Accounting Test 2 Chapters 5-8
Equivalent Units of Production or EUP
# of physical units x % of completion
Direct Labor
Comes out of salaries payable
Price Taker
Companies that do not have a lot of flexibility in pricing, products lack uniqueness, no brand name, heavy competition. Target costing is emphasized. example: gas companies
Operating
Contribution Margin - Fixed Costs
Contribution Margin Ratio
Contribution margin per unit / Sales price per unit
If there are factors that restrict production capacity, a company should focus on the product line that has the highest:
Contribution margin per unit of the constraint.
Contribution Costs
Cost organized by behavior. sales - variable costs = contribution margin contribution margin - fixed costs = operating income
Traditional Costs
Cost organized by function. sales - COGS= gross profit gross profit - operating expenses = operating income
If the sales price is $60 per unit, the variable cost is $10 per unit, total fixed costs is $60,000, and 12,000 units are produced, the break-even in units is:
1,200
Leverage Corporation sells two products: Regular and Supreme. Leverage sells three Regulars for every two Supremes. The Regular sells for $20 each with variable costs of $11 each, whereas the Supreme sells for $25 each with variable costs of $15 each. If fixed costs are $21,000, what is the break-even point in units?
1,340 units of Regular and 894 units of Supreme
If the sales price is $150 per unit, the variable cost is $90 per unit, and total fixed costs is $24,000, the contribution margin ratio is:
40%
There are 10,000 units in Work in Process inventory for the Mixing Department at the end of the month. The units were 60% complete for conversion costs. What are the equivalent units for conversion costs using the weighted-average method?
6,000
If the sales price is $60 per unit, the variable cost is $36 per unit, total fixed costs is $50,000, how many units need to be sold if the desired profit is $100,000?
6,250 units
Direct Materials
Account Name: Raw Materials/ Materials Inventory
Job Cost Flow
Accumulate cost per job.
$199,500 worth of masks were completed and transferred out to finished goods inventory.
DB CR Finished Goods Inventory $199,500 WIP Inventory Insertion $199,500
Sea View determined that $176,000 should be assigned to the units completed and transferred out to the Insertion Department
DB CR WIP Inventory Insertion $176,000 WIP Inventory Shaping $176,000
For the month cost incurred in the insertion department were raw materials $19,000, wages of $3,710, and MOH of $9,225.
DB CR WIP Inventory Insertion $31,935 Raw Materials Inventory $19,000 Wages Payable $3,710 MOH $9,225
During October, $140,000 of direct material was requisitioned for use by the shaping departments.
DB CR WIP Inventory Shaping $140,000 Raw Materials Inventory $140,000
Labor time records show that $21,250 of direct labor was used in the shaping department during October
DB CR WIP Inventory Shaping $21,250 Wages Payable $21,250
Remember*
DEBIT GOING IN CREDIT GOING OUT
Completed 100%
Debit Finished Goods Credit WIP Bottling
Transfer out completed goods (example bottles completed in assembly)
Debit WIP Bottling Credit WIP MOH
Recording the transfer of the cost of items completed in the Forming Department to the Packaging Department would include a:
Debit WIP inventory packaging
Conversion Cost
Direct Labor + Manufacturing Overhead (companies that use automated production processes typically use two cost categories direct materials and this)
Margin of Safety
Excess of actual or expected sales over breakeven sales.
Sales in total units
Fixed expenses + Operating income / Weighted-average contribution margin per unit
Sales in Dollars
Fixed expenses + Operating income / Weighted-average contribution margin ratio
Variable Costing
Fixed overhead is considered a period cost. Fixed overhead is expensed in the period incurred.
Absorption Costing
Fixed overhead is considered a product cost just as direct materials, direct labor, and variable overhead. Fixed overhead is expensed when the product is sold.
Variable Cost
Per unit remains constant. Total changes in direct proportion to changes in levels of activity. Cost that are incurred for every unit of volume. Total variable costs in direct proportion to change in volume. Graphs always begin at the origin. Slope represents the variable cost per unit of activity.
Price Setters
Product is more unique, less competition, and branded. Pricing approach emphasizes cost-plus pricing = add profit. examples: Apple, Nike
Quinn Bakery bakes gingerbread cookies and sells them by the dozen. During the holiday season, they bake 1,000 dozen cookies. They can sell the plain, undecorated cookies ("as is") for $2.50 per dozen. If they decorate the cookies at an additional cost of $1 per dozen, each decorated dozen could be sold for $4.00. Should Quinn Bakery sell the cookies undecorated ("as is") or should the cookies be decorated ("processed further")?
Quinn Bakery should decorate the cookies because operating income will be higher by $500 than if they sell them undecorated ("as is").
Target Variable Cost per Unit
Revenue @ Market Price - Desired Price = Target Total Cost - Fixed Cost = Target Variable Cost / # of units
Unit Contribution Margin
Sales price per unit - Variable cost per unit Each time a unit is sold, the company's operating income will improve by the amount of the unit contribution margin.
Operating Income
Sales revenue - Variable expense - Fixed expenses or (Sales price per unit × Units sold) - (Variable cost per unit × Units sold) - Fixed expenses
Which of the following should be ignored when deciding whether to sell as is or process a product further?
The costs incurred in producing the product as is
Operating Leverage
The relative amount of fixed and variable costs that make up total costs. i. OL Factor = Contribution margin / Operating income ii. The larger the OL factor, the greater the impact a change in sales volume has on operating income
Break Even Point
The sales level at which operating income is zero: Total revenues = Total expenses.
Weighted Average Method
To account for = beginning balance + amount started Accounted for = Transferred out + WIP
Cost Plus Approach (For Price Setters)
Total Cost + Desired Profit or VC + FC = TC + Desired Profit = Sales Revenue / # of Units = Sales Price per Unit
Weighted-average Contribution Margin Ratio
Total contribution margin / Total sales revenue (totals are taken directly from a contribution margin income statement)
Weighted-average contribution margin per unit
Total contribution margin of "basket" / number of units in basket
Signature Corporation has three product lines: silver, gold, and platinum. All three products have a positive contribution margin, but the gold line has an operating loss. Management is considering discontinuing the product. Management decides to discontinue the gold line. If management followed the decision rule this must be true
Total cost savings exceeded the lost revenues from discontinuing the line.
Fixed Cost
Total remains constant. Per units changes with changes in levels of activity. Straight horizontal line going across the y- axis.
Gross Profit
Traditional Sales - COGS
On a graph, if a horizontal axis represents units of production and the vertical axis represents units of production and the vertical axis represents total costs, the total variable cost line would be shown as a
Upward Sloping Line
Conversion Costs (DL and MOH)
WIP - "x" department
Relevant Range
Where fixed cost and variable cost remain constant.
Journal entries in a second or later production department
a. Direct materials used i. Debit Work in Process Inventory and credit Raw Materials Inventory b. Direct labor used i. Debit Work in Process Inventory and credit Wages Payable c. Allocate manufacturing overhead i. Debit Work in Process Inventory and credit Manufacturing Overhead d. Transfer completed units i. Debit Finished Goods and credit Work in Process for the current department (entry assumes that this is the final production department)
Journal entries for the first department in a process costing system
a. Direct materials used i. Debit Work in Process Inventory and credit Raw Materials Inventory b. Direct labor used i. Debit Work in Process Inventory and credit Wages Payable c. Allocate manufacturing overhead i. Debit Work in Process Inventory and credit Manufacturing Overhead d. Transfer completed units i. Debit Work in Process Inventory for the next department and credit Work in Process Inventory for the current department ii. Amount used in the journal entry is calculated in Step 5 of the process costing procedure
Unit Cost
accumulated cost / # of EUP in the period
What are equivalent units are usually determined for
direct materials and conversion costs
Graphing CVP
i. Step 1: Choose a sale volume and draw the sales revenue line ii. Step 2: Draw the fixed expense line iii. Step 3: Draw the total expense line iv. Step 4: Identify the breakeven point v. Step 5: Mark the operating income and operating loss areas
Calculating Break Even Shortcut Approach
in units = Fixed expenses / Contribution margin per unit or in sales dollars = Fixed expenses / Contribution margin ratio
A utility bill consisting of a monthly base, plus an added amount based on usage, is classified as a
mixed cost
Cost per EUP
product cost for the period / equivalent units for the period
Within a relevant range cost that increase in direct proportion to volume are
variable cost
Process Costing Example
water bottle or crayon manufacturer
Total Cost Equation
y = xv + f x = volume of activity v = variable cost per unit of activity f = total fixed cost
Process Costing Flow
1) Raw Materials 2) WIP (DM, DL,MOH) *WIP #1 goes to WIP #2 and so on 3) Finished Goods 4) COGS (After selling finished goods)
A company is analyzing its mixed costs. During July, its busiest month, a company had total labor hours of 14,000 and total costs of $40,000. During February, its slowest month, the company had labor hours of 8,000 and total costs of $25,000. The company is planning for 12,000 direct labor hours next April. How many dollars should the company budget for total costs during April?
$35,000
Process Costing Steps
1) Summarize the flow of physical units 2) Compute output in terms of equivalent units 3) Summarize total cost to account for 4) Compute the cost per equivalent unit 5) Assign total costs to completed and to units in ending WIP inventory
A company is analyzing its mixed costs. During July, its busiest month, a company had total labor hours of 14,000 and total costs of $40,000. During February, its slowest month, the company had labor hours of 8,000 and total costs of $25,000. The company is planning for 12,000 direct labor hours next April. How many dollars should the company budget for fixed costs during April?
$5,000
The Shaping Department's overhead rate is $50 per machine hour and the department used 935 machine hours this month.
$50 * 935 = $46,750 DB CR WIP Inventory Shaping $46,750 MOH $46,750
If the sales price is $150 per unit, the variable cost is $90 per unit, and total fixed costs is $24,000, the breakeven in sales dollars is:
$60,000
There are 10,000 units in Work in Process inventory for the Mixing Department at the end of the month. The units were 60% complete for conversion costs. Assume that the beginning Work in Process inventory for the Mixing Department had $12,000 in conversion costs; and that $30,000 in conversion costs were added during the month. What is the cost per equivalent unit for conversion costs?
$7.00
If the sales price is $20 per unit, the variable cost is $12 per unit, total fixed costs is $12,000, and 15,000 units are produced, the contribution margin per unit is:
$8
Contribution Margin Income Statement
- Organized by cost behavior. - All fixed costs, including fixed MOH, are expensed below the contribution margin line. - The contribution margin is equal to sales revenue minus variable expenses.
The difference between absorption costing and variable costing
- The treatment of fixed MOH. - The timing with which fixed MOH is expensed.
Cost per unit within the relevant range
-Fixed costs decrease in proportion to increase in volume -Mixed cost decrease but not direct proportion to increases in volume -Variable costs stay constant with changes in volume.
Sunk Costs
-Irrelevant to short-term business decisions -Avoid including -Cost incurred in the past and cannot be changed -Avoid using unit cost unless they are purely variable
Target Profit
-Is the sales level at which operating income is greater than zero: Total revenues > Total expenses. Calculate: 1. Sales in units = (Fixed expenses + Operating income) / Contribution margin per unit or 2. Sales in dollars = (Fixed expenses + Operating income) / Contribution margin ratio
Fishing Run Corporation received a special order request for 20,000 new fishing poles at a sales price of $30 each. This is a $10 reduction in the normal sales price. The variable costs per fishing pole are $20. The total fixed costs of $110,000 will not change. What should management do?
-Management should accept the order if the variable costs per unit and fixed costs in total will not change with the order. -Management should accept the order if they have excess capacity. -Management should consider not accepting the order if the customers will expect the price decrease as the standard price in the future.
cost-volume-profit analysis assumptions
-Managers can classify each cost as either variable or fixed, and mixed costs can be broken down into their variable or fixed component. -Revenues are linear throughout the relevant range of volume. -The sales mix remains constant.
Process Costing
-Mass Production -Large Quantities -More Machine Hours -Identical Units
Short-term Special Decisions Key Components
-Relevant revenues, costs, and profits -Use of traditional (absorption costing) income statements
Job Costing
-Special, unique goods -Small Batches -Services -Direct Labor Hours
Hay Company had 3,000 units in its beginning inventory, 2,000 units in its ending inventory, and completed and transferred out 14,000 during the month. What are the total units to account for?
16,000
The Shaping Department started the month with a beginning Work in Process inventory of $15,000. During the month, it was assigned the following costs: direct materials, $120,000; direct labor, $40,000; overhead allocated at the rate of 20% of direct labor cost. Inventory with a cost of $160,000 was transferred to finished goods. What was the ending balance of Work in Process inventory for the department?
23,000
Assign conversion cost to MOH
Goes into WIP Comes out of MOH
Recquisition Raw Materials
Goes into WIP- x department Coming out of raw materials
Operating Income (Net Income)
Gross Profit - Operating Expenses
Regression Analysis
Helps generate a statistic, called the R-square, which tells how well the line fits the data points.
Cost Behavior
How costs change as volume changes. (Variable Cost, Fixed Cost, Mixed Cost)
Fishing Run Corporation received a special order request for 20,000 new fishing poles at a sales price of $30 each. This is a $10 reduction in the normal sales price. The variable costs per fishing pole are $20. The total fixed costs of $110,000 will not change as a result of the special order. The Corporation has enough excess capacity to fill the order without affecting current sales. What will be the impact on operating income if the special order is accepted?
Increase in operating income of $200,000
Thematics Publishing produces 10,000 binders each year. Each binder has a variable cost of $17 and total fixed costs of $110,000 per year. The binders can be purchased from an outside supplier for $20 each. The production space will remain idle, but fixed costs can be reduced by 30%. The annual impact of purchasing the binders will be to:
Increase operating income by $3,000.
