. ex.... shipbuilding, software creation

Activity based systems involve. ...

1. identifying organization activities that constitute oh 2. assigning costs of resources consumed by the activities 3. assigning the costs of the activities to the final cost

In an activity-based costing (ABC) system, cost reduction is accomplished by identifying and eliminating 1.Nonvalue-Adding? 2. All Cost Drivers Activities?

1. no 2. yes An ABC system determines activities associated with the incurrence of costs and then accumulates a cost pool for each activity. It then identifies the driver(s) used to trace those costs to such cost objects as products or services. A driver is a factor that causes a change in a cost. Activities that do not add customer value are identified and eliminated to the extent possible. A clear understanding of what causes a cost (the driver) helps eliminate the nonvalue-adding activities. However, all drivers cannot be eliminated.

What are the 2 main benefits of establishing standard costs.

1. recording WIP, finished goods and CGS in a uniformed manner allows them to be easily managed and maintained. 2. Variances can be assigned to the person or department most likely responsible.

In a production cost report using process costing, transferred-in costs are similar to

Direct materials added at a point A. during the process Transferred-in costs are similar to materials added at a point during the process because both attach to (become part of) the product at that point, which is usually the beginning of the process. Computations for transferred-in costs are usually separate from those for other direct materials costs and conversion costs.

Efficiency variances A. materials quantity variance B. labor efficiency variance C. VOH ev

EF-arise from differences in actual levels of resources used in production and the standard level a. cost of actual use of raw materials and the standard usage of raw materials b. cost of the actual use of labor hours and the standard use of labor hours. c. compares the amount of voh that would have been applied given the use of the base to the standard use of voh.

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

Factory overhead control overhead is incurred, factory overhead control is debited and accounts payable, supplies, etc., are credited. When overhead is applied, work-in-process is debited and factory overhead applied is credited. The difference between the debited and credited amounts is over- or underapplied overhead.

Job order: When a job order is completed what is the Journal entry to finished goods.

Finished goods 136,500 Work In process job-1015 136,5000

Which of the following is a disadvantage of using a process costing system versus job-order costing?

It involves the calculation of stage of completion of goods-in-process and the use of equivalent units Process costing is used to assign costs to similar products that are mass produced on a continuous basis. Costs are accumulated for a cost object consisting of a large number of similar units of goods or services, work-in-process is stated in terms of equivalent units, and unit costs are established based on the average cost of all units. Process costing, therefore, involves the calculation of the stage of completion of goods-in-process, a necessary step in determining the number of equivalent units.

Assuming no beginning work-in-process (BWIP) inventory, and that the ending work-inprocess (EWIP) inventory is 50% complete as to conversion costs, the number of equivalent units as to conversion costs would be

Less than the units placed in process Given no BWIP, it is immaterial whether FIFO or weighted average is used. Thus, conversion cost EUP equal the units that were started and completed this period, plus the EUP in EWIP. Because the units in EWIP are 50% complete as to conversion costs, they will not be fully counted for purposes of determining EUP.

Job order: If indriect costs variance was immaterial. What is general entry? Over applied? under applied?

MOH applied (balance) 331,500 CGS (difference 2,900 MOH Control 328,600

Job order: If variance is material? Given 20:20:60 relationship ex. is over applied flip for under applied

MOH applied (balance) 331,500 WIP (difference x allocation%) 580 Finished goods 580 CGS 1740 MOH control balance 328,600

Standards for a product of Acme Mfg. Co. was 10,000 units of raw materials at a price of $20 per unit. The product's actual usage of materials was 11,200 units at $18.50 per unit. What was Acme's materials price variance?

Materials price variance (AQ × SP) - (AQ × AP) = (11,200 units × $20) - (11,200 units × $18.50) = $224,000 - $207,200 = $16,800 favorable

Under the three-variance method for analyzing factory overhead, the difference between the actual factory overhead and the factory overhead applied to production is the

Net factory A. overhead variance. Three-way analysis calculates spending, efficiency, and production volume variances. However, regardless of whether two-, three-, or four-way analysis is used, the net factory overhead variance is the difference between actual factory overhead and the amount applied to production

Weighted-average and first-in, first-out (FIFO) equivalent units would be the same in a period when which of the following occurs?

No beginning inventory exists. Beginning inventory is therefore not included in the EUP calculation. Under the FIFO method, units in beginning inventory are part of the EUP calculation. If no beginning inventory exists, then weighted-average and FIFO EUP would be the same.

Price variances a. materials price variance b. labor rate variance c. variable overhead spending variance.

PV-arise from difference between the actual price of resources used in production and the standard. A.- is the difference between the actual price of materials and the standard price B.- the labor rate variance is the difference between the actual cost of labor and the standard cost. C. -is the difference between the actual level of variable oh incurred and the standard cost.

Step 2) Assign resource costs to activities

Resource Driver 1. Computer processing cpu cycles 2. product line machine hours 3. materials management hours worked 4. acct hours worked 5. sales & marketing number of orders

Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials quantity variance was $2,500 unfavorable and the standard materials allowed for May production was 17,000 pounds. What was the materials price variance for May?

SQ × SP) - (AQ × SP) = Materials quantity variance (17,000 lbs. × SP) - (17,500 lbs. × SP) = -$2,500 (17,000 lbs. - 17,500 lbs.) × SP = -$2,500 -500 lbs. × SP = -$2,500 SP = $5 per lb =$87,500 (17,000 pounds × $5 per pound). The materials price variance for the month was therefore $17,500 favorable ($87,500 budgeted - $70,000 actual).

How does a job-order cost accounting system differ from a process cost accounting system?

Subsidiary ledgers for the work-in-process and finished goods inventories are necessary in job-order costing Job-order systems account for processes that produce distinctly different products or groups of products. By contrast, process costing is suitable to production of a homogenous product. Given identifiably different products, costs need to be collected separately for each product or group of products. Accordingly, although the same general ledger accounts are used for both cost systems, subsidiary ledgers are maintained in job-order costing for the inventory accounts.

In comparing the FIFO (first-in, first-out) and weighted-average methods for calculating equivalent units

The FIFO method is better than the weighted-average method for judging the performance in a period independently from performance in preceding periods. The calculation of the cost per equivalent unit using the FIFO method keeps the costs in one period separate from the costs of prior periods. Under the weighted-average method, the costs in the beginning work-in-process inventory are combined with current-period costs.

An equivalent unit of direct materials or conversion cost is equal to

The amount of direct materials or conversion cost necessary to complete one unit of production. Equivalent units of production (EUP) measure the amount of work performed in each production phase in terms of fully processed units during a given period. Incomplete units are restated as the equivalent amount of completed units. The calculation is made separately for direct materials and conversion cost (direct labor and overhead).

Kew Co. had 3,000 units in work-in-process at April 1 that were 60% complete as to conversion cost. During April, 10,000 units were completed. At April 30, the 4,000 units in work-in-process were 40% complete as to conversion cost. Direct materials are added at the beginning of the process. How many units were started during April?

The following physical flow formula may be used to calculate the unknown: BWIP + Units started = Units completed + EWIP 3,000 + Units started = 10,000 + 4,000 Units started = 11,000

Which of the following standard costing variances would be least controllable by a production supervisor? A. Overhead volume. B. Overhead efficiency. C. Labor efficiency. D. Material usage.

The volume variance measures the effect of not operating at the budgeted activity level. This variance can be caused by, for example, insufficient sales or a labor strike. These events are out of the production supervisor's control. Thus, the volume variance is the least controllable by a production supervisor

Job order cost accumulation MOH units of OH driver expended x application rate =900 machine hours on job 1015 X $35 per hour = 31,500 What is the journal entry?

Work in process -job 1015 31,500 MOH applied 31,500

In a job-order cost system, the application of factory overhead is usually reflected in the general ledger as an increase in

Work-in-process control. The entry to record the application of factory overhead to specific jobs is to charge WIP control and credit factory overhead applied (or factory overhead control) using a predetermined overhead rate. The effect is to increase the WIP control account.

In a job-order cost system, the use of direct materials previously purchased usually is recorded as an increase in

Work-in-process control. The purchase of direct materials requires a debit to (an increase in) direct materials inventory (stores control). This account is credited and work-in-process control is debited when direct materials are issued to a production department

In a process cost system, the application of factory overhead usually is recorded as an increase in

Work-in-process inventory control.

In computing the current period's manufacturing cost per equivalent unit of production (EUP), the FIFO method of process costing considers current period costs a. only b. plus cost of beg wip c. less cost of beg wip d. plus cost of ewip

a. only An equivalent unit of production is a set of inputs required to manufacture one physical unit. Calculating equivalent units for each factor of production facilitates measurement of output and cost allocation when work-in-process exists. Under the FIFO assumption, only current-period costs are allocated between cost of goods manufactured and ending work in process because FIFO maintains beginning inventory costs completely separable from current-period costs. Although both the BWIP and EWIP are required to compute EUP, the cost per EUP considers only current period costs

Job order: When output is sold on account?

accounts rec 200,000 sales 200,000 CGS 136,500 Finished goods 136,500

Three examples of service department allocation 1. Direct method-is the simplest,

allocates directly to the producing department without regard for services rendered by service departments to each other.

A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor efficiency variance?

labor usage (efficiency) variance is the difference between the cost of the actual use of labor hours and the standard use of labor hours. The company's standard hours to produce 10,000 widgets were 10,000 × .5 hours = 5,000 hours Labor efficiency variance = (SQ × SP) - (AQ × SP) = (5,000 hours × $15) - (3,000 hours × $15) = $75,000 - $45,000 = $30,000 favorable