Accounting 2310 Final Review

The ________ variance "measures how well the business keeps prices of direct labor inputs within standards."

Direct labor rate

The unemployment rate is high in the city in which a company has a factory. The company finds that they are able to pay new employees a lower wage per hour than when the unemployment rate was lower a year ago. Which of the following variances may be directly impacted?

Direct labor rate variance

All of the following budgets are prepared by merchandising companies except

Direct materials

A company uses sugar in producing its product. If the price of sugar doubles, which variance is directly impacted?

Direct materials price variance

The job cost record summarizes which of the following sets of information for each job?

Direct materials, direct labor, and manufacturing overhead

Period Costs

Do not get treated as inventory, immediately expenses Incurred in other functions of the value chain "Operating expenses" or "Selling, general, and administrative expenses" Expensed immediately on Income Statement in the period incurred

Keep or Drop

Does the product provide a positive contribution margin? Are there any fixed costs that could be avoided if we discontinue the product? Will discontinuing the product affect sales of the company's other products? What could we do with the freed capacity?

A potential disadvantage of decentralization is which of the following

Duplication of costs

Margin of Safety

Excess of actual or expected sales over breakeven sales Drop in sales the company can absorb without incurring a loss Higher margin of safety--less risky

If production increases by 30%, how will total variable costs likely react

Increase by 30%

Variable Costs

Increases in total with an increase in output Decreases in total with a decrease in output

Short-term business decisions

Incremental analysis approach: Look only at how operating income would change or differ under each alternative Focus on relevant revenues, costs, and profits Use a contribution margin approach that separates variable costs from fixed costs Ex/ Pricing, special orders, discontinuing products/departments/stores, product mix, outsourcing, selling "as is"

Product Costs

Incurred by manufacturers to produce their products or by merchandisers to purchase their products Relate to obtaining inventory Originally reported as inventory on the Balance Sheet, but once sold it becomes COGS on Income Statement

Accounting Rate of Return

Indicates profitability of investment, short lifespan investments Depreciation expense? =(Cost-RV)/Life Cash inflows-Depr=Operating income Avg Annual Op Income/Initial Inv If the expected accounting rate of return exceeds the required rate of return then INVEST If the expected accounting rate of return is less than the required rate of return then DONT INVEST

Which of the following are classified as manufacturing overhead?

Indirect labor and indirect materials

CVP analysis assumes all of the following except

Inventory levels will increase

If the accounting rate of return exceeds the required rate of return then...

Invest in the capital asset

The manager of the corporate division of Anthropologie, a large retail clothing chain, may be in charge of a(n

Investment center

Cost Behavior

It describes whether a cost changes when the level of output changes--essential to planning, controlling, and decision making

When the number of units produced is less than the number of units sold, how does operating income under variable costing differ from operating income under absorption costing?

It is higher than operating income under absorption costing

What will be the effect on the contribution margin ratio if the selling price per unit decreases and variable cost per unit remains the same?

It will decrease

The two basic types of costing systems are

Job costing and process costing

The standard cost of direct labor per unit is calculated by

multiplying the standard quantity of direct labor by the standard price of direct lab

Which of the following budgets is the cornerstone of the master budget?

Sales

"Financial budget" is best described by which of the following?

A budget that projects cash inflows, cash outflows, and the end of period budgeted balance sheet

Flexible Budget/Performance Reports

A budget prepared for a different level of volume than the one originally anticipated Apples to apples comparison For performance evaluation purposes at the end of the period

"Capital expenditures budget" is best described by which of the following concepts?

A company's plan to purchase property, plant and equipment, and other long term assets

Special Order

A customer requests a one-time order at a reduced sales price, often for a large quantity Management must consider: Do we have excess capacity to fill the order Will the reduced sales price be high enough to cover the incremental costs of filling the order? Will the special order affect regular sales in the long run? If the revenues from the special order exceeds the incremental costs of filling the order then ACCEPT If the revenue from the special order is less than the incremental costs of filling then order then REJECT! NEVER compare the special order sales price with the absorption cost per unit USE the contribution margin

Time Value of Money

A dollar received today is worth more than a dollar received in the future Invested money earns income over time NPV and IRR methods take the time value of money into consideration

A "constraint" is best described by which of the following?

A factor that restricts production or sales of a product

A salesperson's salary would be classified as ________ when determining the cost of a manufactured product

A period cost

If a regression analysis shows an R factor of 0.15, it is safe to assume

A very weak relationship between cost and volume

If total fixed costs decrease while the selling price per unit and variable costs per unit remain constant, which of the following statements is true?

Break Even point in units decrease

Regarding activity - based costing systems, which of the following is true?

ABC costing systems have separate indirect cost allocation rates for each activity

Which of the following is a benefit to an organization that implements a budget?

ALL Budgets help the manager improve the motivation of employees in the workplace. Budgets help managers focus their attention on the future needs in an organization Budgets help managers improve their decision-making processes in an organization.

Allocating Manufacturing Overhead

Actual Costing: Actual Costing=Actual DM + Actual DL + Actual MOH Rarely used because actual costs for Overhead because not timely Applied (normal) Costing: Actual DM + Actual DL + Applied MOH Estimates MOH at the start of the year and "applies" MOG costs systematically using pre-determined MOH Rate POHR= (Estimated OH/ Estimated Cost Driver) Allocated OH: (POHR x Cost Driver) Over/under applied MOH: (Actual MOH-Allcoated MOH) Under-applied: Actual MOH>Applied MOH Over-applied: Actual MOH<Applied MOH

Underallocated manufacturing overhead results when

Actual overhead is greater than allocated overhead

Overallocated manufacturing overhead results when

Actual overhead is less than allocated overhead

Using Standard Costs and Variances

Advantages: Cost benchmarks Usefulness in budgeting Motivation Simplified bookkeeping Disadvantages Outdated or inaccurate standards Lack of timeliness Focus on operational performance measures and visual management Lean thinking Increase in automation and decrease in DL Unintended behavioral consquences

If a frozen pizza plant is the cost object, classify each of the following costs as direct or indirect, respectively: property insurance, cafeteria workers wages, and janitorial supplies.

All are direct

Assuming no other changes in the cost-volume profit relationship, which of the following will decrease the breakeven point in units

An Increase in the selling price per unit

A factory janitor's wages would be classified as ________ when determining the cost of a manufactured product.

An indirect cost

A bill of materials indicates

What materials are needed to complete the job

When is the adjusting of cost of goods sold for the underallocation or overallocation of manufacturing overhead generally done?

At the end of the period

Which of the following are merchandising companies?

Both retailers and wholesalers

If both fixed expenses and the selling price per unit increase while variable costs per unit are unchanged, which of the following statements is true?

Break Even point in units could increase, decrease, or remain the same.

If the variable cost per unit increases while the sale price per unit and total fixed costs remain constant, which of the following statements is true?

Break even point in units increase

How and why managers use budgets

Budgets help business owners and managers to plan ahead, and later, exercise control by comparing what actually happened to what was expected in the budget Budgets formalize managers' expectations regarding sales, prices, and costs Even small businesses and nonprofit entities can benefit from the planning and control provided by budgets

How do you calculate the predetermined manufacturing overhead rate used to allocate manufacturing overhead costs?

By dividing the total estimated manufacturing overhead costs by the total estimated amount of the allocation base

How do you calculate allocated manufacturing overhead to a certain job?

By multiplying the predetermined manufacturing overhead rate by the actual allocation base used by the job

Direct Materials Variances

Can split the flexible budget variance for DM into two variances-- price variance and quantity variance

Direct Labor Variances

Can split the flexible budget variances from DL into two variances-- direct labor rate variance and a direct labor effeciency variance

A sunk cost can be described as which of the following

Can't be changed regardless of future actions taken, always irrelevant, and a historical cost

The term _____ is described as "formal means of analyzing long-range investment alternatives"

Capital Budgeting

The importance of capital investments and the capital budgeting process

Capital Budgeting: the process of making capital investment decisions -involves the comparison of up-front costs to the estimated future multi-year benefits to evaluate if the investment is justified and will increase long-run profitability Capital Investment: when firms acquire capital assets (capital assets are used for long periods of time, greater than one year)

Financial Budgets

Capital expenditures budget, Cash collections budget, Cash payments budget, Combined cash budget, Budgeted balance sheet Cash Collections Budget: focuses on timing... "When does the company expect to collect cash from sales?" Cash Payments Budget: focuses on timing too... "When will the company pay for its expenses?"

Process costing would be most likely used by a

Cereal company, soft drink manufacture, and a salsa company

Fixed costs that are the result of previous management decisions that current managers have no control over in the short run are called _____ fixed costs.

Committed

Performance Report

Compares actual revenues and expenses against budgeted figures Variance: difference between actual and . budget Favorable Variance: causes operating income to be higher than budgeted Unfavorable variance: causes operating income to be lower than budgeted

Mixed Costs

Contain both variable and fixed cost components Increase with volume Does not start at the origin Ex/ hotel expenses Total Cost= Total Fixed Cost+Total Variable Costs

Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest

Contribution margin per unit of the constraint

The manager of the truck maintenance department at Fedex may be in charge of a(n)

Cost Center

A merchandiser's purchases are equivalent to a manufacturer's

Cost of goods manufactured

In the basic flow of inventory through a manufacturing system, which of the following occurs last in the job costing system?

Cost of goods sold

Indirect Costs

Cost that relates to the cost object but cannot be traced specifically to it Ex/ electricity for a factory

Direct Costs

Costs that can be traced to the cost object Ex/ 4 tires on a car

Fixed Costs

Costs that do NOT change in total despite changes in volume Ex/ property taxes, insurance, lease payments, straight-line depreciation and maintenance, salaries of managers, advertising

The ________ variance "measures whether the quantity of direct labor used to make the actual number of outputs is within the standard allowed for that number of outputs.

Direct labor efficiency

Residual Income

Determines whether the division has created any excess income above and beyond management's expectations

Conversion costs consist of

Direct labor and manufacturing overhead

All of the following activities are included in the value chain except

Safety

Contribution Margin

Excess of sales revenue over variable expenses Tells manager how much revenue is left after paying variable costs to contribute toward fixed expenses and operating income

Internal Rate of Return

Factors in NPV, better for longer lifespan Based on discounted cash flows Interest rate that makes the NPV of the investment equal 0 Higher IRR then more desirable project If IRR exceeds the required rate of return then INVEST If the IRR is less than the required rate of return then DONT INVEST

Net Present Value

Factors in NPV, better for longer lifespan Present Value of cash inflows-Present Value of Cash outflow If NPV is positive then INVEST If NPV is negative then DONT INVEST

Which of the following budgets project cash inflows, cash outflows, and the budgeted balance sheet?

Financial budget

In the basic flow of inventory through a manufacturing system, which of the following occurs third in the job costing system?

Finished goods inventory

For most businesses, annual straight line depreciation expense on the company's building is what type of cost?

Fixed

Step Costs

Fixed over a small range of activity and then jump up to a new fixed level

The ________ is a budget based on multiple levels of projected sales or production.

Flexible budget

Capital Turnover

Focuses on how efficiently the division uses its assets to generate sales revenue

Sales Margin

Focuses on profitability by showing how much operating income the division earns on every $1 of sales revenue

The benefits of using the ABC costing system are higher if the company

Has high indirect costs and produces many different products that use differing amounts of resources

Payback Period

How fast cash investment will be recouped, short lifespan investments Initial Inv/Annual Net Cash Flow=Payback If expected accounting rate of return EXCEEDS the required rate of return then INVEST If expected that accounting rate of return is LESS than the required rate of return then DONT INVEST

Sell as Is or Process Further

How much revenue will we receive if we sell the product as is? How much revenue will we receive if we sell the product AFTER processing it further How much extra will it cost to process the product further? If incremental revenue from processing further EXCEEDS extra costs of processing further then PROCESS FURTHER If incremental revenue from processing further is less than extra costs of processing further then DONT PROCESS FURTHER

Operating Leverage Factor

How responsive a company's operating income is to changes in volume Contribution Margin/Operating Income HIGH % Profit Increase with Sales Increase - Large OL LOW % Profit Increase with Sales Increase - Small OL HIGH % Loss Increase with Sales Decrease - Large LOW % % Loss Increase with Sales Decrease - Small

The type of standard that expects no waste and no inefficiencies in the production process is referred to as a(n)

Ideal standard

An unfavorable variance causes operating income to be _______________ the budgeted operating income?

Lower than

Profit Center

Managers are responsible both for generating income and controlling costs Ex/ line of products

Cost Center

Managers are responsible for controlling costs Ex. Manufacturing plant

Revenue Center

Managers are responsible for generating sales revenue Ex/ Midwest Sales Region

Investment Center

Managers are responsible for income and invested capital Ex/ Frito-Lay division

Among other products, Nabisco makes Oreo cookies. Which type of company is Nabisco?

Manufacturer

In which of the following company types does a manager use a sales budget?

Manufacturing, merchandising, and service

In which of the following company types does a manager use an operating expenses budget?

Manufacturing, merchandising, and service

ROI

Measures the amount of income an investment center earns relative to the size of its assets Higher the ROI the more desirable

American Eagle Outfitters classifies the denim jeans on the shelves at its retail locations as

Merchandise inventory

Using account analysis, what type of cost is an electric bill that charges a flat monthly fee plus a charge for each kilowatt hour of electricity used?

Mixed

Renting a scooter and paying $30 per day plus $.20 per mile driven is an example of what type of cost?

Mixed cost

Activity Based Costing

More precise Reduces cost distortion to a minimum Focuses on activities as cost objects Indirect costs are allocated based on: a. types of activities used b. the extent to which the activities are used Same basic steps as departmental cost allocation, except based on activities Ex/ forklifts, gas, operators' wages machine lease payments, electricity, repairs production engineers' labor testing equipment, inspection labor packaging equipment

Operating Budgets

Needed to run daily operations of the company; culminate in budgeted income statement Sales Budget: Starting place for budget Number of unit sales x Sales Price per unit = Total Sales Revenue Production Budget: Decide how many units the company needs to produce, include SAFETY STOCK-- inventory kept on hand in case demand is higher than predicted DM Budget: Quantity of DM Needed+Desired DM Ending Inv=Total Quantity of DM Needed-DM Beg Inv=Quantity of DM Purchased DL Budget: Units to be produced x DL Hours per unit = Total DL Hours Required x DL Cost per hour = DL Cost

If the purchasing manager purchased a greater quantity of raw materials than budgeted, but paid the Standard Price (SP), which variance may be affected?

Neither of the variances may be affected

On a cost of a quality report, which of the following cost items should be classified as an internal failure cost

Net cost of scrap

How is operating income affected if the number of units sold exceeds the number of units produced?

Operating income would be higher under a variable costing income statement

Make or Buy

Outsourcing; contracting an outside company to produce or perform a service Offshoring: having work performed overseas How do our variable costs per unit compare to the outsourcing cost per unit? Are any fixed costs avoidable if we outsource? What could we do with the freed capacity? What volume do we need? If the incremental costs of making exceeds the incremental costs of outsourcing then OUTSOURCE If the incremental costs of making are less than the incremental costs of outsourcing then DONT OUTSOURCE

Which of the following is a result of cost distortion?

Overcosting of some products and undercosting of other products

Most companies use _____ when the lower level management develops budgets each year

Participative budgeting

Sensitivity Analysis

Prepare for increasing costs, pricing pressures, and other changing business conditions "What if" technique: What if sales price changes? What if costs change? What if the sales mix changes? Use CVP to conduct sensitivity analysis If the variable costs increase then the unit contribution margin decreases, and the volume needed to breakeven increases If the variable costs decrease then the unit contribution margin increases and the volume needed to breakeven decreases Reducing costs and helping the environment Decreasing variable costs makes it easier to reach a target profit

Which of the following is a lean strategy

Produce in smaller batches than a traditional system

The entire product line at PepsiCo (such as the Pepsi Max product line) may be classified as a(n)

Profit center

By multiplying ________ and then subtracting fixed costs, managers can quickly forecast the operating income.

Projected sales revenue by the contribution margin

Managers can quickly forecast the total contribution margin by multiplying the

Projected sales revenue by the contribution margin ratio

Service Company

Provides a service Ex. health care, insurance, banking, and consulting DOES NOT make or sell intangible goods so no inventory accounts Largest sector of U.S. economy

The ____ tells managers how much of the total direct materials variance is due to using more or less materials than anticipated by standards

Quantity variance

If a company must decrease its sales price of a product while all of the company's expenses remain constant, what will happen to return on investment (ROI)?

ROI will decrease

If selling and administrative expenses decrease while other expenses remain constant, what will happen to return on investment (ROI)?

ROI will increase

What will happen to return on investment (ROI) if current assets decrease while everything else remains the same (assume the current assets decreased is part of operating current assets)?

ROI will increase over time

Contribution Margin Ratio

Ratio of contribution margin to sales revenue Variable costs ratio + contribution margin ratio = 100%

Flow of Inventory Costs

Raw Materials Inventory, Work in Process, Finished Goods, COGS

Before these materials are used to manufacture its cars, Toyota classifies steel, glass, and plastic as

Raw materials inventory

In the basic flow of inventory through a manufacturing system, which of the following occurs first in a job costing system?

Raw materials inventory

If production increases by 25%, how will total fixed costs likely react?

Remain the same

Merchandising Company

Resell tangible products bought from manufacturers and suppliers Ex. Walmart, Amazon, Gap, Best Buy Retailer-- merchandiser that sells to consumer (end users, individuals) Wholesaler-- merchandiser that sells to retailers Carry substantial amount of inventory

Target total cost is defined as

Revenue at market price less desired profit

Target total cost is described by which of the following?

Revenue at market price minus desired profit

The manager of the Northeast sales region at General Mills may be in charge of a(n)

Revenue center

Which of the following is an example of a cost item that should be classified as an internal failure cost?

Rework costs

Which of the following is the operating income an investment center generates before subtracting common fixed costs that are allocated to the center

Segment margin

Which of the following is most important in making a short-term special decision?

Separate variable from fixed costs

Schlabig & Associates, a public accounting firm that provides business consulting to a consumer, is what type of company?

Service

How and why standard costs are developed

Standard cost: budgeted for a single unit of production Develop a standard cost for each type of product Service companies use standard costs too Becomes benchmark for evaluating actual costs

Which of the following is an advantages of using standard costs and variances?

Standard costs are benchmarks that managers use to judge actual cost

Using account analysis, what type of cost is the fee the airline company charges for your bags assuming a typical policy is $25 if the bag weighs between 0 and 50 lbs.; $75 if the bag weighs between 50 and 75 lbs. and $125 if the bag weighs between 75 and 100 lbs?

Step

Which of the following is a fixed cost?

Straight-line depreciation expense

On a cost quality report , which of the following cost items should be classified as a prevention cost

Technical support provided to suppliers

If manufacturing overhead has been overallocated during the period, then

The jobs produced during the period have been overcosted

All else being equal, when using payback period method to compare the capital investment between several options, a company would choose to invest in the capital asset if...

The payback period is the shortest of all the options

Managers should consider which of the following when predicting costs at different volumes

The relevant range of the cost and the type of cost behavior

Breakeven

The sales level at which operating income is zero Total Revenue = Total Expenses

Which of the following does ABC take into account

The types of manufacturing activities used by the product and the extent to which the manufacturing activities are used by the product

The present value of an investment is affected by all of the following except...

The value of a past investment

The term ____ is best described as a relationship among principal, interest rate, and time

Time Value of Money

Managers may intentionally build slack into the budget

To gain the resources they need in the event of budget cuts

Why companies refine their cost allocation system? (Why do they use ABC?)

Traditional system isn't accurate enough AND cost distortion Who can benefit from refining? Manufacturing companies, service companies, governmental agencies

Manufacturing Company

Use labor, plant, and equipment to convert raw materials into finished goods Ex. Toyota Three types of inventory: Raw Materials Work in Process Finished Goods

Process Costing System

Used by firms producing very similar products or services Large quantities of identical units More averaging, costs are averaged over the thousands or millions of identical units that pass through each PROCESS

Job Costing System

Used by firms producing very unique products or services Single units or small batches with large differences between jobs Less averaging-- costs are averaged over the small number of units in a JOB (often one unit in a job)

A(n) ________ cost is a cost whose total amount changes in direct proportion to a change in volume.

Variable

Management by exception would dictate that the manager investigate which of the following variances?

Variances which are greater than a budget and actual dollar amount or percentage

Which of the following is an example of a cost item that should be classified as an external failure cost?

Warranty claims

How would Chevrolet classify its partially completed vehicles?

Work in progress inventory

When direct materials are requisitioned, they flow directly into

Work in progress inventory account

Manufactures follow four steps to implement a manufacturing overhead allocation system. The last step is

allocate some manufacturing overhead to each individual job.

For a manufacturer, beginning work in process would be equal to

cost of goods manufactured + ending work in process inventory - manufacturing costs incurred in the period.

When calculating the total amount of manufacturing overhead to allocate to a particular job, the company would multiply each departmental overhead rate by ________ and then ________ together the allocated amounts from each department.

the actual amount of the departmental allocation based used by the job; add