D196 Unit 6 & 7

Sales minus variable cost Contribution margin is equal to sales revenue less variable costs. Contribution margin is the amount of revenue that remains to cover fixed costs and provide a profit for an organization.

How is contribution margin calculated?

Manufacturing overhead Manufacturing overhead includes all manufacturing costs (costs incurred within the production facility) that are not classified as direct materials or direct labor. This includes wages for the factory supervisor.

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

Overhead Correct. In a job order costing system, while a job or product or project is in the production process, the accountant assigns the actual direct materials and direct labor costs and also allocates a specific amount of overhead costs.

In a job order costing system, some actual production costs are directly associated with a job or product or project. Which production cost is allocated rather than being directly associated with a job, product, or project? Sales discounts Interest Overhead Income taxes

The collection of overhead costs associated with a specific overhead cost activity

In an ABC system, what is a cost pool?

Service organization A service business is any organization whose main economic activity involves performing an activity for or providing a nonphysical product to a customer.

Jack just started a business that develops websites for other businesses. Which type of organization is Jack's new business?

$9 Correct! Contribution margin per unit = $20 price per unit - $11 variable cost per unit = $9.

Kamal Company reported the following data. Price per unit = $20 Fixed cost = $6,000 Variable cost per unit = $11 Compute the contribution margin per unit for Kamal Company.

GM likely has relatively high materials costs, whereas the materials costs for a McKinsey are relatively low. Correct! One important difference in costs between a manufacturer like GM and a service company like McKinsey is that manufacturers must also manage large amounts of raw materials costs, while the materials included in the services sold by service companies are typically limited to insignificant amounts of supplies used in the service process.

Leilani and Diego are discussing different types of businesses. They agree that, in terms of cost flows, there are many similarities between a manufacturer of cars, such as General Motors, and a consulting company, such as McKinsey. However, they also agree that there is one very important difference in the costs being incurred by General Motors and McKinsey. What is the important difference in the costs of GM as compared to McKinsey?

A consulting firm Lucas should use a firm that provides a similar service to his business to use as a benchmark.

Lucas works for a professional consulting firm. He has been asked to compare his firm's financial performance to the performance of another firm. Which company should Lucas use as a benchmark for his company's performance

Both product costs and period costs Maria's company is a merchandising organization, and merchandising organizations have both product and period costs.

Maria just started a cosmetics company. She purchases makeup and nail polish from a wholesale distributor and sells these products on social media. Which costs will Maria's new company have?

Better decisions made ABC involves identifying the activities that cause overhead costs and then estimating and allocating those costs based on those activities. The result is much more accurate product costing and better decisions being made.

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

product-line

Overhead activities associated with the capability to produce different types of products.

batch-level

Overhead activities performed each time a new production batch is started or ended

Unit-level

Overhead cost activities performed each time a unit is produced.

Activity Rates

Overhead cost pool/Cost Driver = overhead cost to be allocated per driver

An increase in work-in-process inventory When raw materials are moved to the production floor, they become work in process inventory.

Paradigm Toys is a manufacturing company that produces stuffed animals. In one step of the manufacturing process, raw materials such as fabric, thread, and polyester filling are moved from the warehouse to the production floor. What would be the effect of this event on the company's books?

Sunk Costs

Past costs that cannot be changed as the result of a future decision

Process Costing

Production costs for a period are accumulated and then averaged over all units manufactured during that period

$19 per unit Designate VC as the variable cost per unit $6,000 fixed cost / ($25 selling price per unit - VC) = 1,000 break-even number of units VC = $25 selling price per unit - ($6,000 fixed cost / 1,000 break-even number of units) VC = $19 per unit

Quiet Flag Industries reported the following data. Price per unit = $25 Fixed cost = $6,000 Break-even number of units = 1,000 units Given these data, compute the variable cost per unit.

Activity-based costing Correct! Activity-based costing is a more accurate product costing system that allocates overhead based on multiple activities.

Sara is frustrated with her company's costing system. She suspects that too much overhead cost is being allocated to generic, simple products, and too little overhead cost is being allocated to custom-designed, complex products. The existing overhead allocation system is very traditional, with overhead being allocated strictly based on the number of direct labor hours. Which type of costing system should Sara's company be using instead of its current system?

Job order costing - Correct! Job order costing is useful when products or services are provided in discrete units based on specific customer orders.

Smartistry produces custom photo albums, calendars, and stationery for customers. Which overhead allocation system should the company use? Product line costing Unit-based costing Job order costing Process costing

Unit-level, batch-level, and product-line

There are three general types of overhead cost activities in an ABC system. What are those three general types of activities?

Direct materials, direct labor, and manufacturing overhead

What are the three components of product costs?

Strategic planning and capital budgeting

What does long-run planning include?

Sales Revenue - Variable Costs - Fixed Costs = Profit

What is CVP (Cost Volume Profit) equation?

Managerial accounting includes budget and forecast data.

What is a characteristic of managerial accounting systems that is not also a characteristic of financial accounting systems?

A cost that includes both a fixed portion and a variable portion

What is a mixed cost?

A cost associated with activities occurring outside the factory Period costs are costs associated with activities or facilities outside the factory. Period costs are reported as an expense in the period in which they occur.

What is a period cost?

Revenue lost from selecting a different alternative Correct! Opportunity costs are the benefits lost or forfeited as a result of selecting one alternative course of action over another.

What is an opportunity cost?

Wages of factory employees who work directly on the products manufactured Correct! Direct labor includes the wages and other payroll-related expenses of factory employees who work directly on products. The cost of wages and benefits for assembly-line workers would be included, but not the wages and benefits of the factory supervisors because even though they work in the factory, they do not work directly on making products.

What is direct labor?

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

What is process costing?

Total cost of products or orders will be understated. If overhead is underapplied, then the total cost of products or orders will be understated. If a company were to allow the price of its products to fall based on this understated cost, the company could lose money because it might not cover its actual overhead costs.

What problem will be caused if overhead is underapplied?

When a company produces products or services in a continuous process in which jobs or products or projects can't be specifically identified Job order costing is not appropriate when a company produces large volumes of products or services using a series of uniform processes.

When is job order costing NOT appropriate?

Controlling Controlling means tracking the actual performance of a company.

Which activity involves the process of tracking the actual performance of a company?

Management accounting information is composed of both financial and nonfinancial data.

Which characteristic is a unique feature of management accounting information?

Managers

Which group represents the primary users of managerial accounting information?

A system in which manufacturing costs are accumulated by separate product orders or batches A job order costing system is one in which manufacturing costs are accumulated by separate product orders or batches.

Which phrase describes job order costing?

Managerial accounting data are created based on competitive needs that are unique to the organization.

Which statement about managerial accounting data is true?

Managerial accounting data are created based on competitive needs that are unique to the organization. It is important to remember that a company's managerial accounting information system is potentially a competitive tool.

Which statement accurately describes managerial and financial accounting data?

Financial accounting information is prepared according to a generally accepted set of rules. Financial accounting information is prepared according to GAAP.

Which statement correctly distinguishes the uses of financial accounting information from the uses of managerial accounting information?

Managerial accounting has substantial competitive value, while financial accounting is not a competitive tool. Correct! Financial statements are intended to be unbiased reports of a company's financial position and performance to be used by outsiders. In contrast, managerial accounting can be a competitive tool.

Which statement identifies a difference between managerial and financial accounting?

Overhead is allocated based on several different measures of activity. With an ABC overhead allocation method, overhead is allocated based on several different measures of activity, called cost drivers.

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

Merchandising business A retailer is a good example of a merchandising business. A retailer does not add value to the inventory itself but instead simply buys the inventory from a wholesaler and then resells it to the final customer as is.

Which type of business is a typical retailer?

Merchandising

Which type of business purchases finished goods for resale?

Both product and period costs

Which types of costs does a manufacturer have?

Both product and period costs

Which types of costs does a merchandiser have?

Variable Correct! Variable costs always increase directly when a new subscriber is added to the cable subscriber base.

Williams Cable Company markets cable services to local residential homes on a direct sales basis. You are sitting in a meeting attended by representatives of the sales, marketing, and the accounting departments of the company. The sales and marketing personnel explain how many local subscribers they plan to add in the next year to the company's subscriber listing using certain types of sales and marketing approaches. Since the company has excess capacity to add more cable subscribers at the moment, when one more subscriber is added to the subscriber base, which type of costs will increase in a direct proportion to each subscriber added?

Bonuses paid to the phone assemblers who work on the production line Period costs are incurred outside the factory. The only product cost in the list is the cost of the bonuses paid to the phone assemblers who work inside the factory.

Yoshida Company manufactures cell phones. Which item is a product cost for Yoshida Company?

Cost Driver

an activity that causes a cost to be incurred

Cost Pools

groups of overhead costs that are similar; used to simplify the task of assigning costs to products with ABC costing

Opportunity Costs

the loss of potential gain from other alternatives when one alternative is chosen.

Allocate costs with a predetermined overhead rate based on budgeted overhead costs. (BUDGETED overhead costs) Using some type of predetermined overhead rate based upon budgeted overhead costs is the appropriate approach to allocating overhead costs to custom jobs.

A manufacturing company that produces custom snowmobiles must determine a systematic and rational way to allocate overhead costs. How should the company allocate overhead costs?

Activity-based costing (ABC)

A method of allocating overhead based on each product's use of activities in making the product.

Cost of goods sold A law firm is a service firm. A service firm that does not deal with any parts or merchandise does not require a cost of goods sold section on the income statement because the firm does not sell any goods.

A successful law firm called Kim and Lee provides legal services to large corporations and employs over 100 attorneys to represent clients. The firm does not purchase products to sell to its clients but focuses solely on providing legal counsel. Which line item must be absent from the firm's income statement?

Product Costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. (Inside the Factory)

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

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

Wages of the janitors in the executive office building Product costs are costs associated with activities in the manufacturing facilities. Because the janitors in the executive office building do not work in the factory, their wages are not a product cost but a period cost.

Baby Jude Company manufactures car seats. Your colleague works in the sales and marketing department, and is trying to understand the differences between a product and a period cost for Baby Jude Company including examples for both. Which item is a period cost for Baby Jude Company?

Planning, controlling, and evaluating

Company managers are important users of managerial accounting information. What are the three primary functions of company managers?

Period Costs

Costs not directly related to a product, service, or asset. They are charged as expenses to the income statement in the period in which they are incurred. (outside the factory)

Job Order Costing

Each job, product or batch of products is costed separately

$3 Correct! Contribution margin per unit = price per unit - variable cost per unit = $10 - $7 = $3.

Endothon Company reported the following data. Price per unit = $10 Variable cost per unit = $7 Fixed cost = $1,500 Number of units sold = 1,000 units Given these data, compute contribution margin per unit.

Process costing is appropriate when the units produced as a result of passing through the process centers are basically the same. Producing identical cans of paint

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 process is process costing more appropriate?

Manufacturing identical residential refrigerators A process costing system is used when nearly identical units are mass-produced. As a result, all units produced during that period are assigned the same cost.

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?

A manufacturer of custom-designed furniture Job costing is appropriate for the manufacturer of custom-designed furniture so that the manufacturer can trace the production costs incurred, directly, to each order received for custom-designed furniture. By tracing the production costs incurred, directly, to each order received for custom-designed so that the manufacturer can properly price and also measure the profits being generated from each custom-design furniture order received.

For which company is job order costing the appropriate costing methodology?

A company that serves tax customers who are middle-income individuals who all have basically the same tax issues The appropriate scenario for the use of process costing is when a company produces large volumes of a product or service, and each item is basically the same.

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?

Differential Costs

Future costs that change as a result of a decision; also called incremental or relevant costs.

Cost pool divided by number of cost driver events The calculation of an activity rate in an ABC system involves dividing the amount of the estimated cost pool by the estimated number of cost driver events.

How is an activity rate computed in an ABC system?