Exam 1- Accounting 2

What new rules were enacted under the Sarbanes-Oxley Act to address unethical accounting practices?

-Higher ups must sign off on financial activities and they are correct -Management must have international controls for safeguarding -Bus paying more attention to board of directors -Outside audits are a must!

What is generally true about overhead allocation to high-volume products versus low-volume products under a traditional costing system?

-Overhead allocation occurs based on a single predetermined overhead rate -Results in lower amount of overhead allocated to it b/c low volume requires more set ups and changeovers which requires more direct labor and overhead. -Based on most direct connection to its usage -will result in most accurate allocation of overhead costs

Under what conditions is direct labor a valid basis for allocating overhead?

-most relevant factor has direct effort on resources consumed -if direct labor cost is a large part of total product cost= sig correlations btw direct labor cost and changes to over head cost -based on direct connection to usage -results in more accurate allocation of over head costs

Explain the preparation and use of a value-added/ non-value-added activity flowchart in an ABC system.

-value added: increases the perceived worth of a product to the customer and it's company operations -non value: does not change perceived worth of a product to a consumer -flow chart allows mgmt to focus efforts/resources on value added activities

What are the principal differences between activitybased costing (ABC) and traditional product costing?

1. ABC uses multiple activity cost pools instead of just one 2. ABC assigns cost to users of overhead based on performed activities 3. ABC gives managers better info than traditional costing methods 4. ABC provides more accurate overhead cost allocation 5.ABC provides more effective overhead cost controls 6. ABC lets mgt focus on relevant factors and allows for better mgt of activities

What steps are involved in developing an activity based costing system?

1. Classify manufacturing process activities and allocate overhead to one or many cost pools 2. Recognized the cost driver that has the best relationship to the costs built up in the cost pool 3. calculate the activity based overhead rate for each driver 4. assign overhead costs to manufactured products by means of the overhead rates calculated for each cost pool

What is the formula for assigning activity cost pools to products?

1. Identify the expected use of the cost drivers for each product 2. Assign overhead costs to each product 3. Use sum of assigned overhead costs- divide that figure by number of units produced 4. Resulting figure is the overhead cost per unit

What are the benefits of activity-based costing?

1. Identifying activities that create these costs makes it easy to assign cost directly to them instead of an arbitrary calculation 2. Considered more accurate than other overhead allocation methods 3. isn't confined to manufacturing companies 4. determines which place uses more of the resources so that overhead costs can be allocated more accurately 5. managers are more informed and make better choices 6. substantial diversity will be gained 7. complexity and volume will be maintained

What type of industry is likely to use a job order cost system? Give some examples.

A company that assigns cost to every batch of items. Used by companies that produce products at consumer request or to a group of consumers. Examples: printing magazines, movie productions that produces multiple films

"At the end of the year, under- or overapplied overhead is closed to Income Summary." Is this correct? If not, indicate the customary treatment of this amount.

Any over or under applied overhead is eliminated by adjusting the cogs account.

Distinguish between managerial and financial accounting.

Both: Deal with economic events and communicate them to appropriate parties Managerial: determines the cost per unit for manufacturing a product Financial: report total cogs/manufactured

What is an activity cost pool?

Collection of costs that all related to the same activity. Cost are pooled together to determine an activity overhead rate for all the costs incurred by the same activity.

What type of industry is likely to use a process cost system? Give some examples.

Companies that manufacture large amounts of the same product. Ex: grandpa's shop

How are manufacturing cost classified?

Current period: adding direct materials, direct labor, and manufacturing overhead Cost of units not completed at end of the year are classified as the cost of the ending work in process inventory. COGM: contains info about cost elements used to calculate COGM- outlines data for manufacturing overhead and direct materials

Btw Man/Fin acc: purpose of reports

Fin: general purpose- comprehensive overview of the company- aren't used for informed decisions on specific things Man: specific purpose- specific decision to be made and what departments it will affect

Btw Man/Fin acc: primary users

Fin: primary users are external users, not used by organization employees Man: everyone in the organization reviews report

Btw Man/Fin acc: types/ freq of reports

Fin: used to create financial statements, created both quarterly/annually, identify areas that can increase revenue Man: for managers- what they can spend money on- weekly, monthly, daily

What refinement has been made to enhance the efficiency and effectiveness of ABC for use in managing costs?

Focus on reducing cost and improving production and decision making functions.

Sam Bowden believes actual manufacturing overhead should be charged to jobs. Do you agree? Why or why not?

It makes sense to keep them separate. Manufacturing overhead applies to multiple avenues so it wouldn't make sense to apply it to a specific job.

What has happened in recent industrial history to reduce the usefulness of direct labor as the primary basis for allocating overhead to products?

Manufacturing techniques have become more advanced. Actual usage of direct labor has decreased while the use of machine hours has increased.

Identify the differences in the cost of goods sold section of an income statement between a merchandising company and a manufacturing company.

Merch: cog purchased+ beg inventory- ending inventory Man: cogs: cogm+beg finished goods-ending finished inventory

In what ways can the budgeting process create incentives for unethical behavior?

People can alter numbers and take money off the top. Always double check and make sure all numbers are correct.

Tina Burke is confused about the differences between a product cost and a period cost. Explain the differences to Tina.

Product cost: manufacturing cost components- direct labor, direct materials, manufacturing overhead- cost in producing finished good Period cost: non manufacturing cost- administrative/selling expenses

What is the purpose of a job cost sheet?

Recording the cost that can be charged to a specific job. Determines the total and unit cost in relation to the completed job.

Explain what is meant by "balanced" in the balanced scorecard approach.

The limited perspective is often corrected. Uses financial and non financial measures for evaluating opportunity. Performance measures are linked with cause and effect approach to ensure they match up with company goals.

In an automated manufacturing environment, what basis of overhead allocation is frequently more relevant than direct labor hours?

The overhead allocation should always be based on the most direct connection to its usage. This results in the most accurate allocation of overhead costs.

What is a cost driver?

Usage of resources that is driven by the activity. Component that has the best cause and effect relationship with resources expended.

Indicate the source documents that are used in charging costs to specific jobs.

Use job cost sheets-all the cost relating to a specific job- depicts the total cost of all units manufactured as well as per cost unit.

Of what benefit is classifying activities as value-added and non-value-added?

Value:activities of an organizations operations that increase apparent worth of a service/good Non value: activities that can e eliminated and would not hinder company's operations or reduce the apparent value of its service/good

What elements are involved in computing a predetermined overhead rate?

direct labor costs, machine hours, direct labor hours or any other type of measurement formula: est annual overhead rate/ expected annual operating activity

What is the formula for computing activity-based overhead rates?

formula= est overhead per activity/ expected use of cost drivers per activity

Matt Litkee is confused about under- and overapplied manufacturing overhead. Define the terms for Matt, and indicate the balance in the manufacturing overhead account applicable to each term.

under: overhead that was assigned to work in process is LESS than what is actually earned- man overhead account=debt over: overhead assigned to work in process is MORE than total overhead actually incurred