Principles of Accounting - D074 UNIT:7

job order costing

a method of product costing whereby each job, product, or batch of product, is costed separately

Product-line activities

overhead activities that are associated with the capability to produce different types of products

Batch-level activities

overhead activities that are performed each time a new production batch is started or ended

three different (though related) methodologies are..

process costing job order costing activity-based costing (ABC)

Product costing

the process of analyzing all costs involved in creating products (Manufacturing overhead, direct labor, and direct materials)

Companies that use process costing do not specifically identify the costs associated with each job or order being produced. Instead, these companies compute costs on a different basis. What is this basis?

Amount of cost associated with work done for a particular period of time

Four tax consulting companies serve very different sets of customers. Which of these four tax consulting companies is most likely to use a process system in determining the cost of each customer engagement?

A company that serves tax customers who are middle-income individuals who all have basically the same tax issues

What is a period cost?

A cost associated with activities occurring outside the factory

activity-based costing (ABC)

A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs.

What is process costing?

A method of product costing in which costs are accumulated by process and averaged over all products made during a period

What is a cost driver?

A numerical measure reflecting the amount of a cost associated with a particular overhead cost activity

cost drivers

A numerical measure used to reflect the amount of a specific cost that is associated with a particular activity.

Which phrase below describes job order costing?

A system in which manufacturing costs are accumulated by separate product orders or batches

Unit-level activities

Activities that take place each time a unit of product is produced.

In a job order costing system, how are factory supervisor wages classified?

Administrative expense

What is manufacturing overhead?

All manufacturing costs that are not classified as either direct materials or direct labor

One important result of using an ABC system is more accurate product costing. What is another important result of using an ABC system?

Better decisions made

In an ABC system, how are the costs belonging to a cost pool identified?

By carefully analyzing what activities cause the need for each specific overhead cost

After reviewing the job order costing plan, Eva wonders if she should go another direction for Gold Leaf Trophies. She is now trying to determine the cost of producing each order the company receives for custom-manufactured trophies. Eva can easily trace the direct materials and the direct labor costs associated with each custom-manufactured trophy. What would be the first step for Eva to consider in implementing an ABC overhead system to allocate overhead to each trophy?

Determine exactly what activities cause overhead costs for each trophy.

What are the three categories of manufacturing costs?

Direct materials, direct labor, and manufacturing overhead

Eva is now giving serious thought to implementing an activity-based costing (ABC) system at the custom trophy manufacturer. She wants to make sure she has considered all relevant factors before making this decision. Which statement is correct with respect to implementing an ABC system at the trophy manufacturer?

Implementing an ABC system requires a more careful analysis of the factors that create overhead costs.

For some production processes, job order costing is the correct production costing system to use. With other production processes, process costing is more appropriate. For which product is process more appropriate?

Manufacturing identical residential refrigerators

Sophie has recently learned about activity-based costing (ABC). Sophie has determined that using an ABC overhead allocation system would result in basically the same pattern of overhead allocation as she is currently getting with her traditional system based on direct labor hours. Should Sophie go ahead and install an ABC system anyway?

No. The cost in terms of time and money would not be worth it.(If the production process for all products is about the same, then both a traditional overhead system and an ABC system will result in basically the same pattern of overhead cost allocation. In such a case, going to the trouble, in terms of time and money, of setting up an elaborate ABC system would simply not be worth it.)

Which statement is correct with respect to activity-based costing (ABC) overhead allocation?

Overhead is allocated based on several different measures of activity.

How is overhead allocated in an ABC system?

Overhead per cost driver multiplied by the number of cost driver events

What is the most common sequence of the flow of costs through a job order costing system?

Purchase raw materials, transfer raw materials to production, add direct labor and manufacturing overhead costs, transfer the cost of completed goods to finished goods inventory, sell goods and transfer cost to cost of goods sold.

Eva has been asked to redesign Gold Leaf's old job order costing system. One of the first things Eva notices is that some items are not being recorded correctly. For example, the accounting flow of costs and the actual flow of costs in the production facility do not appear to match up. The raw materials inventory, for example, is incorrectly placed after the finished goods inventory. This is the first thing Eva wants to fix. In what order should Eva place the flow of materials costs through the rest of the production process?

Raw materials inventory, work-in-process inventory, finished goods inventory, cost of goods sold

Accurate cost data is needed for the following purposes:

Setting sales prices Measuring gross margin Valuing assets Making optimal choices

The amount of work actually done in a process costing center for the period includes all units started and completed during the period. In addition, other work is included in the quantification of the work done during the period. What other work is included?

The amount of work done to complete the beginning work-in-process inventory and the amount of work done to start the ending work-in-process inventory

What is included in the direct materials cost?

The cost of raw materials that are used directly in the manufacture of products

cost pool

Total cost being generated by a specific overhead cost activity.

Gold Leaf Trophies has discovered an export market for one of the trophies they manufacture, which can be mass-produced. The manufacturing manager understands that process costing can be applied in this situation in order to measure the costs of mass-producing this particular trophy. How would production costs be assigned to this trophy using process costing?

Total manufacturing cost and total units of production would be used to assign production costs equally to identical trophies.

What is the appropriate situation in which to use process costing?

When a company produces a large volume of products using a series of uniform processes

When is job order costing NOT appropriate?

When a company produces products or services in a continuous process in which jobs or products or projects can't be specifically identified

An ABC overhead allocation system is not always substantially better than a traditional system. When does a traditional overhead allocation system work well?

When the production process for each different product or project or process is basically the same

cost objects

an output of business, such as product, service, or division

process costing

method of product costing whereby a production cost for a period are accumulated and then averaged overall units manufactured during that period