5b Operations Management - Cost Measurement Concepts

When selecting appropriate cost drivers for an activity based costing system, each of the following should be considered (3)

1. Behavioral effects 2. Cost of measurement 3. Degree of correlation

Which of the following is a basic approach to allocating costs for costing inventory in joint-cost situations? (3)

1. Constant gross margin percentage net realizable value method 2. Physical measures such as weights or volume 3. Sales value at split-off

3 Methods of Allocating Costs

1. Direct 2. Reciprocal 3. Step-down

Support Department Costs

1. Human Resources 2. Purchasing 3. Building Maintenance Costs incurred by support (or service) departments

Backflush Costing Trigger Points

1. Pay point for purchases and materials 2. Completion of manufacturing 3. Point-of-sale transaction

There are four methods commonly used for allocating joint costs: (4)

1. Relative sales value at split-off 2. Physical output 3. Net realizable value (NRV) 4. Constant gross margin NRV

3 Characteristics of Joint Costs

1. Two or more products whose total resale value is significant 2. Common processing costs allocated to joint products using estimates 3. Allocations are based on the relative sales value or the relative measures of the products.

Direct Labor Efficiency Variance Formula

= SP x (SH - AH)

What relationship should exist between a cost driver and its cost to deem a cost equation reliable for estimating future costs?

A cause-and-effect relationship

Key Co. changed from a traditional manufacturing operation with a job order costing system to a just-in-time operation with a back-flush costing system. What are the expected effects of these changes on Key's inspection costs and recording detail of costs tracked to jobs in process?

A decrease in both inspection costs and detail of costs tracked to jobs

Non-value added costs

A nonvalue-added cost is one that if it were eliminated would not reduce value or utility for customers using the product or service.

Which of the following is not a characteristic of an allocation of joint costs?

A product having a relatively small retail value

Standard cost systems

Historically, standard cost systems have been mainly used by companies involved in mass production of products. Cost categorization by materials, labor, and overhead fits in well with cost standards and variance analysis.

Which of the following statements is true with respect to operating income when examining absorption versus variable costing?

If production is greater than sales, absorption costing operating income will be greater than variable costing operating income. If sales are greater than production, inventory decreases.

Total Manufacturing cost of finished product...

In a manufacturing company, the total cost of the finished product is a combination of direct materials, direct labor, and manufacturing overhead.

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.

As it relates to estimating costs at different levels of activities, what information is provided by economic plausibility?

It is logical that total cost increases when activity increases.

Why is the split-off sales value a better method to use to allocate joint costs when sales information is available?

It measures the cost of a product at the amount at which it can be sold at the split-off point.

Why is the reciprocal method considered to be the best method of allocating support costs?

It recognizes that all service departments provide work efforts to and from each other.

In an activity-based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes?

Multiple cause and effect relationships

Which of the following statements is correct regarding variable costing and absorption costing income statements for a company that has no beginning inventory and whose production exceeds sales for the current period?

Net income is higher if absorption costing is used.

Which of the following is not an allocation method used for joint products or byproducts?

Net present value (NPV)

NRV method for allocating costs

Net realizable value equals eventual sales price less separable costs. Then take the percentage of each and multiply the joint costs

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.

When using throughput costing, which of the following costs are allocated to cost objects?

No costs are allocated. They are assigned directly to products not cost objects. Only direct materials are assigned to products using Throughput costing

Which of the following statements is true concerning actual and normal costing?

Normal costing assigns overhead costs to cost objects during production, while actual costing assigns overhead costs at the end of the accounting period.

Which of the following statements is correct concerning manufacturing labor?

Overtime premium due to rush orders is normally considered to be a component of direct labor, idle time is normally considered to be manufacturing overhead, and vacation pay for a factory janitor is considered to be an indirect manufacturing cost.

A corporation manufactures two qualities (brands) of barbed-wire fencing for sale to wholesalers and large ranchers. Which of the following would be the best type of costing system for such a company to use?

Process

Which of the following is assigned to goods that were either purchased or manufactured for resale?

Product cost

Direct Labor Efficiency Variance Calc

SP x (SH - AH) or Standard Wage x (SH-AH)

Direct Materials Usage Variance

SP(SQ-AQ)

Gross Margin

Sales Less: DM DL Variable Mfg AND Fixed Mfg

Contribution Margin

Sales Less: Variable DM Variable DL Variable Mfg Variable Selling Costs

Contribution Margin Variable Costing

Sales - Variable Costs

Variable Costing Income Statement

Sales Revenue - Variable Costs = Contribution Margin - Fixed Costs = Net Operating Income

Absorption Costing Income Statement

Sales Revenue -COGS (DM, DL, VOH, FOH) =Gross Profit -Selling and administrative expenses (including variable and fixed selling admin. expenses =NOI

Which of the following is a reciprocal method in cost allocation methods?

Service department costs are allocated to fully incorporate interdepartmental support.

When allocating service department costs to production departments, the method that does not consider different cost behavior patterns is the:

Single-rate method

Standard Price for One unit of Material Calc

Standard Cost Allowed for Material / Units raw material allowed per finished unit x Finished units produced

Standard Cost System

Standard cost is a predetermined quantity or cost of inputs (direct material, direct labor, and manufacturing overhead) that should be required to produce one unit of output. A guess, not actual

Dowell Co. manufactures a wooden item. Which of the following is included with the inventoriable cost under absorption costing and excluded from the inventoriable cost under variable costing?

Straight-line depreciation on factory equipment

Benefit of ABC Costing (Activity-based costing)

The benefit of implementing an activity-based costing (ABC) procedure is that it allows management to examine nonvalue-added (not value-added) activities so that they can be controlled or eliminated. Provides an understanding of complex product costs and product profitability

A CPA would recommend implementing an activity-based costing system under which of the following circumstances?

The client produced products that heterogeneously consume resources. Multiple products

Which of the following nonvalue-added costs associated with manufactured work-in-process inventory is most significant?

The cost of moving, handling, and storing any individual product

Limitations of an activity-based costing system include which of the following?

The expense of obtaining cost data is relatively high. However it is usually more reliable

Which of the following indicates that market-based transfer prices would be preferable to cost-based transfer prices?

The market is perfectly competitive for the intermediate product, and the selling division has no unused capacity.

Which of the following describes a company's gross margin ratio?

The portion of each sales dollar available to cover operating costs and to contribute to profit

To what should the balance of the Work-in-Process account equal at the end of a period?

The total cost of the incomplete jobs

Which of the following statements is true when estimating costs and selecting a cost driver?

There must be a strong relationship between the cost driver and the costs.

ABC Costing and Cost Objects

Under activity-based costing (ABC), products (cost objects) result from activities; those activities consume resources. Cost objects are products, services, jobs, and divisions for which costs are accumulated.

Under what conditions does normal spoilage occur?

Under normal, efficient operating conditions Abnormal spoilage is spoilage in excess of the expected level; it is treated as a period cost.

FIFO Equivalent Units Calc

Units Completed During Period + Ending WIP - Beginning WIP

Total Units Allowed =

Units raw material allowed per finished unit x finished units produced

Which of the following hierarchies is associated with the following two costs incurred by a carving knife manufacturer?

Unloading direct materials received from a supplier: Batch-unit levelRunning production machines: Unit level

Which of the following costing methods will yield the lowest inventory value?

Variable

Direct Costing Method aka

Variable Costing Method

Using the variable costing method, which of the following costs are assigned to inventory?

Variable factory overhead costs NOT variable selling and administrative costs, these are period costs and treated as expenses for the period

Traditional cost system is based on

Volume-based production So this would be a good method to use if their is a high volume of product produced

Weighted Average Method for Equivalent Units

Weighted average means beginning work-in-process inventory is included with the current period production. Number of units = Units Completed + Ending WIP Materials Costs = Beginning WIP + Work Started Materials Costs / Number of Units = WA Equivalent Units

Under which situation are managers able to increase reported operating income without an increase in sales?

When absorption costing is used and additional units are produced

A company would most benefit from using an activity-based costing (ABC) system as opposed to a traditional costing system under which of the following conditions?

When indirect costs are a high percentage of total costs

Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?

When production is greater than sales, absorption costing income is greater than variable costing income.

In which of the following situations is it appropriate to use a static budget in the performance evaluation of a production manager?

When the static budget activity is on the equivalent level as actual activity

Transferred-in costs are treated as if they are:

a separate direct material added at the beginning of the process.

A decision must be made as to the disposition of the balance in the variance accounts. At year-end, a decision is made as to the materiality of the variances. If the balance is deemed material, then the variances are:

allocated to the relevant inventory balances and to cost of goods sold based on the relative amounts of each account.

Inventoriable costs of a ladder manufacturer:

are reported as assets until the units are sold.

Total manufacturing costs

are the costs added to production (work-in-process inventory) during the period. They consist of direct material, direct labor, and applied factory overhead.

When a company uses a FIFO process costing system, its transferred-in costs:

are the costs incurred in preceding departments.

Value-adding costs

are those costs that are essential or necessary in production to assure product performance and/or appearance. Nonvalue-adding costs are those costs that may be incurred but are not essential.

A standard cost system may be used in:

either job order costing or process costing.

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

factory overhead control.

When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant would normally recommend:

flexible budgeting and standard costing.

Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed to allocate a homogeneous cost pool should:

have a cause-and-effect relationship with the cost items in the cost pool.

In its April production, Hern Corp., which does not use a standard cost system, incurred total production costs of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should account for this spoilage as:

inventoriable cost of $60,000 and period cost of $30,000.

Process costing system

is used in those cases where a company produces a standardized product that is sold to many different customers

Job order cost system

is used where products are differentiated from one customer to the next.

A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in the current year was the same as in the previous year. The variable costing statement reported a profit whereas the absorption costing statement reported a loss. The difference in reported income could be explained by units produced being:

less than units sold.

The method for allocating service department costs that best recognizes the mutual services rendered to other service departments is the:

linear algebra (reciprocal) allocation method.

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

net sales value at split-off.

In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:

nonvalue-adding activities.

Assuming no units of products are lost or spoiled, the number of units accounted for in weighted-average process costing should be the same as the: Equivalent Units

number of physical units to account for. All physical units that start in production plus those in beginning inventory must be accounted for as units that are completed and transferred out, and those that are still in process at the end of the period.

In computing the current period's manufacturing cost per equivalent unit, the first-in, first-out (FIFO) method of process costing considers current period costs:

only. 1. only current period costs are used in calculating cost(s) per equivalent unit using the FIFO Method

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

products or services require the performance of activities, and activities consume resources.

Because this allocation method recognizes that service departments often provide each other with interdepartmental service, it is theoretically considered to be the most accurate method for allocating service department costs to production departments. This method is the:

reciprocal method.

The most accurate method of allocating service department costs is the:

reciprocal method.

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

relative sales value at split-off.

The use of activity-based costing normally results in:

substantially greater unit costs for low-volume products than is reported by traditional product costing.

Joint costs are costs:

that are incurred up to the split-off point.

Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when:

various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.

Each of the following should be considered in the selection of appropriate cost drivers for an activity-based costing system, except:

volume-based production.

When a company classifies a cost as direct or indirect, the determination depends upon:

whether the cost is easily identifiable with a cost object or not.

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

work-in-process inventory control.

In developing a predetermined factory overhead application rate for use in a process costing system, which of the following could be used in the numerator and denominator?

Estimated Overhead Costs / Estimated Volume (ex machine hours)

The production supervisor saved the company $400 by paying less for the monthly machine rental than allowed in the budget. What variance does this generate?

Fixed overhead variance in spending

Which of the following costing methods provides the added benefit of usefulness for external reporting purposes?

Absorption costing Variable costing is not used for GAAP or external reporting

Absorption vs Variable Costing

Absorption costing assigns the fixed (overhead) costs as product costs. Variable costing considers the fixed costs as expense in the period incurred.

Absorption Costing

Absorption costing is a method of costing in which both fixed and variable production costs are assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as an inventoriable cost and are expensed through cost of goods sold when the units are sold.

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:

Activity Based Costing (ABC)

In determining the need to charge passengers to check baggage, what accounting technique would managers most likely use to determine that handling baggage was a cost that should be passed along to passengers?

Activity-based cost management

Which of the following is a value-added activity based on examining activity-based costing (ABC)?

An activity that enhances the product

What is activity-based costing (ABC) management?

An analysis of a company's costs as they relate to activities overhead costs are accumulated in cost pools related to separately identified activities that are allocated based on cost drivers.

Where will the amount reported for fixed overhead on the flexible budget be reported?

As budgeted fixed overhead on the static budget

Dawn Corp. uses a standard cost system. During the year, both the labor rate variance and the labor efficiency variance were unfavorable. Dawn wrote the variances off directly to cost of goods sold. If Dawn had allocated the variances to work-in-process, finished goods, and cost of goods sold instead, what would have been the effects on the current ratio and net income?

Current ratio: Increases Net income: Increases

Prime Costs

Direct Materials + Direct Labor

Total manufacturing costs calc

Direct Materials Used in Production + Direct Labor Used in Production + Manufacturing Overhead Applied

Which of the following choices shows the proper treatment of sales commissions and abnormal spoilage charges when calculating a manufactured good's inventoriable cost?

Exclude both sales commissions and abnormal spoilage

Raw Materials Ending Inventory Calc

BI Raw Materials + Freight in + Cost of materials purchased - Indirect materials transferred - Raw materials used for production = EI Raw Materials

Batch-level costs

Batch-level costs include activities related to a group of units of products or services rather than the individual unit.

Cost pool and indirect costs

Because indirect costs (e.g., overhead, joint costs) cannot be directly traced to the cost object, it is more efficient to accumulate indirect costs in one or more cost pools and then assign the indirect cost to cost objects. The dollars in the cost pool are then allocated to cost objects using an allocation base.

WIP Ending Inventory Calculation

Beg WIP + DM Used in Production + DL incurred + Manufacturing OH Applied - COGM = End WIP

What is the correct formula for the calculation of work-in-process (WIP)?

Beginning WIP + Manufacturing costs - Cost of goods manufactured

Cost of goods manufactured is determined as follows:

Beginning work-in-process (WIP) + Raw materials used + Direct labor + Overhead applied - Ending WIP

Companies in what type of industry may use a standard cost system for cost control?

Both mass production and service industries

What information is contained in a flexible budget?

Budgeted costs at the actual output

A static budget contains which of the following amounts?

Budgeted costs for budgeted output

Cotton Company has two service departments and three operating departments. In allocating service department costs to the operating departments, for which of the following three methods (direct, step-down, and reciprocal) does the order in which the departments are allocated not affect the amount allocated to each department?

Direct and reciprocal methods only Only using the step-down method does the order of allocation make a difference

Which of the following types of costs are prime costs?

Direct materials and direct labor

If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?

Conversion Costs

Which variance will Strata Dairy investigate to determine if it used more or less milk for the ice cream it produces?

Direct materials quantity variance

Direct (variable costing) method

Fixed costs are charged to expense as period costs. Only Variable manufacturing costs are treated as product costs Selling costs variable or fixed are expensed in the period incurred

When disposing of overapplied or underapplied overhead that is considered to be material in amount, on what basis would a manager select the particular account(s) chosen to which the amount will be closed in a normal costing system?

During the period, all incurred overhead will be in the chosen account(s).

Inventoriable costs (manufacturing product costs) consist of

DM Indirect Material DL Indirect Labor Factory Overhead

Total Manufacturing Costs Calc

DM used in production + DL used in production + Overhead applied

Direct (variable) Costing

Direct (variable) costing is a method of costing in which fixed costs are charged to expense as a period cost when incurred. Includes only variable manufacturing costs in inventory. It excludes fixed manufacturing overhead.

Conversion Costs

Direct Labor + Manufacturing Overhead

Typical product-costing systems synchronize the recording of accounting-system entries with the physical sequence of purchases and production. The alternative of delaying journal entries until after the physical sequences have occurred (which is normally used in high-speed automated environments) is referred to as:

backflush costing.

In an income statement prepared as an internal report using the variable costing method, fixed selling and administrative expenses would:

be used in the computation of operating income but not in the computation of the contribution margin.

In a job cost system, manufacturing overhead is:

both an indirect cost of jobs and a necessary element in production. This is also true of process costing systems

Cost of goods manufactured:

consists of the total manufacturing cost of materials, labor, and overhead of products completed during the period.

When allocating costs from one department to another, a dual-rate cost allocation method may be used. The dual-rate cost allocation method is most useful when:

costs are separated into variable-cost and fixed-cost subpools.

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 job.