Accounting 233 - Exam 2

why is overhead allocations important for job order costing

because the distinguishing characteristics of job order costing is that costs are accumulated separately for each job. thus, overhead must be assigned separately to each job

equation to find ending balance

beginning balance + purchases - sales = ending balance

Who uses a periodic inventory system?

businesses that are immaterial in dollar amount, or when management does not need a continuous record of quantities on hand.

when are the actual overhead costs and total units of output known?

by the end of the year (which is too late to be useful)

by reporting a higher cost of goods sold than results from other inventory valuation methods, the LIFO method usually results in

lower taxable income

cost accounting systems are essential for....

maintaining competitive advantage

cost accounting systems

measure, record, and report product costs

inventory

merchandise intended for resale to customers

the average-cost method that is most commonly used with a perpetual inventory system is as the ....

moving average method

Length of operating cycle

number of days to sell inventory + number of days to collect accounts receivable

FIFO moves which costs to the income statement as inventory is sold

oldest

when merchandise is sold, what are the two necessary entries correlate?

one to recognize the revenue earned and the second is to recognize the related cost of goods sold

The series of transactions through which a business generates its revenue and its cash receipts from customers is called the

operating cycle

estimated overhead application rates are used to assign

overhead cost to specific jobs as goods and services are provided to customer throughout the accounting period - ex: a company using direct labor hours as an activity base would allocate the greatest proportion of its overhead costs to those products or services requiring the most direct labor hours

works in process

partially completed products

in periods of rising prices, using an inventory method other than LIFO will result in

payment of higher income taxes

which merchandise inventory system is more commonly used today

perpetual inventory system

what are the two approaches used in accounting for merchandise inventories?

perpetual inventory system and periodic inventory system

in a periodic system, the __________ account is _______ when merchandise is acquired

purchases, debited

inventory is an asset that is held for ______ to customers

sale

inventory cost flow from the balance sheet to the income statement at the point in time that the inventory is ________

sold

net sales

the actual dollar amounts received by a firm for the goods and services it has sold after adjustment for returns, allowances, and discounts

what is the correct flow of inventory within the financial statements?

the cost of inventory is offset in the income statement against the amount for which the inventory is sold

perpetual inventory system

the cost of transactions involving the sale of merchandise is recorded immediately as they occur. UP TO DATE DATA

cost of goods sold

the cost to a merchandising company of the good it has sold to its customers during the period

What does a job represent

the goods produced of services provided to fill a particular order. it can also be the production of a particular product

the only requirement in selecting cost flow assumption is that

the items to which the assumption is applied must be homogeneous

why do we want to repeat the operating cycle a lot?

the more laps around the circle, more money introduced

in applying the LIFO inventory method, what describes how costs move from the statement of financial position (balance sheet) to the income statement?

the most recent costs move first

the LIFO method is based on the assumption that

the most recently purchased units are sold first and the earliest purchases remain in inventory

if an activity base is used to apply overhead costs is not a primarily cost driver....

the overhead costs charge to certain jobs may become significantly distorted

operating cycle

the repeating sequence of transactions by which a business generates its revenue and cash receipts from customers

unit costs are determined by what?

tracing direct materials, direct labor, and overhead to specific units of production

what is special identification best used for?

unique inventories of high priced, low volume items

what happens when a job represents a batch of items?

unit costs are determined by dividing the total cost charged to the job by the number of units in the batch

When is revenue recognized?

when it is earned

where does it show revenue has been recognized?

when it is included in the income statement

Is cost of goods sold an expense?

yes

are the Direct materials, direct labor, and overhead accumulated separately for each job?

yes

cost flow assumption

Assumption as to the sequence in which units are removed from inventory for the purpose of sale. Is not required to parallel the physical movement of merchandise if the units are homogeneous.

Special Identification

- recording as the cost of goods sold the actual costs of the specific units sold. necessary if each unit in inventory is unique, but not if the inventory consists of homogeneous products - only method that exactly parallels the physical flow of merchandise - ex: cars are unique so they have an identification number that is made specifically for that vehicle so we can later track all of its costs

First-In, First-Out (FIFO)

- the assumption that the stock that is purchased first will be sold first - ex: groceries - want to sell the older ones instead of the fresher ones before they go bad

LIFO is based on the assumption that

- the oldest costs are retained in the balance sheet as an asset when items are sold - the most recently purchased inventory is assumed to be sold first

average cost

- total cost of goods available for sale by the number of units in inventory(assumes that units are withdrawn from the inventory in random order) - ex: pumping gas into the tank in the ground. no way to separate the old gas that was already in there to the new gas you just put in

what two important things does cost accounting system help manage?

1) to determine the unit cost of manufacturing a product or providing a service 2) to provide managers with useful information for planning and cost control functions

wholesalers

Businesses that buy large quantities of goods from manufacturers, store the goods, and then resell them to other businesses.

Activity Based Costing

Cost accounting method that tracks indirect costs to the activities that consume resources.

in a period of rising prices, ________ inventory method comes the closest to matching income statement revenues and current costs

LIFO

which generally accepted inventory method comes closest to matching the current selling price with the cost of replacing the inventory items sold

LIFO

which inventory pricing method is regarded as the most conservative?

LIFO

in a merchandising company, inventory consists of what?

all goods owned and held for sale to costomers

in a company's statement of financial position (balance sheet), inventory is usually presented

as a current asset immediately following receivables

inventory starts off as an _________, but becomes an __________ once those items are sold

asset, expense

the operating cycle of merchandise company consists of what basic transactions?

(1) purchases of merchandise (2) sales of the merchandise (3) collection of receivables from customers

formula for finding overhead application rate

(estimated overhead costs)/(estimated united in the activity base)

control account

- A general ledger account that summarizes the content of a specific subsidiary ledger. - do not provide the detailed info needed to effectively manage most business enterprises

Gross Profit (Gross Margin)

- Revenue - cost of goods sold - it does not represent the overall profitability of the businessman

give correct statements: as part of the closing process in a periodic inventory system

- an increase in inventory during the period reduces cost of goods sold - costs of goods sold is affected by the change in inventory during the period

as inventory is purchased, it is i totally reported as _________ in the balance sheet. as it is sold to customers, it becomes _________ which is known as

- asset - expense - cost of goods sold

Last-In, First-Out (LIFO)

- assumes that the costs of the last goods purchased (last in) are the costs of the first goods sold (first out) - ex: dumping coal on top of a big pile of existing coal. pull materials off the top when needed - does not change over time, will stay the same no matter when used

contra revenue account

A debit balance account that is offset against revenue in the income statement. Examples include Sales Discounts and Sales Returns and Allowances.

overhead application rate

A device used to apply a normal amount of overhead costs to work in process. The rate is predetermined at the beginning of the year and expresses the percentage relationship between estimated total overhead for the year and the estimated total of some cost driver, such as direct labor hours, direct labor costs, or machine hours. Use of the overhead application rate causes overhead to be charged to work in process in proportion to the amount of "cost driver" traceable to those units.

Lower of Cost or Market (LCM) rule

A method of inventory pricing in which goods are valued at the lower of original cost or replacement cost (market).

moving average method

A method of valuing all units of inventory at the same average per-unit cost, recalculating this cost after each purchase. This method is used in a perpetual inventory system.

write-down (of an asset)

A reduction in the carrying amount of an asset because it has become obsolete or its usefulness has otherwise been impaired. Involves a credit to the appropriate asset account, with an offsetting debit to a loss account.i

just-in-time (JIT) inventory system

A technique designed to minimize a company's investment in inventory. In a manufacturing company, this means receiving purchases of raw materials just in time for use in the manufacturing process and completing the manufacture of finished goods just in time to fill sales orders. Just-in-time also may be described as the philosophy of constantly striving to become more efficient by purchasing and storing less inventory.

consistency (in inventory valuation)

An accounting principle that calls for the use of the same method of inventory pricing from year to year, with full disclosure of the effects of any change in method. Intended to make financial statements comparable.

cost driver

An activity base that can be traced directly to units produced and that serves as a casual factor in the incurrence of overhead costs. Serves as an activity base in an overhead application rate.

periodic inventory system

An alternative to the perpetual inventory system. It eliminates the need for recording the cost of goods sold as sales occur. However, the amounts of inventory and the cost of goods sold are not known until a complete physical inventory is taken at year-end. ANNUAL DATA

the cost flow assumption that assumes that the most recent purchases are sold before the less recent purchases is

FIFO

which cost flow assumption is most consistent with the physical flow of inventory assuming the earliest purchases are sold first?

FIFO

which inventory pricing method is regarded as the least conservative?

FIFO

what are three cost flow assumptions?

FIFO, LIFO, Average Cost

accounts receivable turnover rate

Net Sales / Average Accounts Receivable

what happens to LIFO during the time of rising prices?

it will result in lower income because you are recognizing the cost of sales of most recent goods that have the higher prices. FIFO will report higher prices

cost control refers to

keeping costs at reasonable levels

overhead costs

The costs not directly related to the production or selling of goods. such as marketing, staff, work that does not create or produce product. INDIRECT COST

inventory shrinkage

The loss of merchandise through such causes as shoplifting, breakage, and spoilage.

cost layer

Units of merchandise acquired at the same unit cost. An inventory comprised of several cost layers is characteristic of all inventory valuation methods except average cost.

retailer

a business that sells merchandise directly to the public

in period of rising prices, what best describes the rationale for a company to use an inventory method other than LIFO

a company using a method other than LIFO will report higher net income

job order costing

a costing system used in situations where many different products, jobs, or services are produced each period

subsidiary ledger account

a ledger containing separate accounts got each of the items making up the balance of a control account in the general ledger. the total of the account balances in a subsidiary ledger are equal to the balance in the general ledger control account

what happened when there's is an increase in the number of activity base (ex: direct labor hours)?

causes a proportional increase in actual overhead costs incurred

for job order costing, all products or service costs are...

charged (debited) to the Work in Process a inventory as incurred

what are some companies that use job order cost systems

construction companies, shipbuilders, motion picture studios, defense contractors, print shops, and custom furniture makers

inventory in the statement of financial position (balance sheet) is directly linked to _____ ______ _______ _______ in the income statement

cost of goods sold

inventory turnover rate

cost of sales / average inventory cost

for LIFO, the flow of _________ is more important than the __________ flow of merchandise

costs, physical

number of days to collect accounts receivable

days in period / accounts receivable turnover rate

number of days to sell inventory

days in period / inventory turnover rate

in double-entry accounting...

debit purchases and credit costs of goods sold

the use of cost flow assumption eliminates.....

eliminates the need for separately identifying each unit sold and looking up it's actual cost

T/F: the cost of inventory generally does not include any cash discounts taken

false

if prices to acquire inventory are rising, FIFO will cause

higher income to be reported than under LIFO

inventory costs generally flow from the balance sheet to the _________ ______________ when they are sold

income statement

the cost of inventory is included in which account before the inventory is sold?

inventory

the cost of items purchased for resale is included in which account before the inventory is sold?

inventory

which balance sheet account is particularly important to merchandising businesses?

inventory

the perpetual inventory system is useful when management needs info during the year on...

inventory levels and gross profit