ACC 711 Test 2

As the product flows from one producing department to the next, the costs of production ____

"attach" to the products as it moves from one department to the next and eventually to finished goods inventory

Cumulative Customer Profitability (4)

-A high-tech producer of semiconductors, implemented ABC customer costing and discovered that 10% of its customers were responsible for about 90% of its profits. -It also discovered it was actually losing money on about 50% of its customers. -It worked to convert its unprofitable customers into profitable ones and invited those who would not provide a fair return to take their business elsewhere. -As a consequence, company sales decreased, but its profit tripled

Nonvalue-added Activities (2 and ex)

-All activities other than those that are absolutely essential to remain in business, and therefore considered unnecessary -can be identified by its failure to satisfy any one of the three previous defining conditions for adding value. -Ex: inspection is nonvalue-added because it is a state-detection activity, not a state-changing activity.

Waiting

-An activity in which raw materials or work in process use time and resources by waiting on the next process.

Inspecting

-An activity in which time and resources are spent ensuring that the product meets specifications.

Scheduling

-An activity that uses time and resources to determine when different products have access to processes

Moving

-An activity that uses time and resources to move raw materials, work in process, and finished goods from one department to another

Storing

-An activity that uses time and resources while a good or raw material is held in inventory

Production Report of Weighted Average Method

-Applying manufacturing inputs at different stages of a process poses no serious problems, though it requires more effort.

Equivalent Units of Production (3)

-By definition, EWIP is not complete. -A unit completed and transferred out during the period is not identical (or equivalent) to one in EWIP inventory, and the cost attached to the two units should not be the same. -In computing the unit cost, the output of the period must be defined, a significant issue for process costing.

Non-Value Added Costs

-Costs that are caused either by nonvalue-added activities or the inefficient performance of valued-added activities.

The presence of WIP inventories adds what additional measurement?

-Defining the units produced can be difficult, given that some units produced during a period are complete, while those in ending inventory are not. This is handled through the concept of equivalent units of production

Percentage Completion Figures (5)

-Different percentage completion figures for manufacturing inputs pose a challenge for the calculation of equivalent units, unit cost, and valuation of EWIP (steps 2-4). -In such cases, equivalent unit calculations are done for each category of manufacturing input. -Equivalent units are calculated for each category of materials and for conversion cost. -The individual category costs are then used in Step 4 to cost out EWIP. -The total unit cost is used to calculate the cost of goods transferred out in the same way as when there was only one input category.

Non-Uniform Application of Manufacturing Inputs (3)

-Direct labor input is usually needed throughout the process, and overhead is normally assigned on the basis of direct labor hours. -Direct materials are not as likely to be applied uniformly. -In many instances, materials are added either at the beginning or the end of the process.

2 Characteristics of Process Manufacturing

-Each product within a line passing through the processes would receive similar ''doses'' or amounts of materials, labor, and overhead costs. -works well whenever homogeneous products pass through a series of processes and receive similar amounts of manufacturing costs.

2 Types of Failure Costs

-Internal Failure Costs -External Failure Costs

What is a key part of the production report?

-The computation of unit cost for the work performed during a period

Transferred-In Goods (2)

-The cost of this material is the cost of the goods transferred out as computed in the prior department. -The units started in the subsequent department correspond to the units transferred out from the prior department (assuming that there is a one-to-one relationship between the output measures of both departments).

Activity-Analysis (2)

-The heart of process-value analysis -the process of identifying, describing, and evaluating the activities that an organization performs.

Product Diversity (2)

-The presence of product diversity is also necessary for product cost distortion to occur. -products consume overhead activities in systematically different proportions

2 major factors that impair the ability of unit-based plant-wide and departmental rates to assign overhead costs accurately

-The proportion of nonunit-related overhead costs to total overhead costs is large. -The degree of product diversity is great.

Physical Flow Analysis

-The purpose is to trace the physical units of production.

Computation of Unit Cost (2)

-The weighted average method rolls back and includes the manufacturing costs associated with the units in BWIP -Manufacturing costs are carried over from the prior period and treated as if they were current period costs.

Calculation of Equivalent Units (3)

-The weighted average method treats beginning inventory units as if they were started and completed during the current period. -Because of this, the equivalent unit schedule shown in Step 2 shows only the total units completed. -There is no need to show whether the units completed are from the month in question (July) or from BWIP

Valuation of Inventories

-Units completed (from Step 1), equivalent units in EWIP (from Step 2), and the unit cost (from Step 3) are all needed to value both goods transferred out and EWIP.

2 calculations needed to construct a physical flow schedule

-Units started and completed -Units Started

Distorted Product Costs (4)

-Using only unit-based activity drivers to assign non-unit-related overhead costs can create distorted product costs. -The severity of this distortion depends on what proportion of total overhead costs these nonunit-based costs represent. -If non-unit based overhead costs are only a small percentage of total overhead costs, then the distortion of product costs will be quite small. -In such a case, using unit-based activity drivers to assign overhead costs is acceptable.

The usual approach is to treat transferred-in goods as ___

-a separate material category when calculating equivalent units

Value-Added Activities (3)

-activities necessary to remain in business -Some activities are value-added by mandate. -Activities required by the SEC and IRS

Under the weighted average method, equivalent units of output are computed by ____

-adding units completed to equivalent units in EWIP.

4 Ways Activity Management Reduces Costs

1. Activity Elimination 2, Activity Selection 3. Activity Reduction 4. Activity Sharing

7 Limitations of Functional-Based Cost Accounting Systems

1. Continuous Improvement 2. Small Profit Margins 3. Increasing Competitive Pressures 4. Total Quality Management 5. Total Customer Satisfaction 6. Sophisticated Technology 7. Intense Worldwide Competition -these make product cost distortions damaging

5 key questions asked that provide much of the data needed for an ABC system

1. How many employees are in your department? (Activities consume labor.) 2. What do they do (please describe)? (Activities are people doing things for other people.) 3. Do customers outside your department use any equipment? (Activities also can be equipment working for other people. In other words, the equipment provides the service for someone by itself). 4. What resources are used by each activity (equipment, materials, energy)? (Activities consume resources in addition to labor.) 5. What are the outputs of each activity? (Helps to identify activity drivers.)

2 Major Stages in Functional-Based Overhead Costing

1. Overhead costs are assigned to an organizational unit (plant or department). 2. Overhead costs are then assigned to cost objects.

2 Types of Control Activities

1. Prevention Costs 2. Appraisal Costs

5 Activities that are considered non-value added in the manufacturing operation

1. Scheduling 2. Moving 3. Waiting 4. Inspecting 5. Storing

A discretionary activity is classified as value-added provided it simultaneously satisfies what 3 conditions?

1. The activity produces a change of state. 2. The change of state was not achievable by preceding activities. 3. The activity enables other activities to be performed.

2 Methods of Treating Beginning Work-in-Process Inventory

1. The weighted Average Costing Method 2. The FIFO Costing Method

2 sections of a Production Report

1. Unit Information Section 2. Cost Information Section

4 Ways of Categorizing Costs under ABC

1. Unit-Level 2. Batch-Level 3. Product-Sustaining 4. Facility-Sustaining

2 methods that help with the impact of Work-In-Process Inventories on Process Costing

1. Weighted Average Method 2. FIFO Method

2 Reasons accounting for production under process costing can be a bit more complicated

1. nonuniform application of manufacturing inputs 2. presence of multiple processing departments.

5 steps in preparing a Production Report

1. physical flow analysis 2. calculation of equivalent units 3. computation of unit cost 4. valuation of inventories (goods transferred out and EWIP) 5. cost reconciliation

Differences in what 4 things could cause Product Diversity?

1. product size 2. product complexity 3. setup time 4. size of batches

3 Reasons knowing how much it costs to service different customers can be vital information

1. setting pricing 2. determining customer mix 3. improving profitability

Units started in the current period are divided into what two categories in FIFO Costing Method?

1. units started and completed 2. units started but not finished (EWIP)

4 Outcomes Activity Analysis Produces

1. what activities are done 2. how many people perform the activities 3. the time and resources required to perform the activities 4. an assessment of the value of the activities to the organization, including a recommendation to select and keep only those that add value.

Consumption Ratio

The proportion of each activity consumed by a product

Overhead Rate Formula

Total Overhead Costs / Total Direct Labor Hours

Formula for Units Started and Completed

Total Units Completed-Units in BWIP

Formula for Unit Cost

Unit Cost= total cost/# of units produced

Formula for Total Manufacturing Costs for July

WIP July + Costs added in July

The need for more accurate product costs has forced ____

many companies to take a serious look at their costing procedures.

To assign costs, the amount of each activity consumed by each product ___

must be known

In process manufacturing, some departments receive ____

partially completed goods from prior departments

In process costing, each ____ has its own WIP account

producing department

Activity-Based Product Costing

reveals that functional-based costing under-costs the low volume deluxe models and over-costs the high volume regular models.

The concept of job order costing is pretty ____

straight forward

Regardless of the nature of the product diversity, product cost will be distorted whenever ____

the quantity of unit-based overhead that a product consumes does not vary in direct proportion to the quantity consumed of non-unit based overhead.

Total units to account for must equal ____

the total units accounted for

The journal entries generally parallel what?

those described in job-order costing system

The manufacturing cost flows for a process-costing system are the same as _____

those for a job order system

As goods are sold, the cost of finished goods is transferred where?

to the cost of goods sold account

as goods are completes in 1 department, they are transferred where?

to the next department

Formula for Units Started

units started and completed + Units in EWIP

If there are non-unit-level activities (or activities that are not performed each time a unit of product is produced), the costs associated with these non-unit-level activities are ____

unlikely to vary (i.e., increase or decrease) with units produced.

Activity Selection

-involves choosing among different sets of activities that are caused by competing strategies

Activity Dictionary

-lists the activities in an organization along with some critical activity attributes (financial and nonfinancial information items that describe individual activities)

Traditional Manufacturing Firms (3)

-may have significant beginning and ending WIP inventories. -This causes complications in process costing due to several factors such as the presence of beginning and ending WIP inventories -there are different possible approaches to the treatment of beginning inventory cost.

Unit-Level Activity Drivers

-measure the consumption of unit-level activities

Because of diversity of customers ____

-multiple drivers are needed to trace costs accurately

To calculate an activity rate, the practical capacity of each activity ___

-must be determined

Units remaining in EWIP inventory are ___

-not complete

Customers are cost ___

-objects of fundamental interest

3 Input Categories the department receiving transferred-in goods would have

-one for the transferred-in materials -one for materials added -one for conversion costs

Failure Activities

-performed by an organization or its customers in response to poor quality (poor quality does exist).

Control Activities

-performed by an organization to prevent or detect poor quality (because poor quality may exist).

activity-based cost assignment (2)

-reflects the pattern of overhead consumption -the most accurate.

The use of either plant-wide rates or departmental rates assumes that a product's consumption of overhead resources is ____ (2)

-related primarily to the units produced. -For unit-level activities (or activities that are performed each time a unit is produced), this assumption makes sense.

Process Costing vs. Job Order Costing (2)

-same basic concepts -Process costing has to address a continuous flow production process

FIFO Costing Method (4)

-separates work and costs of the equivalent units in beginning inventory from work and costs of the equivalent units produced during the current period. -Only current work and costs are used to calculate this period's unit cost. -It is assumed that units from beginning inventory are completed first and transferred out. -The costs of these units include the costs of the work done in the prior period as well as the current period costs necessary to complete the units.

Equivalent Units of Output (3)

-solution to calculating equivalent units of production -the complete units that could have been produced given the total amount of manufacturing effort expended for the period under consideration. -Determining equivalent units of output for transferred-out units is easy; a unit would not be transferred out unless it was complete.

The production report is subsidiary to ___

-the WIP account for a department

Someone in production must determine what for the EWIP? (2)

-the amount % of completion -it is an estimate of the degree of completion for EWIP

For nonvalue-added activities, what is the nonvalue added cost?

-the cost of the activity itself

Failure Costs

-the costs incurred by an organization because failure activities are performed.

Units in both FIFO categories are valued using what?

-the current period's cost per equivalent unit

When Cost Reconciliation (Step 5) is done, what can happen?

-the production report can be prepared

Value-Added Component

-the waste-free component of the value-added activity and is, therefore, the value-added standard.

In Weighted Average Costing, what happens with beginning inventory output and current period output?

-they are merged in the calculation of equivalent units

Goal of job order costing and process costing (2)

-to accurately measure the cost of making a product -the same goal for both

Weighted Average Costing (2)

-treats beginning inventory costs and the accompanying equivalent output as if they belong to the current period. -This is done for costs by adding the manufacturing costs in BWIP to the manufacturing costs incurred during the current period.

5 examples of Activity Dictionary

-types of resources consumed -amount (percentage) of time spent on an activity by workers -cost objects that consume the activity output (reason for performing the activity) -measure of the activity output (activity driver) -activity name

2 subdivisions in the Unit Information Section

-units to account for -units accounted for

ABC is often used to more accurately determine what 2 things?

-upstream costs -downstream costs

Activities can be classified as ____ or ___

-value-added -nonvalue-added

Knowing the costs of suppliers and customers can be ____

-vital information for improving a company's profitability

Production Report (7)

-also called the cost of production report -document that summarizes the manufacturing activity that takes place in each specific process department for a given period of time -contains information on costs transferred in from prior departments plus the additional costs incurred in the current department -These costs added in the department include direct materials, direct labor, and overhead -Similar to the job-order cost sheet -A subsidiary to the WIP account -traces the flow of units through a department, identifies the costs charged to the department, shows the computation of unit costs, and reveals the disposition of the department's costs for the reporting period.

Every transferred out unit is ___

-an equivalent unit

Physical Units (2)

-are not equivalent units -units that may be in any stage of completion

In Weighted Average Costing, the total cost is treated as what?

-as if it were the current period's total manufacturing cost.

Plant-Wide and Departmental Rates (3)

-based on direct labor hours, machine hours, or other volume-based measures -used for decades to assign overhead costs to products and continue to be used successfully by many organizations -However, for many settings, this approach to costing is equivalent to an averaging approach and may produce distorted, or inaccurate, costs.

For inefficient value-added activities, the activity cost must be ____

-broken into its value-added and nonvalue-added components

How are cost accumulated in process costing?

-by department for a specific period of time such as a month

How are activity costs assigned to products?

-by multiplying a predetermined activity rate by the usage of the activity, as measured by activity drivers.

Cost Reconciliation (3)

-checks to see if the costs to account for are exactly assigned to inventories. -the total costs assigned to goods transferred out and to EWIP must agree with the total costs in BWIP and the manufacturing costs incurred during the current period. -the costs assigned to production are reconciled to the total manufacturing costs to account for.

Weighted Average Costing Method (3)

-combines beginning inventory costs and work done with current-period costs and work to calculate this period's unit cost. -The costs and work carried over from the prior period are counted as if they belong to the current period. -Beginning inventory work and costs are pooled with current work and costs, and an average unit cost is computed and applied to both units transferred out and units remaining in ending inventory.

2 reasons unit cost is needed

-compute the cost of goods transferred out of a department -to value ending work-in-process (EWIP) inventory.

Faculty-Sustaining (1 and ex)

-cost driver is necessary to operate the plant facility but does not vary with units, batches, or product lines -ex: cost of General Motors plant manager salary

Unit-Level (2 and ex)

-cost driver varies with output volume (ex: units) -traditional variable costs -ex: Cost of indirect materials for labeling each bottle of Victoria's Secret perfume

Batch-Level (1 and ex)

-cost driver varies with the number of batches produced -ex: cost of setting up laser engraving equipment for each batch of Epilog key chains

Product-Sustaining (1 and ex)

-cost driver varies with the number of product lines -ex: cost of inventory handling and warranty servicing of different brands carried by Best Buy electronics store

Control Costs

-costs of performing control activities.

2 subdivisions in in the Cost Information Section

-costs to account for -costs accounted for

Activity Reduction

-decreases the time and resources required by an activity

Nonunit-Level Activity Drivers (1 and ex)

-ex: batch, product-sustaining, and facility-sustaining -factors that measure the consumption of nonunit-level activities by products and other cost objects

Activity Drivers

-factors that measure the consumption of activities by products and other cost objects and can be classified as either unit-level or nonunit-level

Activity Elimination

-focuses on nonvalue added activities

Why did ABC systems originally become popular? (2)

-for their ability to improve product-costing accuracy by tracing activity costs to the products that consume the activities in MOH. -ABC has expanded into areas upstream (i.e., before the production section of the value chain—research and development, prototyping, etc.) and downstream (i.e., after the production section of the value chain—marketing, distribution, customer service, etc.) from production.

When goods are completed, the cost of the completed goods is transferred from ____ to ____

-from WIP -to the finished goods account

Assigning the costs of customer service to customers is done how? (4)

-in the same way that manufacturing costs are assigned to products -Customer-driven activities such as order entry, order picking, shipping etc.; are identified and listed in an activity dictionary. -The cost of the resources consumed is assigned to activities, and the cost of the activities is assigned to individual customers. -The same model and procedures that apply to products apply to customers as well.

Activity Sharing

-increases the efficiency of necessary activities by using the economies of scale

Appraisal Costs

-incurred to determine whether products and services are conforming to their requirements or customer needs.

Prevention Costs

-incurred to prevent poor quality in the products or services being produced.

Internal Failure Costs

-incurred when products and services do not conform to specifications or customer needs before being shipped.

External Failure Costs

-incurred when products and services fail to conform to requirements or satisfy customer needs after being delivered to customers

Formula for Consumption Ratio

Amount of Activity Driver per Product / Total Driver Quantity

Discretionary Activities

activities that aren't value-added

Raw materials, direct labor, and applied overhead costs flow where?

flow into a work-in-process (WIP) account

As raw materials are purchased, the cost of materials flows where?

flows into a raw materials inventory account

Assuming uniform application of conversion costs ___

is not unreasonable