Acct 208 Midterm

ch 2 Job-Order Costing: Examples

Examples of companies that would use job-order costing include: 1. Boeing (aircraft manufacturing) 2. Bechtel International (large-scale construction) 3. Walt Disney Studios (movie production) 4. Consulting contract- Advertising5. Auto repair

ch 5 Contribution Margin Ratio (Formula)

contribution margin per unit / sales price per unit OR total contribution margin / total sales $ -contribution margin per unit by the selling price per unit

ch 3 The difference between the entries to record depreciation on office equipment and depreciation on factory equipment is that one ______.

debits Depreciation expense, while the other debits Manufacturing overhead

ch 5A account analysis

each account is classified as either variable or fixed based on the analyst's knowledge of how the account behaves

ch 3 Job B was not completed by April 30. If an April balance sheet is prepared, the costs accumulated for Job B will NOT appear on it.

false

ch 5 dollar sales to break even

fixed expenses/CM ratio

ch 5 unit sales to break even=

fixed expenses/unit CM

ch 5 contribution income statement

helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behavior

ch 3 Actual overhead costs may not be proportional to the actual amount of the allocation base used because ______.

-many actual overhead costs are fixed -overhead spending may not be under control

ch 3 two methods for disposing over and underapplied overhead

1. Close out to Cost of Goods Sold. 2. Allocate between Work in Process, Finished Goods, and Cost of Goods Sold. -The latter method is considered more accurate, but it is more complex to compute.

ch 3 The schedules contain three types of costs and what they calculate

1. Direct materials. 2. Direct labor. 3. Manufacturing overhead. The schedules calculate: 1. The cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production. 2. The manufacturing costs associated with goods that were finished during the period.

ch 3 The Manufacturing Overhead account is debited when ______.

actual overhead costs are incurred

ch 3 Overhead is overapplied if ______.

actual overhead is less than applied overhead

ch 3 The journal entry to record depreciation on office equipment debits ______.

Depreciation expense and credits Accumulated depreciation

ch 1 cost behavior

Refers to how a cost will react to changes in the level of activity. -The most common classifications are: • Variable costs. • Fixed costs • Mixed costs.

ch 2 (chapter 3 topic) Job-Order Costing for Financial Statements to External Parties

The amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period. 1. When a company applies less overhead to production than it actually incurs, it creates what is known as underapplied overhead. 2. When it applies more overhead to production than it actually incurs, it results in overapplied overhead.

ch 3 The transfer of costs from one inventory account to the next parallels the physical transfer of goods from one inventory to the next.

true

ch 3 Underapplied or overapplied overhead occurs because overhead is applied to jobs using a predetermined rate based on estimates of costs and activity levels.

true

ch 3 A debit balance in Manufacturing overhead means overhead was

underapplied

ch 5 target profit analysis-formula method

unit sales to attain the target profit= (target profit + fixed expenses)/CM per unit

ch 5 break even point

unit sold provides a certain amount of contribution margin that goes toward covering fixed expenses

ch 1 Which of the following costs would be considered a period rather than a product cost in a manufacturing company?

-Property taxes on corporate headquarters. -Sales commissions.

ch 5A scatter graph plot

Plot the data points on a graph (Total cost Y "dependent variable" versus Activity X "independent variable")

ch 2 The Need for a POHR

Predetermined overhead rates that rely upon estimated data are often used because: 1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period. 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers.

ch 5A mixed costs formula (total mixed cost line)

The total mixed cost line can be expressed as an equation: Y = a + bX Where: Y=Total mixed cost a=Total fixed cost (vertical intercept of the line) b=Variable cost per unit of activity (slope of the line) X=Level of activity

ch 5A mixed costs example and solution If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?

Y = a + bX Y = $40 + ($0.03 × 2,000) Y= $100

ch 5A R^2 meaning

a measure of the goodness of fit of the regression line to the data points

ch 3 Selling and administrative costs first appear on the

income statement

ch 3 When only a portion of the units involved in a job are sold, the ______.

unit product cost is used to calculate the amount transferred from finished goods to cost of goods sold

ch 1 Indirect costs

• Costs that cannot be easily and conveniently traced to a unit of product or other cost object. • Example: Manufacturing overhead

ch 1 examples of manufacturing overhead

• Depreciation of manufacturing equipment • Utility costs • Property taxes • Insurance premiums incurred to operate a manufacturing facility -Only those indirect costs associated with operating the factory are included in manufacturing overhead.

ch 1 Manufacturing Product Costs

• Raw materials: Includes any materials that go into the final product. • Work in process: Consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. • Finished goods costs: Consists of completed units of product that have not yet been sold to customers.

ch 5 definition of sales mix

• Sales mix is the relative proportion in which a company's products are sold • Different products have different selling prices, cost structures, and contribution margins • When a company sells more than one product, break-even analysis becomes more complex

ch 2 Financial Adjust for Overhead Applied

The cost of goods sold reported on a company's income statement must be adjusted to reflect under- or overapplied overhead. 1. The adjustment for underapplied overhead increases cost of goods sold and decreases net operating income. 2. The adjustment for overapplied overhead decreases cost of goods sold and increases net operating income.

ch 1 Nonmanufacturing Costs

Selling Costs -Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs. Administrative Costs -All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.

ch 5A mixed costs

contains both variable and fixed elements (utility cost)

ch 3 Job #4260 consisted of 1,000 units at a total cost of $200,000. The cost transferred to Cost of Goods Sold for the sale of 600 of the units is

$120,000

ch 1 fixed cost

-A cost that remains constant, in total, regardless of changes in the level of the activity -If expressed on a per-unit basis, the average fixed cost per unit varies inversely with changes in activity.

ch 1 variable cost

-A cost that varies, in total, in direct proportion to changes in the level of activity. -A variable cost per unit is constant.

ch 1 product and period costs

-Product costs include direct materials, direct labor, and manufacturing overhead. -Period costs include all selling costs and administrative costs.

ch 2A activity absorption based costing

Activity-based absorption costing assigns all manufacturing overhead costs to products using activity cost pools instead of plantwide or department cost pools.

ch 2A Differences Between Activity-Based and Traditional Absorption Costing

Activity-based absorption costing differs from traditional absorption costing in two ways: 1. The activity-based approach uses more cost pools than a traditional approach. 2. The activity-based approach includes some batch-level and product-level activities and activity measures that do not relate to the volume of units produced, whereas the traditional approach relies exclusively on volume-related overhead allocation.

ch 3 What side of the Manufacturing overhead account is applied manufacturing overhead entered on?

Always the credit side

ch 3 Disposition of Overapplied and Underapplied Overhead

Any remaining balance in the Manufacturing Overhead account, such as PearCo's $30,000 of overapplied overhead, is disposed of in one of two ways: 1. It can be closed to Cost of Goods Sold. 2. It can be closed proportionally to Work in Process, Finished Goods, and Cost of Goods Sold

ch 2 Job-Order Costing - A Managerial Perspective

Inaccurately assigning manufacturing costs to jobs adversely influences planning and decisions made by managers 1. Job-order costing systems can accurately trace direct materials and direct labor costs to jobs. 2. Job-order costing systems often fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs.

ch 2 Choosing an Allocation Base

Job-order costing systems often use allocation bases that do not reflect how jobs actually use overhead resources. The allocation base in the predetermined overhead rate must drive the overhead cost to improve job cost accuracy. A cost driver is a factor that causes overhead costs.

ch 5 Cost-Volume-Profit Analysis: Key Assumptions

To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors: 1. Selling price is constant. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. In multiproduct companies, the mix of products sold remains constant.

ch 1 Behavior of Cost (within the relevant range) fixed vs. variable costs

Variable -Total variable cost increases and decreases in proportion to changes in the activity level. -Variable cost per unit remains constant. Fixed -Total fixed cost is not affected by changes in the activity level within the relevant range. -Fixed cost per unit decreases as the activity level rises and increases as the activity level falls.

ch 2 Computing Predetermined Overhead Rates cont.

Y = a + bX Where: Y = Estimated total manufacturing overhead cost a = Estimated total fixed manufacturing overhead cost b = Estimated variable manufacturing overhead cost per unit of the allocation base X = Estimated total amount of the allocation base 4. Compute the predetermined overhead rate.

ch 3 Labor costs charged to Manufacturing Overhead represent ______ labor costs

indirect

ch 1 Managerial accounting

is concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions

ch 1 Financial accounting

is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. (GAAP)

ch 5 contribution margin (CM)

is the amount remaining from sales revenue after variable expenses have been deducted -CM is used first to cover fixed expenses -Any remaining CM contributes to net operating income

ch 3 Which of the following is a clearing account?

manufacturing overhead

ch 3 Applied manufacturing overhead will most likely ______ actual manufacturing overhead.

not equal

ch 3 When labor costs are incurred, _________ labor costs are added directly to the Work in Process account

only direct

ch 3 A credit balance in the Manufacturing Overhead account means overhead was

overapplied

ch 5 how can sales, variable expenses, and contribution margin also be expressed

per-unit basis

ch 5 what is an even simpler form of CVP graph

profit graph

ch 3 The difference between the overhead cost applied to Work in Process and the actual overhead costs of a period

referred to as either under- or overapplied overhead

ch 3 The value of work in process is equal to

the cost of all unfinished jobs

ch 5 margin of safety in dollars equation

total sales-break even sales

ch 5A least-squares regression method

used to analyze mixed costs if a scatter graph plot reveals an approximately linear relationship between the X and Y variables -This method uses all the data points to estimate the fixed and variable cost components of a mixed cost -*The goal of this method is to fit a straight line to the data that minimizes the sum of the squared errors

ch 5 Variable Expense Ratio

variable expenses/sales

ch 1 Direct costs

• Costs that can be easily and conveniently traced to a unit of product or other cost object • Examples: Direct materials and direct

ch 1 Common costs

• Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

ch 3 Manufacturing overhead costs include ______.

-the factory supervisor's salary -factory insurance

ch 2 Job-Order Costing - Cost Flow

-Charge direct material and direct labor costs to each job as work is performed -Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job

ch 1 product costs

-Product costs includes all the costs that are involved in acquiring or making a product. -Product costs "attach" to a unit of product as it is purchased or manufactured, and they stay attached to each unit of product as long as it remains in inventory awaiting sale.

ch 2A absorption based costing key Definitions and concepts

1. An activity is an event that causes the consumption of overhead resources. 2. An activity cost pool is a "bucket" in which costs are accumulated that relate to a single activity. 3. An activity measure is an allocation that is used as the denominator for an activity cost pool. 4. An activity rate is used to assign costs from an activity cost pool to products.

ch 1 Purposes of Cost Classification

1. Assigning costs to cost objects. 2. Accounting for costs in manufacturing companies. 3. Preparing financial statements. 4. Predicting cost behavior in response to changes in activity. 5. Making decisions.

ch 2 Many companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct labor-hours

1. It is often overly simplistic and incorrect to assume that direct labor-hours is a company's only manufacturing overhead cost driver. 2. If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.

ch 2 Job-order costing systems are used when:

1. Many different products are produced each period. 2. Products are manufactured to order. 3. The unique nature of each order requires tracing or allocating costs to each job and maintaining cost records for each job.

ch 5 degree of operating leverage equation

=CM/net operating income

ch 3 Normal costing

A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job

ch 2 Why Use an Allocation Base?

An allocation base, such as direct labor-hours, direct labor dollars, or machine-hours, is used to assign manufacturing overhead to individual jobs. -We use an allocation base because: a. It is impossible or difficult to trace overhead costs to particular jobs. b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary. c. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.

ch 5 summary of CM margin ratio

CM ratio= CM/sales CM ratio= (sales-variable expenses)/sales CM ratio= 1-variable expense ratio

ch 5 (quick check 1) Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is$1,300. An average of 2,100 cups are sold each month. What is the CM ratio for Coffee Klatch?

CM ratio=unit CM/unit selling price =($1.49-$0.36)/$1.49 =$1.13/$1.49 =0.758

ch 3 Which of the statements regarding closing out over or underapplied overhead is correct?

Closing to Cost of goods sold is simpler, and allocating is more accurate.

ch 1 Types of Fixed Costs

Committed -Long-term, cannot be significantly reduced in the short term Discretionary -May be altered in the short term by current managerial decisions

ch 3 Underapplied or overapplied manufacturing overhead can be disposed of by closing it to ______.

Cost of goods sold or allocating it to Work in process, Finished goods, and Cost of goods sold

ch 3 Disposition of Overapplied and Underapplied Overhead (its effects)

Manufacturing OH- too much applied- decrease Work in process decrease- charged too much Finished Goods Inventory decrease- charged too much Cost of Goods Sold decrease- charged too much

ch 1 manufacturing overhead

Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products. -Includes indirect materials that cannot be easily or conveniently traced to specific units of product. -Includes indirect labor costs that cannot be easily or conveniently traced to specific units of product.

ch 3 What effect will the overapplied overhead have on net operating income?

Net operating income will increase.

ch 2 Computing Predetermined Overhead Rates

The predetermined overhead rate is computed before the period begins using a four-step process. 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3. Use the following equation to estimate the total amount of manufacturing overhead:

ch 3 Overhead application

The process of assigning overhead costs to specific jobs using the following formula: Overhead applied to a particular job = Predetermined overhead rate × Amount of allocation base incurred by the job

ch 3 To calculate the adjusted cost of goods sold ______.

add underapplied overhead to or subtract overapplied overhead from unadjusted cost of goods sold

ch 3 Job cost sheets and the work in process account contain ______ manufacturing overhead.

applied

ch 3 To calculate total manufacturing costs, add direct materials, direct labor and ______.

applied manufacturing overhead

ch 3 Raw materials inventory is a(n)

asset

ch 5A engineering approach

classifies costs based upon an industrial engineer's evaluation of production methods and material, labor, and overhead requirements

ch 3 finished goods

consist of completed, unsold goods

ch 5 Target Profit Analysis - Formula Method Sales Dollars Solution

dollar sales to attain the target profit= (target profit + fixed expenses)/CM per unit

ch 3 Actual overhead costs appear in the Work in Process account but not on the job cost sheet.

false

ch 3 Cost of goods manufactured ______.

includes manufacturing costs of goods finished during the period

ch 3 Which of the following statements are true about raw materials

-Raw materials inventory represents the cost of materials not yet used in production. -When materials are purchased they are recorded in the Raw materials inventory account.

ch 1 Uses of the Contribution Format

-The contribution income statement format is used as an internal planning and decision-making tool. -We will use this approach for: 1. Cost-volume-profit analysis (Chapter 5). 2. Segmented reporting of profit data (Chapter 6). 3. Budgeting (Chapter 8). 4. Special decisions such as pricing and make-or-buy analysis (Chapter 13).

ch 1 Which of the following costs would be variable with respect to the number of ice cream cones sold at Baskin-Robbins? (There may be more than one correct answer.)

-The cost of ice cream. -The cost of napkins for customers.

ch 2 Manufacturing Overhead Application

-The predetermined overhead rate (P O H R) used to apply overhead to jobs is determined before the period begins. -Ideally, the allocation base is a cost driver that causes overhead. POHR= est. total manufacturing OH cost for coming period/est. total units in the allocation base for coming period

ch 1 Direct Labor

Direct labor costs are those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers

ch 1 direct materials

Direct materials are raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile

ch 3 underapplied vs. overapplied overhead

-Underapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period. -Overapplied overhead exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period.

ch 5 operating leverage

-a measure of how sensitive net operating income is to percentage changes in sales -It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits

ch 3 Manufacturing overhead applied to production is always recorded on the ---- side of the manufacturing overhead account and the ---- side is always used to record the actual manufacturing costs incurred

-credit -debit

ch 5 target profit analysis

-estimate what sales volume is needed to achieve a specific target profit -We can compute the number of units that must be sold to attain a target profit using either the: • Equation method, or • Formula method

ch 5 margin of safety in dollars

-the excess of budgeted or actual sales dollars over the break-even volume of sales dollars -It is the amount by which sales can drop before losses are incurred -The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

ch 2A The Two Approaches - Difference in Unit Cost

1. The activity-based approach contains two non-volume-related cost pools -"setting up machines" which is a batch-level activity and "parts administration" which is a product-level activity. 2. The activity-based approach assigned these to products in a way that shifted costs from the high-volume product (standard) to the low-volume product.

ch 3 job cost sheet

A form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job.

ch 1 An Activity Base (Cost Driver)

A measure of what causes the incurrence of a variable cost: • Units produced • Machine hours • Miles driven • Labor hours

ch 5 CVP Relationships in Graphic Form

The relationships among revenue, cost, profit, and volume can be expressed graphically by preparing a CVP graph -In a CVP graph, unit volume is usually represented on the horizontal (x) axis and dollars on the vertical (y) axis -Draw a line parallel to the volume axis to represent total fixed expenses -Choose some sales volume, say 400 units, and plot the point representing total expenses (fixed and variable). Draw a line through the data point back to where the fixed expenses line intersects the dollar axis -Choose some sales volume, say 400 units, and plot the point representing total sales. Draw a line through the data point back to the point of origin -Break-even point (400 units or $200,000 in sales)

ch 3 Product Cost Flows

-Raw material purchases made during the period are added to beginning raw materials inventory. -The ending raw materials inventory is deducted to arrive at the raw materials used in production. -As items are removed from raw materials inventory and placed into the production process, they are called direct materials. -Direct labor used in production and manufacturing overhead applied to production are added to direct materials to arrive at total manufacturing costs. -Total manufacturing costs are added to the beginning work in process to arrive at total work in process. -The ending work in process inventory is deducted from the total work in process for the period to arrive at the cost of goods manufactured. -The cost of goods manufactured is added to the beginning finished goods inventory to arrive at cost of goods available for sale. -The ending finished goods inventory is deducted from this figure to arrive at cost of goods sold.

ch 2 Multiple Predetermined Overhead Rates—An Activity-Based Approach

-When a company creates overhead rates based on the activities that it performs, it is employing an approach called activity-based costing. -Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.