ACCTG432 Exam#1
What are the 3 methods that can be used to express CVP relationships?
(1) Equation (2) CM (3) Graph
Quantity of Units Required to Be Sold
(Fixed costs+ Operating income)/CM per unit
What are two key assumptions made by managers using cost functions?
1. Changes in activity levels explain changes in total costs. Variations in the level of single activity (cost driver) explain the variations in related total costs. 2. Cost behavior within the relevant range can be estimated with a linear function
Steps in estimating a cost function using quantitative analysis
1. Choose the dependent variable (the cost to be predicted). 2. Identify the independent variable or cost driver. 3. Collect data on the dependent variable and the cost driver. 4. Plot the data. 5. Estimate the cost function using the high-low method or regression analysis. 6. Evaluate the cost driver of the estimated cost function.
(Ch.1,2) An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is A. Activity-based costing B. Target costing C. Cycle time costing D. Variable costing
A. Activity-based costing
Inventoriable costs
Also known as product costs. They are first capitalized as assets on the B/S and then are transferred to COGS on I/S
(Ch.3) Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott's FIXED COST?
Answer: $24,000 [Explanation: $200,000 Sales- $80,000 MOS= $120,000 B.E. Point--> B.E. $120,000 * C.M. 20%= $24,000]
(Ch.1,2) BWIP: $12,000 EWIP: 10,000 COGM: 97,000 DM issued to production: 20,000 Factory OH is assigned at 150% of direct labor. What was the August direct labor?
Answer: $30,000 COGM= BWIP + DL + DM + factory OH - EWIP $97,000= 12,000 + DL + 20,000 + 1.5DL - 10,000 2.5 DL= 75,000 DL= $30,000
(Ch.1,2) Life-cycle costing: A. Is sometimes used as a basis for cost planning and product pricing. B. Includes only mfg. costs incurred over the life of the product. C. Includes only mfg. cost, selling expense, and distribution expense. D. Emphasizes cost savings opportunities during the mfg. cycle.
Answer: (A) Life-cycle costing estimates a product's revenues amd expenses over its expected life-cycle. This approach is especially useful when revenues and related costs do not incur in the same periods. It emphasizes the need to price products to cover all costs, not just those for production.
(Ch.10) If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear? A. Random points B. A least squares line that slopes up to the right C. A least squares line that slopes down to the left D. Under this condition, a scatter diagram could not be plotted on a graph`
Answer: A. Random points. A coefficient of correlation of zero indicates there is no relationship between the variables, and the points will be randomly distributed
A direct labor overtime premium should be charged to a specific job when the overtime is caused by the: A. Increased overall level of activity B. Customer's requirement for early completion of the job C. Mgmt's failure to include the job in the production schedule D. Mgmt's requirement that the job be completed before before the annual factory vacation closure
Answer: B. Customer's requirement for early completion of the job A direct labor overtime premium is ordinarily an indirect cost, charged to OH, and allocated to all jobs. The association of overtime with a specific job may be attributable solely to random scheduling and an abnormally large production volume, a condition affecting all jobs. However, if overtime directly results from the demands of a specific job, it is a direct cost of that job.
(Ch.10) Omaha Sales Company asked asked a CPA's assistance in planning the use of multiple regression analysis to predict district sales. An equation has been estimated based upon historical data, and a standard error has been computed. When regression analysis based upon past periods is used to predict for a future period, the standard error associated with the predicted value, in relation to the standard error for the base equation will be: A. Smaller B. Larger C. The same D. Larger or smaller, depending upon the circumstances.
Answer: B. Larger The standard error associated with a predicted value is always larger because it takes into account two types of error. It contains the standard error of the estimate, which is the variability of the y values about the least squares line, and a measure of the fact that the least squares line only approximates the true relationship between x and y.
Application rates for factory overhead best reflect anticipated fluctuations in sales over a cycle of years when they are computed under the concept of: A. Maximum capacity B. Normal capacity C. Practical capacity D. Expected actual capacity
Answer: B. Normal capacity Normal capacity is the output level that will approximate demand over a period of years that includes seasonal, cyclical, and trend variations. Deviations in one year will be offset in other years
(Ch.4) In a traditional job-order cost system, the issuance of supplies to a production department increases: A. Stores control B. Work-in-process control C. Factory overhead control D. Factory overhead applied
Answer: C. Factory OH control As overhead is incurred, factory overhead control is debited, and the accounts payable, stores, etc., are credited. When OH is applied, WIP is debited, and factory OH applied is credited. The difference between the debited and credited amounts is over- or under-applied overhead. (So basically, the issuance of supplies here is OH)
Units of production is an appropriate method of assigning overhead when: A. Several well-differentiated products are manufactured B. Direct labor costs are low C. Only one product is manufactured D. The manufacturing process is complex
Answer: C. Only one product is manufactured Assigning OH on the basis of # of units produced is usually not appropriate. Costs should be assigned on the basis of some plausible relationship between the cost object and the incurrence of the cost, preferably cause and effect. OH costs may be incurred regardless of the level of production. Nevertheless, if a firm manufactures only one product, this method may be acceptable because all costs are to be charged to the single product.
(Ch.4) In a job-order cost system, the application of factory overhead is usually reflected in the general ledger as an increase in: A. Factory OH control B. Finished goods control C. WIP control D. COGS
Answer: C. WIP control The entry to record the application of factory OH to specific jobs is to charge WIP control and credit factory OH applied (or factory OH control) using a predetermined OH rate. The effect is to increase the WIP control account
(Ch.3) The contribution margin per unit is the difference between the selling price and the variable cost per unit, and the contribution margin ratio is the ratio of the unit contribution margin to the selling price per unit. If the selling price and the variable cost per unit both increase by 10% and fixed costs do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?
Answer: CM per unit increases, and the CM ratio remains unchanged.
(Ch.10) In determining cost behavior in business, the cost function is often expressed as y= a + bx. Which one of the following cost estimation methods should not be used in estimating fixed and variable costs for the equation? A. Graphic method B. Simple regression C. High- and low-point method D. Multiple regression
Answer: D. Multiple regression Regression analysis can be used to find an equation for the linear relationship among variables. However, multiple regression is not used to generate an equation of the type y= a + bx because multiple regression has more than one variable.
Cox company found that the difference in product costs resulting from the application of predetermined OH rates rather than actual OH rates were immaterial even though actual production was substantially less than planned production. The most likely explanation is that:
Answer: Overhead was composed chiefly of variable costs. Total variable OH costs change in proportion to changes in the activity level. Total fixed costs do not. For the difference between applied and actual OH to be immaterial when actual production is substantially less than planned production, OH costs must be composed chiefly of variable costs.
Cost flows
COGM and COGS on I/S are accounting representations of the actual flow of costs through a production system
Criteria for classifying variable vs. fixed costs
Choice of cost object, time horizon, and relevant range
Which describes the flow of the linear relationship between cost behavior, cost prediction, and cost estimation?
Cost estimation → Cost behavior → Cost prediction In other words, (1) determine how a cost behaves, (2) determine the relationship between the cost and activity, and (3) forecast the cost at a particular level of activity.
3 Factors that affect direct/indirect cost classification
Cost materiality, availability of information gathering technology, and operational design
(Ch.1,2) Theoretically, cash discounts permitted on raw materials should be
Deducted from inventory, whether taken or not. (So that goods avail. for sale reflect net purchase prices.)
(Ch.1,2) Conversion costs do NOT include: A. Depreciation B. Direct materials C. Indirect labor D. Indirect materials
Direct materials. Explanation: Conversion costs are necessary to convert raw materials into finished products. They include all manufacturing costs, for example, direct labor and factory overhead, other than direct materials.
Criteria for evaluating alternate cost drivers
Economic plausibility, goodness of fit, significance of the independent variable
(Ch.1,2) Just-in-time manufacturing practices are based in part on the belief that
Goods should be "pulled" through the production process, not "pushed."
(Ch.3) The breakeven point in units increases when unit costs
Increase and sales price remains unchanged.
(Ch.1,2) Which one of the following is least likely to be an objective of a cost accounting system? A. Product costing and inventory valuation B. Departmental efficiency C. Sales commission determination D. Income determination
Sales commission determination
(Ch.3) Describe the high-low method.
The high-low method estimates variable cost by dividing the difference in costs incurred at the highest and lowest observed levels of activity by the difference in activity.
Period costs
They have no future value and are expensed as incurred.
A high correlation between activities does not necessarily mean causality. T or F?
True!
(Ch.3) The contribution margin increases when revenues remain the same and
Variable cost per unit decreases
y=a + bx
y= dependent variable; thing being predicted a= fixed cost b= slope x= independent variable/cost driver