Accounting 2 Exam 1

what effect does this have on inventory accounts?

Increases WIP . . . See Job Cost Record template . . . Remember that an increase to WIP will also eventually affect FG, COGS, GP, op y

Why not use number of units as the allocation base?

Individual units may not consume resources at the same rate.

How is POHR computed?

POHR = budgeted MOH ÷ budgeted allocation base

What do you compare to get cost distortion?

We compare traditional and refined

Which of the following statements best explains why MOH is allocated rather than traced to​ jobs?

bec it is an indirect product cost

The ultimate goal of any product costing system for a manufacturer is to determine the cost of producing one unit of product.

true

To calculate the direct labor costs​ incurred, the direct labor wage rate is multiplied by the direct labor hours logged for the job.

true

Product costs are initially inventoried on a​ company's Balance Sheet.

A

value chain

A company incurs cost at every link in the value chain. The value consists of activities the company engages in (links) which add value to the company's end products. They are six links in the value chain: research and development- costs associated with the consideration of launching new products and making new ones. design- cost associated with the creation of a detailed plans and specification for products design- cost associated with the creation of detailed plans ands specifications for products production or purpose- cost associated with the purchase(merchandiser) or production (manufacturer) of products marketing- cost associated with advertisements distriubution- costs associated with the delivery of products to customers customer service- cost associated with providing support to customers

job costing formula

Beg Bal= Given +DM= Price x input ration +DL= wage hrs x hrs worked on job +allocated MOH=POHR x cost driver used by job = End bal

how companies handle MOH

By their very nature, indirect manufacturing can NOT be traced to specific cost object. Yet GAAP requires that MOH be treated as an product cost for financial reporting purposes. To do this, most manufacturers use what is known as normal costing. Normal costing consists of 3 steps: (versus actual costing . . . advantage of normal costing is timeliness, disadvantage of normal costing is lack of 100% accuracy) 1.Before the year begins, most manufacturers calculate a predetermined MOH rate (POHR) that will be used throughout the year to allocate MOH to each cost object. ● 2.During the year, manufacturers allocate MOH to each cost object. ● 3.At the end of the year, manufacturers must deal with any overallocated OR underallocated overhead.

what is the difference btw COGM and COGS

COGM: is the cost assigned to units completed during the period, the decrease in WIP, the increase to FG COGS: is the cost assigned units sold during the period, the decrease to FG

indirect costs

Costs that cannot be easily and accurately traced to a cost object. all other product costs that are not direct product costs

what are the most common allocation basis? why these?

DL costs, DL hours, m hours . . . typically already systems in place to track these . . . easy

what allocation bases should be used?

Depends on the manufacturing environment . . . Labor intensive → DL costs or hrs, automated → m hours

how do manufacturers use POHR

During the year, manufacturers allocate MOH to each job by multiplying the POHR by the actual activity level of the allocation base for the job . This allocation occurs when it is convenient for the company. The allocated MOH increases the job's work in process inventory balance. At the end of the year, manufacturers who use a POHR to allocate MOH to production must reconcile the temporary MOH account used to "hold" actual MOH and allocated MOH.

Which of the following statements is correct with regard to Activity Based Costing​ (ABC)? A. ABC categorizes all manufacturing overhead activities as unit level activities. B. ABC uses only volume based cost drivers in the calculation of predetermined manufacturing overhead rates. C. The costs of implementing ABC are generally higher for companies that have established information technology systems. D. If the consumption ratios using the traditional method are the same as the consumption ratios using​ ABC, cost distortion will exist. E. None of the above statements are correct.

E.

hy would a manufacturer who produces its product in small batches choose to use job costing to track its manufacturing​ costs?

Each batch requires different product costs for completion.

equivalent units

Equivalent units (EU) are used in a Process Costing environment to enable the fair assignment of costs to a completed unit and to a partially completed unit. EUs are calculated by multiplying physical units (PU) by a given percentage of completion. Total EUs for a product cost c ategory represent the total amount of units that could have been completed given the product costs incurred during a given period. EUs will be calculated separately for DM and C because the costs are added at different points during the production process. DM is usually added at a specific during production, and C is incurred uniformly throughout production.

When raw materials are used for a​ job, Work in Process Inventory decreases.

False, raw materials increases work in process inventory

manufacturing companies how product and period costs shown

For a manufacturer, product costs pass through a series of inventory accounts before making their way to the Income Statement. When raw materials are purchased, the costs are placed in Raw Materials Inventory (RM). When the raw materials are used in production, the costs are moved to Work in Process Inventory.(WIP). In addition to the cost of raw materials used, direct labor and manufacturing overhead costs are added to WIP during production. When production is complete, the product costs are moved out of WIP and into Finished Goods Inventory (FG). When units are sold, the related costs are moved out of FG and into COGS. Period costs are expensed when incurred as Operating Expenses

how are product and period costs shown in financial statements

For a merchandiser, product costs are initially held in Merchandise Inventory. Once a sale is made, the product costs move out of Merchandise Inventory and into Cost of Goods Sold (COGS). Period costs are expensed when incurred as Operating Expense

Which of the following would be considered a direct product cost for a computer​ manufacturer? (assume the​ company's cost object is a unit of​ product)

Hard drivers used in computers

Where is the "error" currently sitting if we've sold most of the jobs we've produced during the year? COGS (WIP → FG → COGS)

How do we close overallocated MOH? Decrease COGS by the difference between allocated MOH and actual MOH How do we close underallocated MOH? Increase COGS by the difference between allocated MOH and actual MOH

what are the building blocks of process costing: dm and civersion costs

In chapter 2, we discussed three categories of product costs: DM, DL, and MOH. As mentioned above, these product costs categories are used in both Job and Process Costing. However, for our Process Costing calculations, the three categories are condensed into two categories: DM and Conversion (C).Conversion consists of DL and MOH. These are the two product cost categories needed to convert DM to a finished product. Remember that MOH can be either actual MOH or allocated MOH. If MOH is allocated, a company can use either traditional or refined costing to allocate MOH to production for the period

Which of the following statements is correct with regard to process​ costing?

In sequential​ processing, manufacturing occurs​ "in order" of production departments. B. The percentage of completion for all units in a subsequent department with respect to transferred in costs from a previous department is​ 100%. C. Nonuniform input occurs when production costs are added at different points in time in a production department. D. Manufacturers who operate in a mass production environment choose between actual and normal costing to account for manufacturing overhead.

comparing chapter 3 to chaoter 4

In the last chapter, we discussed Job Costing and the allocation of MOH in a JobCosting Environment. Our examples used a plantwide overhead rate based on a single cost driver to allocate MOH to the cost objects. This type of allocation systemis known as traditional costing. For some companies, the MOH allocated to the cost object under traditional costing may bedisproportionate to the MOH actually used by the cost object in production. If this is the case, the costs will be distorted and could possibly lead to over/undercosting (and over/underpricing). This chapter explores ways to further refine how MOH is allocated to production by using multiple cost drivers. Through this process, companies hope to minimize cost distortion and appropriately price their products to remain competitive in the market

Which product cost category "causes" cost distortion

MOH

during the year allocating MOH.....

MOH allocated to a cost object = POHR x actual amount of allocation base used by the cost object

using departmental overhead rates to allocate indirect costs

One way to refine our costing system is to use multiple departmental overhead rates rather than a single plantwide overhead rate. The process of allocating MOH under this refined system is similar to traditional costing. The difference is that there are multiple POHRs, one POHR for each department. In this refined system, each department will estimate the amount of MOH it expects to generate during the period. Each department will choose the most appropriate cost driver for its operations, either DL hours or machine hours, and then estimate its cost driver activity level for the period. Using these estimates, a departmental POHR is calculated. The POHRs are then used to allocate MOH to production. At the end of the period, the company calculates the amount of over/underallocated MOH and closes the MOH account

what is left in the MOH account what does it mean?

Overallocated MOH Allocated MOH > Actual MOH . . . too much was put in WIP . . . "price" was too high Underallocated MOH Allocated MOH < Actual MOH . . . too little was put in WIP . . . "price" was too low

refined POHR calculation

POHR 1 = portion of total MOH/total appropriate allocation base

What do we do if the amount of over/underallocation is fairly large, and we still have a lot of the inventory left?

Prorate over/underallocated MOH between WIP, FG, and COGS

Which of the following represents the sequential series of inventory accounts that product costs pass through for a​ manufacturer?

Raw Material​ Inventory, Work in Process​ Inventory, Finished Goods Inventory

tracing direct labor cost to a job

Since this cost is, by definition, direct, the direct labor cost is added to the job cost record. To calculate the direct labor costs incurred, the direct labor wage rate is multiplied by the direct labor hours logged for the job. The cost increases the job's work in process inventory balance

The ultimate goal of any product costing system

The ultimate goal of any product costing system is to determine the cost of a unit. There are two common product costing system: job costing and process costing.

What is the relationship between the numerator in the traditional column and the numerators in the refined column?

They equal

when is MOH allocated to the cost object

Throughout the period . . . typically on a monthly basis

How under job costs do we determine if MOH is overallocated

To determine if MOH is overallocated or underallocated, manufacturers compare the amount of MOH allocated to production during the year to the amount of actual MOH incurred during the period. The difference between allocated MOH and actual MOH is then closed to COGS.

•Why do companies use a predetermined MOH rate, rather than the actual rate?

To have the ability to calculate a job cost sooner rather than later . . . bill sooner . . . collect sooner

Which column would be higher if the traditional system is overcosting the cost object?

Traditional

Before categorizing costs as either direct or​ indirect, a company must identify a cost object.

True

Both Merchandisers and Manufacturers hold inventory.

True

When MOH is overallocated to production

When MOH is overallocated to production (too much cost was put in WIP), the allocated MOH is greater than the actual MOH. When the costs in WIP ultimately move to COGS, COGS would be too high without adjustment. To close the overallocated MOH, COGS is decrease

When MOH underallocated to production

When MOH is underallocated to production (too little cost was put in WIP), the allocated MOH is less than the actual MOH. When the costs in WIP ultimately move to COGS, COGS would be too low without adjustment. To close the underallocated MOH, COGS is increase

using a job costs record to accumulate job costs

When jobs are being produced, manufacturers use job cost records to accumulate the costs. The job cost record is essentially a T-account for the job's Work in Process Inventory account. The T-account can have a beginning balance if the job was started in a previous period but not completed. During the current period, DM, DL, and MOH costs are added to balance in the T-account. When the job is complete, the balance in the WIP T-account is transferred to FG. Once the job is sold, the related costs are transferred out of FG into COG

.only proucuction or purpose considered product costs, all other period costs

a

It is possible for a job to consist of more than one unit of product

a

Product costs for a manufacturer are categorized as either direct​ material, direct​ labor, or manufacturing overhead costs.

a

cant know ending RM if not given you can only know the change.

a

companies who produce products in small batches use job costing

a

the initial cost object used in job costing is jobs

a

Which of the following masters level accounting tracks at UGA consists of viewing the work of others to determine if the output is​ "free of material​ errors"?

audit

Closing MOH to COGS

closing MOH to COGS is only appropriate in situations where the amount of the over/underallocated MOH is small and the majority of inventory has been sold. If the amount of over/underallocated MOH is large and the majority of the inventory has not yet been sold, it is more accurate to divide the over/underallocated MOH between WIP, FG, and COGS. You will not be asked to do this in a calculation question, but it is important to know that closing MOH to COGS is not appropriate in all situations.

direct costs

costs include direct materials (DM) and direct labor(DL). Direct materials refers to primary raw materials used to produce a finished product. direct labor refers to the labor cost paid to employees to physically turn raw materials into finished products.

how to calculate MOH

efore the year begins, most manufacturers calculate a predetermined MOH rate (POHR) that will be used through the year to allocate MOH to each job. To calculate a POHR, manufacturers divide the total estimated MOH for the year by the total estimated activity level of the allocation base. If a manufacturer does not use a POHR to allocate MOH, it would use an actual MOH rate to apply MOH to each job. Though this method is more accurate, it is not commonly used in practice because it lacks timeliness. If an actual rate were used, a company would have to wait until the end of the period to apply MOH and cost the job. This would delay pricing, billing, and the ultimate receipt of payment from the customer

if a balance exists in the temporary MOH account at the end of the​ period, it can be ignored for purposes of preparing the​ company's financial statements.

false

only manufacturers have both product and period costs

false

Allocating MOH to a job

first thing you may notice about this header is that instead of the word "tracing," the header uses the word "allocating." Why do you think this header uses a different word? The reason is that by definition, MOH is an indirect cost and cannot be directly traced to a job. However, MOH is a real cost of production and needs to be included in the job cost record so that the job is not undercosted (and ultimately underpriced). When MOH is allocated, MOH is divided up among the jobs produced during the period. Before MOH can be allocated to a job, the company needs to choose an appropriate allocation base for its overhead. The allocation base chosen should have a strong, positive relationship to the manufacturing overhead costs. For this reason, the allocation base is sometimes referred to as the cost driver. Under the traditional system (which is what we are using in this chapter), manufacturers with labor intensive operations use direct labor hours as the MOH allocation base and manufacturers with highly automated operations use machine hours as the MOH allocation base. (note: It is inappropriate to use number of units as an allocation base because each unit is unique and can use varying amounts of the true cost driver.)

product

goes from inventory (asset)n to COG- production and purchase link. only merchandisers and manufactureres have product costs.

production cost report 5 steps

he weighted average method is accomplished by completing a production cost report. The production cost report consists of 5 steps. 1. Flow of Physical Units (PU) 2. Calculation of Total Equivalent Units (EU) 3. Summary of Costs to Account For* 4. Calculation of the Cost per Equivalent Unit (cost/EU)* 5. Assignment of Costs to units completed (C&TO) and units in ending inventory (EI) *I like to combine steps 3 and 4 into a single step. So, my calculations will condense the production cost report into 4 step

how does process costing work in second processing department

in the second (or third, fourth, etc.) production department, the production cost report is almost identical to the report prepared for the first processing department, except an additional column is added in steps 2 and 3. This column is for the transferred in costs (TI). Once a unit has moved out of a department, it is considered 100% complete with respect to the previous department. Therefore, for the EU calculation in step 2, the percentage of completion for the units in the transferred in column will always be 100%. Also, since the report is for a department other than he first department, the physical units we start on during the period are the units transferred in from the previous department during the period. (note: Many students confuse units in beginning inventory with units transferred in during the period. These are two different groups of units. The units in a department's beginning inventory were the units in the same department's ending inventory for the previous period. The units transferred into a department are the units received from the previous department during the current period.

process costing vs job costing

job Costing is not appropriate for all companies. Some companies operate in an environment where they produce large batches of identical units of product. In this mass production environment, it is inefficient to trace product costs to individual jobs because all of the units require the same input and conversion process. In this environment, it is more appropriate to use Process Costing. The ultimate goal of both Job Order Costing and Process Costing is to determine the cost of a unit of product. However, the initial cost object under Process Costing is a processing department. A processing department is a point in the production process where specific steps are completed that brings a unit closer to completion both Job and Process Costing systems use the same product cost categories, DM, DL,and MOH, and the same basic accounts, RM, WIP, FG, and COGS. In Process Costing, the production costs are separately tracked for each processing department. In other words, each processing department has its own WIP account. We will deal with sequential processing in this course, which means units and their related costs are transferred from department 1 to department 2 and department 2 to department 3, etc. When a unit is ready to be sold, the units and their related costs are transferred from the final processing department to FG. When a unit is sold, the units and their related costs are transferred from FG to COGS

Job costing

manufacturers who produce unique, customizable products in small batches. not only manufacturers use this service companies also uses job costing

will MOH be the same in both traditional and refined

no

refined departmental costing

number of POHRS: more than one . . . 1 POHR per department (company level) typical cost drivers: DL hrs, m hrs (volume based) why use: easy to track, assume all activities are unit level activities

ABC refined costing

number of POHRs: more than one . . . 1 POHR per activity (company level) typical cost drivers: DL hrs, m hrs, number of moves, number of machine setups (volume and transactions based) why use: recognizes that activities can be either unit level or batch level AND that the chosen cost drivers should reflect this

Traditional costing

one POHR (one company level) typical cost drivers: DL hrs, m hrs (volume based) why use? easy to track, assume all activities are unit level activities

Which of the following lists all phases of the business​ cycle?

planning, directing, and controlling

inventory flow assumptions and process costing

process Costing calculations can be completed using first-in, first-out (FIFO) or weighted average. FIFO tracks the physical flow and costs of units in beginning inventory separately from the physical flow and costs of new units started during the period. FIFO is more complicated to use but is more accurate when product costs vary drastically from period to period. Weighted average combines the physical flow and costs of units beginning inventory and of units started during the period. Weighted average is easier to use but is less accurate when product costs vary drastically from period to period

Which column would be higher if the traditional system is undercosting the cost object?

refined

formula for calculating profit

revenue-expenses

Three types of business models

service companies- provide services, hold zero inventory merchandising companies- resell tangible products they buy from suppliers; hold merchandise inventory manufacturing companies- sell tangible products that they make, hold raw materials inventory, work in process inventory, and finished goods inventory

If a net increase is reported in the Work in Process Inventory account during the​ period, which of the following statements is always​ true?

the sum of Direct​ Material, Direct​ Labor, and Manufacturing Overhead costs added during the period is greater than the Cost of Goods Manufactured.

cost object

the thing we want to assign costs to- think one unit

What if a company only has two cost objects, what would always be true about the cost distortion for the two objects?

they would be equal and offset

formula for predetermined manufacturing overhead

total estimated MOH/total estimated activity level for the allocation basis

Financial and Managerial accounting are similar in that both

use information provided by the internal accounting system.

Product costing systems

used to ultimately determine the cost of producing one unit of a companies products. his information is useful because it enables managers to do such things as set prices, cut costs to remain competitive, and determine which product is the most profitable to produce and sell.

Will DM and DL be the same in both the traditional and refined columns?

yes

job cost

•Environment: custom, small batch, unique •Example: builder, airplane manufacturer, law firm •Initial cost object: job •Ultimate cost object: unit (total job cost ÷ number of units in job) •Template: job cost record

Process costing

•Environment: mass production, large batch, identical products •Example: candy manufacturer, water bottle manufacturer •Initial cost object: processing/production department •Sequential - manufacturing occurs "in order" of production departments •Parallel - manufacturing occurs simultaneously in production departments •Ultimate cost object: unit •Template: production cost report (we'll build the report on the next slide) •equivalent units - how many units could have been completed given the production costs incurred •uniform versus nonuniform input - uniform input occurs when ALL production costs are added at the same point in time; nonuniform input occurs when production are added at different points in time (DM and C)

period costs

•SG&A (expense) (selling, general, and administrative expenses aka operating expenses) - research and development, design, marketing, distribution, and customer service links - think "office" - includes office rent, office supplies, office depreciation, CEO's salary, bookkeeper's wages, office utilities, etc. •

what is the "issue" we are dealing with in chapter 2?

•The COGS schedule focuses on the company as a whole. The issue is that we don't "sell the company," so we need more cost information about the "units" we sell. •The COGS schedule, as we learned in in Chapter 2, uses what is known as actual costing to account for MOH. The issue is that to know the "actual" costs you have to wait until the end of the period. This delays costing, pricing, billing, and the collection of cash from customers.

purchase

•all costs related to getting product ready for sale to customers - includes cost of product, shipping to "store," insurance on shipping, taxes/tariffs paid to secure product