Cost Accounting Test 1
When might a company use budgeted costs rather than actual costs to compute direct-labor rates?
A company might use budgeted costs rather than actual costs to compute direct labor rates because it may be difficult to trace direct labor costs to jobs as they are completed (for example, because bonuses are only known at the end of the year).
Distinguish between inventoriable costs and period costs.
Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory (they are "inventoried") to accumulate the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.
Define cost pool, cost tracing, cost allocation, and cost-allocation base.
Cost pool--a grouping of individual indirect cost items. Cost tracing--the assigning of direct costs to the chosen cost object. Cost allocation--the assigning of indirect costs to the chosen cost object. Cost-allocation base--a factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.
Define direct costs and indirect costs.
Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way. Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object, while indirect costs are allocated to a cost object.
What is the advantage of using computerized source documents to prepare job-cost records?
The main advantages of using computerized source documents for job cost records are the accuracy of the records and the ability to provide managers with instantaneous feedback to help control job costs
What is a cost driver. give one example.
A cost driver is a variable, such as the level of activity or volume that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.
Define cost object and give three examples.
A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department.
Which of the following statement is true regarding variable costs: a. Do not vary in total within the relevant range b. Do not vary on a per unit basis within the relevant range c. Vary on a per unit basis within the relevant range d. Do not vary in total with changes in production volume e. None of the above
B)As long as a firm operates within its relevant range (normal range of production or service capacity), variable costs per unit should remain constant. Outside of the relevant range, variable cost per unit may either increase or decrease on a per unit basis. For example, the cost of materials per unit of output may decrease with increases in production volume outside of the relevant range due to more favorable pricing for purchasing in bulk, or due to efficiencies in production
Describe three different debit entries to the Work-in-Process Control T-account under normal costing.
Debit entries to Work-in-Process Control represent increases in work in process. Examples of debit entries under normal costing are (1) direct materials used (credit to Materials Control), (2) direct manufacturing labor billed to jobs (credit to Wages Payable Control), and (3) manufacturing overhead allocated to jobs (credit to Manufacturing Overhead Allocated).
Define product cost. Describe three different purposes for computing product costs.
A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include • pricing and product mix decisions, • contracting with government agencies, and • preparing financial statements for external reporting under GAAP.
Why might an advertising agency use job costing for an advertising campaign by PepsiCo, whereas a bank might use process costing to determine the cost of checking account deposits
An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account deposits is similar for many customers. Here, process costing can be used to compute the cost of each checking account deposit.
Give examples of two cost objects in companies using job costing
Major cost objects that managers focus on in companies using job costing are a product such as a specialized machine, a service such as a repair job, a project such as running the Expo, or a task such as an advertising campaign.
Describe how manufacturing-, merchandising-, and service-sector companies differ from one another
Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example automotive and textile companies. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution. Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits.
Describe two ways in which a house-construction company may use job-cost information
A house construction firm can use job cost information (1) to determine the profitability of individual jobs, (2) to assist in bidding on future jobs, and (3) to evaluate professionals who are in charge of managing individual jobs
Explain why unit costs must often be interpreted with caution.
A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels
Define variable cost and fixed cost. Give an example of each.
A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is sales commission paid as a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year) regardless of the number of units of product produced on the machine.
Which of the following statements best describes the information generated by management accounting? a. There are no regulations governing the type of reports it produces b. The reports are generally produced at month's end and use only historical data c. The main users of the information tends to be stockholders, creditors, and tax authorities d. It reports only financial data e. None of the above
A)Managerial accounting generates information to aid managers and employees in decisionmaking. There are not regulations (may not follow GAAP) in terms of the type of data that it disseminates. The reports are usually produced when needed, include financial and non-financial data, and are used internally by managers and employees as opposed to external users (stockholders, creditors)
Cost behavior refers to: a. How costs react to changes in production volume or business activity b. Whether a cost is incurred in a manufacturing, merchandising, or service company c. Classifying costs as either inventoriable or period costs d. Whether a cost is classified as being direct or indirect e. None of the above
A)cost behavior relates to how a cost change given increases or decreases in production volume or business activity. For example, direct material costs will increase on a total basis with increases in production volume. Others like rent, are considered fixed, and therefore do not increase or decrease with changes in volume as long as a firm operates within its relevant range of production capacity.
Which type of production processes is used when products or services are highly customized or when products are produced in production batches and lower production volumes? a. Continuous process flow b. Assembly lines c. Job shops d. A and B e. B and C
C): Job shop production is one of the five types of production processes. It allows a product or service to be customized according to specifications; therefore, the average cost per each product (or job) tends to vary greatly as each is processed differently. Neither continuous process flows or assembly lines allows for customization of small production batches.
High Tech, a manufacturing firm, uses job costing and applies overhead using a normal costing system and direct labor cost as the allocation base. The current period's estimated overhead cost is $100,000 3 and estimated direct labor cost is $50,000 and 2,500 direct labor hours. The following jobs were processed during Sept. 2014: Direct Direct Direct Materials Labor Cost Labor Hours Job 200 $ 500 $800 40 Job 201 350 200 10 Job 202 1,000 600 30 What is the total manufacturing cost for Job 201? a. $550 b. $570 c. $850 d. $1,500 e. None of the above
E)None of the above
Name three factors that will affect the classification of a cost as direct or indirect.
Factors affecting the classification of a cost as direct or indirect include • the materiality of the cost in question • available information-gathering technology • design of operations
How does a job-costing system differ from a process-costing system?
In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.
Explain the difference between job-costing and process costing and explain clearly when it would be appropriate to use each for costing products or production jobs. Also, describe in detail which types of production processes employ job-costing and which ones would employ process costing.
Job-costing tracks production costs to specific production jobs, production batches, contracts, or customers. In a job costing system, the principal cost object is the production job/batch/contract, or customer. Each production job uses different amount of resources or production inputs and therefore, it generates different per unit product costs. Job-costing is appropriate in the following instances: When heterogeneous products are produced in small quantities (distinct products and services). In this case, the unit cost for each job differs, because the job may have various dissimilar products. When products are manufactured in identifiable production lots or batches. Job-costing is widely used in customized manufacturing or in batch production, such as fabrication of specialized products, consumer electronics, aircraft, construction projects, professional services (legal, health care, auditing). Process costing is used to account for production costs when products are identical (homogenous) and produced in very large volumes using highly automated machinery, such as chemicals, food processing, steel mills, glass, oil refining. In terms of the types of production processes, continuous-process flow and assembly lines will employ process costing.
How does management accounting differ from financial accounting?
Management accounting measures, analyzes, and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP). Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks. It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP). Other differences include (1) management accounting emphasizes the future (not the past), and (2) management accounting influences the behavior of managers and other employees (rather than primarily reporting economic events).
Why do managers consider direct costs to be more accurate than indirect costs?
Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions.
What are three different types of inventory that manufacturing companies hold?
Manufacturing companies have one or more of the following three types of inventory: 1. Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing process. 2. Work-in-process inventory. Goods partially worked on but not yet completed. Also called work in progress. 3. Finished goods inventory. Goods completed but not yet sold
Describe briefly why Electronic Data Interchange (EDI) is helpful to managers.
Modern technology of electronic data interchange (EDI) is helpful to managers because it ensures that a purchase order is transmitted quickly and accurately to suppliers with minimum paperwork and costs.
Describe the overtime-premium and idle-time categories of indirect labor.
Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates. Idle time is a subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.
Describe the business functions in the value chain.
The business functions in the value chain are • Research and development—generating and experimenting with ideas related to new products, services, or processes. • Design of products and processes—detailed planning, engineering, and testing of products and processes. • Production—procuring, transporting, storing, coordinating and assembling resources to produce a product or deliver a service. • Marketing—promoting and selling products or services to customers or prospective customers. • Distribution—processing orders and shipping products or services to customers. • Customer service—providing after-sales service to customers.
Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates. Two reasons for using an annual period to compute budgeted indirect cost rates are:
The numerator reason--the longer the time period, the less the influence of seasonal patterns in indirect (overhead) costs, and b. The denominator reason--the longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs.
What is the relevant range? What role does the relevant-range concept play in explaining how costs behave?
The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range.
Describe the seven steps in job costing.
The seven steps in job costing are (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job.
Describe three major source documents used in job-costing systems.
Three major source documents used in job-costing systems are (1) job cost record or job cost sheet, a document that records and accumulates all costs assigned to a specific job, starting when work begins; (2) materials requisition record, a document that contains information about the cost of direct materials used on a specific job and in a specific department; and (3) labor-time sheet, a document that contains information about the amount of labor time used for a specific job in a specific department.
