ACC Chapter 12, 13, & 14

variable costing

separate costs into the categories of fixed and variable. Revenues less ALL variable costs (mfg and non-mfg) is the contribution margin.

absorption-costing

separate costs into the categories of mfg. and non-mfg. Revenues less all mfg. costs (variable and fixed) is the gross margin (or GP).

reconciliation of absorption-costing and variable-costing

the difference in variable-costing and absorption-costing operating income can be explained by multiplying the fixed-overhead rate by the change in the number of units from the beginning to the ending inventory.

_____ = (actual volume - expected volume) x fixed overhead rate

Production volume variance

Construct an income statement using the absorption-costing approach

The absorption or traditional approach ignores cost behavior distinctions. As a result, all costs incurred in the production of goods become part of the inventory cost. Thus, we add fixed manufacturing overhead to inventory and it appears on the income statement only when the company sells the goods.

The expected ___-overhead costs from the flexible budget are the same as the variable-overhead costs applied to the products.

variable

A production-volume variance arises when the actual production volume achieved is different than the expected volume of production used as a denominator for computing the fixed-overhead rate for product-costing purposes:

when actual volume is less than expected volume, the production-volume variance is unfavorable because usage of facilities is less than expected and fixed overhead is underapplied.

The proration method of disposing of overhead variances assigns the variance in proportion to the sizes of the ending account balances of

work-in-process inventory, finished goods inventory and cost of goods sold

Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method.

Process is complicated by the presence of beginning inventories. The weighted-average method calculates a unit cost that includes the work done and costs incurred in previous periods on the current period's beginning inventory with work done and costs incurred in the current period.

Distinguish between job-order costing and process costing

Product costing is an averaging process. Job-order costing involves narrow averages and unique units or a small batch of similar units. Process costing deals with broad averages and large volumes of homogeneous units.

In a job-order system, accountants apply factory overhead costs to Work-In-Process Inventory by using the ________. The company does not use activity-based costing.

budgeted overhead rate

describe the general framework for cost allocation

companies assign direct and indirect costs to various cost objects, including service departments, producing departments, products, and customers. All organizations allocate indirect costs to producing departments and to the products or services delivered to customers. These allocations often include the costs of service departments. Some organizations carry cost allocation one more step-to customers.

allocate the variable and fixed costs of service departments to other organizational units.

companies should use separate cost pools for variable and fixed costs when allocating service department costs. They should allocate variable costs using budgeted cost rates times the actual cost-driver level. They should allocate fixed costs using budgeted percent of capacity available times the total budgeted fixed costs.

Use an ABC system in a job-order environment.

ABC can be used for any type of business that has significant levels of shared resources. In a job-order system, ABC helps managers understand the cost structure of the business on a job-by-job basis. Overhead costs are assigned to activity centers and then to jobs based on appropriate cost drivers. ABM uses ABC information and the increased understanding of the organization's cost structure to control and reduce overhead costs.

Fixed OH rate:

Budgeted fixed OH/Expected volume of production

Use normalized variable- and fixed-overhead application rates and explain the disposition of overhead variances

Budgeted overhead rates are usually annual averages. The resulting product costs are normal costs, consisting of actual direct materials, actual direct labor, and applied overhead using the budgeted rates. Normal product costs are often more useful than actual costs for decision-making and inventory-costing purposes. Variances under a normal costing system are either prorated or written-off to cost of goods sold.

Allocate the central corporate costs of an organization

Central costs include public relations, top corporate management overhead, legal, data processing, controller's department, and company-wide planning. Often, it is best to allocate only those central costs of an organization for which measures of usage by departments are available.

Allocate joint costs to products using the physical-units and relative-sales-value methods.

Companies often allocate joint costs to products for inventory valuation and income determination using the physical-units or relative-sales-value method. However, such allocations should not affect decisions.

Allocate costs associated with customer actions to customers.

Customer profitability is a function of product mix and the cost to serve. Activities that can drive up the costs to service customers include small order quantities, pre-sales support, order changes, returns, special delivery requirements, and post-sales support.

Use backflush costing with JIT production system.

Many companies with JIT production systems use backflush costing. Such systems have no WIP Inventory account and apply costs to products only after the production process is complete.

Explain the basic ideas underlying process costing and how they differ from job-order costing.

Process costing is used for inventory costing when there is continuous mass production of homogeneous units. Process-cost systems accumulate costs by department (or process); each department has its own WIP account. Job-order cost systems differ because costs are accumulated and tracked by the individual job order.

The difference between applied and budgeted fixed overhead is the _____.

production-volume variance

Prepare summary journal entries for the typical transactions of a job-costing system.

The focus of journal entries in a job-order costing system is on inventory accounts. The WIP Inventory account receives central attention. Direct materials used, direct labor, and factory overhead applied are accumulated in WIP. In turn, the cost of completed goods is transferred from WIP to Finished Goods.

Show how service organizations use job-order costing.

The job-costing approach is used in nonmanufacturing as well as manufacturing environments. Examples include costs of services such as auto repair, consulting, and auditing. For example, the job order is a key tool for planning and controlling an audit engagement by a public accounting firm.

Compute output in terms of equivalent terms.

The key concept in process costing is that of equivalent units, the number of fully completed units that could have been produced from the resources required for the partially completed units.

Distinguish between product-costing and planning-and-control purposes in accounting for variable and fixed costs.

Variable-overhead costs are the same for product-costing and planning-and-control purposes. In contrast, fixed costs are a lump sum for planning-and-control purposes but are unitized and therefore vary with production volume for product-costing purposes.

Construct an income statement using the variable-costing approach

The variable-costing method emphasizes the effects of cost behavior on income. This method excludes fixed manufacturing overhead from the cost of products and expenses it immediately.

Compute costs and prepare journal entries for the principal transactions in a process-costing system.

There are five basic steps to process costing: 1. Summarize the flow of physical units. 2. Calculate output in terms of equivalent units. 3. Summarize the total costs to account for. 4. Calculate unit costs (step 3/step 2). 5. Apply costs to units completed and to units in the ending work in process. Step 3 and 5 provide data for journal entries. These entries all involve the WIP accounts for the various departments (processes) producing products.

Determine and use appropriate cost-allocation bases for overhead application to products and services.

There should be a strong cause-and-effect relationship between cost-allocation bases and the overhead costs that are applied using these bases.

Understand the concept of transferred-in costs in a process-costing system with sequential processes.

Transferred-in costs are costs incurred in a previous department for items that have been received by a subsequent department. Although we consider transferred-in costs as a separate cost category, we treat them as if they were direct materials that are 100% added as the beginning of the subsequent department.

Compare variable- and absorption-costing systems

Two major methods of product costing are variable (contribution approach) and absorption costing. They differ in how they account for fixed manufacturing overhead. Variable costing cannot be used for financial reporting or tax purposes, but it is used internally by many companies.

Allocate costs from producing departments to products or services using the traditional and ABC approaches.

When a company's products or services are the final cost object, it should integrate its service department allocation with the allocation system used to determine the costs or products and services. A traditional system traces the direct costs in each department to its products or services and allocates indirect costs using a cost-allocation base. The ABC approach uses three steps to assign costs to products or services: 1) Determine the key components and the relationship among them, 2) collect relevant data, and 3) calculate and interpret ABC information. The ABC approach provides more accurate estimates of product or service costs than the traditional approach but is more costly to maintain.

Use the direct and step-down methods to allocate service department costs to user departments.

When service departments support other service departments in addition to producing departments, they can use either the direct or step-down method for allocation. The direct method ignores other service departments when allocating costs. The step-down method recognizes other service departments' use of services.

Compute the production-volume variance and show how it should appear in the income statement.

Whenever a company employs the absorption method and the actual production volume doesn't equal the budgeted volume (denominator level) that it used for computing the fixed-overhead rate, a production-volume variance arises. When the actual production volume is less than budgeted, the variance is unfavorable; when actual volume exceeds budgeted volume, the variance is favorable. The amount of the variance is equal to the fixed-overhead rate times the difference between the budgeted and actual volume. Companies usually dispose of this variance by adjusting the current-period income. Favorable variances increase current-period income and unfavorable variances reduce current-period income.

Reconcile variable- and absorption-costing operating income and explain why a company might prefer to use a variable-costing approach.

Whenever sales volume exceeds production volume, variable-costing operating income exceeds absorption-costing operating income; when production exceeds sales, absorption-costing operating has the greater operating income. Companies that use operating income to measure results may prefer variable costing. This is because changes in production volume affect absorption-costing income but not variable-costing, since the level of sales is the primary driver of variable-costing income.

Compute budgeted factory-overhead rates and apply factory overhead to production.

accountants usually apply indirect manufacturing costs (factory overhead) to products using budgeted overhead rates. They compute the rates by dividing total budgeted overhead by a measure of cost-allocation base activity such as expected machine hours.

The Computer Department in a large company provides services to many departments. The cost driver for costs in the Computer Department is the number of computer hours. When allocating variable costs of the Computer Department to a user department, which of the following formulas is used?

actual computer hours used × (total budgeted variable costs of Computer Department/total budgeted computer hours of Computer Department)

whenever units sold are greater than (less than) units produced, variable-costing income is ____ (less than) than absorption-costing income.

greater