ACCT 102 - Midterm 1

What are the four components of every customer value proposition?

1. Cost 2. Quality 3. Functionality and features 4. Service

Compare discretionary fixed costs to committed fixed costs. Think of an organization with which you are familiar. Give two examples of discretionary fixed costs and two examples of committed fixed costs that organization may have. Explain why the costs you have chosen as examples fit within the definitions of "discretionary fixed costs" and "committed fixed costs."

Discretionary fixed costs are controllable in the short run where managers have little or no control over committed fixed costs in the short run. Advertising and R&D are examples of discretionary fixed costs because they can be increased or decreased in the short run by managers. Rent and depreciation are examples of committed fixed costs because they can only be changed in the long run.

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

It is higher than income under absorption

What product costs must be allocated to jobs in absorption costing systems? Why must these costs be allocated rather than assigned?

Manufacturing overhead must be allocated to jobs. Manufacturing overhead is an indirect cost and as such is not economically traceable to individual jobs. Therefore, these costs are allocated.

What is anchoring bias?

The common human tendency to rely too heavily on the first piece of information offered (the anchor) when making decisions.

Define the terms "independent variable" and "dependent variable," as used in regression analysis. Illustrate the concepts of independent variables and dependent variables by selecting a cost a company would want to predict and what activity it might use to predict that cost. Describe the independent variable and the dependent variable in that situation.

The dependent variable is the amount you want to predict and is based on the amounts of the independent variables. For example, a company would like to know the total cost of paid compensation for their salespeople (dependent variable). The total cost would be based on their base salary and their commission percentage of sales revenue (independent variables).

What is framing bias?

The tendency of people to react to a particular piece of info in different ways depending on how it is presented

What will the use of departmental overhead rates generally result in?

The use of a separate cost allocation base for each department in the factory

How do fixed costs per unit behave?

They increase as production decreases.

How do variable costs per unit behave?

They remain the same throughout production when in the relevant range.

With respect to total variable costs, what happens within the relevant range?

They will decrease as production decreases

What is considered a discretionary fixed cost?

advertising

Allocating manufacturing costs is done when?

during the period

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

finished goods inventory

The cost of lighting a factory would be considered what kind of cost when determining the cost of a manufactured product?

indirect cost

Service firms develop a predetermined rate for some costs called a

indirect cost allocation rate

What is the cost of making one more unit?

marginal cost

Manufacturing overhead is usually considered what type of cost?

mixed

The entry to record the purchase of raw materials on account using a job costing system would include a debit to

raw materials inventory account

When using the hi-lo method, how do you choose points?

the data points with the highest and lowest volume

To forecast total costs at a given level of production, management would use what calculation?

total fixed cost +(variable costs per unit * predicted # of units)

What type of cost is one whose total amount changes in direct proportion to a change in volume?

variable cost

An example of direct labor:

wages of assembly line personnel

How do the authors of "Outsmart Your Own Biases" recommend dealing with cognitive biases?

1. Make three estimates of future conditions - high, medium, and low 2.Generate at least three objectives that make the most sense in light of your predicted future conditions 3. Generate three viable options for each decision scenario This approach will broaden your perspective on possible futures, objectives, and options thus reducing the impact of cognitive rigidity

Two control activities designed to combat fraud.

1.Separation of duties 2.Physical controls

What is a customer value proposition?

A business or marketing statement that describes why a customer should buy a product or use a service. It is specifically targeted towards potential customers rather than other constituent groups such as employees, partners or suppliers.

What is availability bias?

A cognitive bias that causes us to overestimate probabilities of events associated with memorable or dramatic occurrences.

Assume a company uses a plantwide predetermined manufacturing overhead rate that is calculated using direct labor hours as the cost driver. The use of this plantwide predetermined manufacturing overhead rate has resulted in cost distortion. The company's high-volume products are overcosted and its low-volume products are undercosted. What effects of this cost distortion will the company most likely be experiencing?

A company that overcosts its high-volume products may be overpricing its high volume product and thereby losing sales. Meanwhile, the low-volume product is underpriced and the firm sells more of that product. In this situation, the low-volume product looks more profitable than it really is and management may be misled into promoting more sales of the low-volume product at the expense of the high-volume product. This cost distortion can be harmful to a company's competitive position in the market because the firm could be losing sales of its high-volume products due to the overcosting and therefore over-pricing. It could also be harmed by losing money on the undercosted low-volume products due to underpricing.

Explain why "differential cost" and "variable cost" do not have the same meaning. Give an example of a situation in which there is a cost that is a differential cost but not a variable cost.

A differential cost is the difference in cost between two alternative courses of action whereas a variable cost is a cost that changes in total in direct proportion to changes in volume. If a company were deciding between renting office space downtown (more expensive) or in the suburbs (less expensive), the cost of rent would be an example of a differential cost that is not a variable cost. Rent is a fixed cost. The cost of coffee service at each location is a variable cost (varies with the number of employees) but is not a differential cost because it would be the same at either location.

Compare direct costs to indirect costs. Give an example of a cost at a company that could be a direct cost at one level of the organization but would be considered an indirect cost at a different level of that organization. Explain why this same cost could be both direct and indirect (at different levels).

A direct cost can be economically traced to a cost object whereas an indirect cost relates to the cost object but cannot be economically traced to it. The salary of a car sales manager is a direct cost to the sales department, but an indirect cost of the car itself. The salary of a sales manager is directly traceable to the sales department because that is the only place the manager works in the company. The salary is an indirect cost of the car because it is impossible to determine how much of it belongs to a specific car. In other words, the sales manager's salary affects the cost of all cars sold, but is not traceable to individual cars.

If production exceeds units sold, will variable or absorption income be higher?

A higher income will result under absorption

What is a mixed cost? Give an example of a mixed cost. Sketch a graph of this example.

A mixed cost contains both variable cost and fixed cost components. The expense for a cell phone is often mixed because there is a fixed amount for a certain number of minutes and an additional per minute charge if the minutes exceed the limit.

Define internal control.

A process effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance.

Explain why departmental overhead rates might be used instead of a single plantwide overhead rate.

A single plantwide overhead rate doesn't always do a good job of matching the cost of overhead resources with the products that consume those resources because different products may consume overhead resources at different rates in different departments. For example, one product may consume more overhead resources in a machine-intensive department while another product may consume more overhead resources in a labor-intensive department. Allocating overhead by department would more accurately assign overhead to each of these products and managers wouldhave more accurate information for making business decisions.

If manufacturing overhead has been overallocated during the period, and most of the jobs produced have been sold....

COGS on the income statement should be decreased

If manufacturing overheard has been underallocated during the period, and most of the jobs produced have been sold....

COGS on the income statement should be increased

Managers use unconscious mental shortcuts, known as heuristics, as simple ways of dealing with complexity. What are these heuristics called?

Cognitive biases

Which occurs last in a job costing system?

Cost of goods sold

What is the example of a manufacturing overhead cost?

Depreciation

What are scatter plots useful for?

Determining the strength of the relationship between historical cost and volume, identifying outlying points

Conversion cost=

Direct Labor + Manufacturing Overhead

Prime cost =

Direct materials + Direct Labor

What is confirmation bias?

Explains why people tend to seek out info that confirms their existing opinions and overlook or ignore info that refutes their beliefs. It occurs when people filter out potentially useful facts and opinions that do not coincide with their preconceived notions.

Describe a situation that may cause manufacturing overhead to be overallocated in a given year. Also describe a situation that may cause manufacturing overhead to be underallocated in a given year.

Let's say a company has underestimated the amount of the base for allocating overhead, such as direct labor hours, when computing the predetermined overhead rate. During the year, if they have more jobs than they anticipated and overhead costs were as planned, the overhead would be overallocated due to the increase in direct labor hours. A company could experience an unanticipated increase in the costs of manufacturing overhead and the volume of the allocation base was as planned, the predetermined rate would be too low. In that case, the amount of allocated overhead at the end of the year would be underallocated, meaning their actual costs of overhead were greater than their allocated costs of overhead assuming volume was as planned.

Why is managerial accounting more suitable for internal reporting than financial accounting?

Managerial accounting is more suitable for internal reporting than financial accounting because management needs timely information that will assist them in planning, controlling, and making decisions. Financial accounting focuses on the past while managerial accounting uses information about the past along with future-oriented information to help management make better decisions. Unlike financial accounting which is constrained by GAAP, managerial accounting has the flexibility to respond to the differing information needs associated with different users, different questions and different time frames. For example, managerial accounting can tailor the definition of cost to the specific needs of a particular manager making a specific type of decision. In this course, we will see that cost can be computed using absorption costing, variable costing, activity-based costing, relevant costing as well as historical cost.

Why should manufacturing overhead be allocated to a job even though the costs cannot be directly traced to a job? Give at least two reasons.

Manufacturing overhead should be allocated to a job because it is one of the essential costs of converting raw materials into a finished product. If the cost of overhead were not allocated to a job, the cost of the job would be recorded incorrectly in the company's accounting records, which would violate GAAP. Also, if the selling price of a product is determined in part by the cost of the product, the selling price could be too low to provide the desired margin.

When calculating the total of manufacturing overhead to allocate to a particular job, the company would do what?

Multiply the departmental overhead rate by the actual amount of the departmental allocation based used by the job and then add together the allocations from each department

How are fixed costs similar to step fixed costs? How are fixed costs different from step fixed costs? Give an example of a step fixed cost and describe why that cost is not considered to be a fixed cost.

Step costs and fixed costs are similar in that they remain constant over a certain range of activity. Step costs are fixed over a much smaller range of activity and then jump to a different level with moderate changes in volume. Truck loading fees are an example of a step cost. Each three hours that a truck is at a loading dock may cost $1,000. If a truck needs three hours and five minutes at the loading dock, the loading fee jumps to $2,000 and stays at that level for the next three hours. Factory rent is an example of a fixed cost where the total cost of rent does not change no matter how much volume of activity within the factory changes. This cost is fixed for the term of the lease.

What is the Sarbanes-Oxley Act of 2002 (SOX)? How does SOX affect financial accounting? How does SOX impact managerial accounting? Is there any overlap between financial and managerial accounting in terms of the SOX impact? If so, what are the areas of overlap?

The Sarbanes-Oxley Act of 2002 is a congressional act that enhances internal control and financial reporting requirements and establishes new regulatory requirements for publicly traded companies and their independent auditors. SOX requires company CEOs and CFOs to assume responsibility for the financial statements and disclosures. In addition, they assume responsibility for establishing an adequate internal control structure and procedures for financial reporting. Managerial accounting is affected by SOX because internal control affects the entire company and managerial accounting systems provide information that is published in the company's financial reporting.

Why is it acceptable to close overallocated or underallocated manufacturing overhead to Cost of goods sold rather than allocating it proportionately to Work in process inventory, Finished goods inventory, and Cost of goods sold? Under what circumstances would it be advisable to allocate the overallocated or underallocated manufacturing overhead to Work in process inventory, Finished goods inventory, and Cost of goods sold?

The amount of overallocated or underallocated manufacturing overhead is typically insignificant in relation to the total costs of manufacturing. Since the largest balance of the three accounts is by far the Cost of goods sold, it is acceptable to close the entire amount to Cost of goods sold. Also, if the reason for a debit balance in the manufacturing overhead account (underapplied overhead) is inefficiency, rework costs, additional unplanned inspection costs, etc., one cannot justify increasing inventory valuations that would result from allocating underapplied overhead to the inventory accounts. If the overallocated or underallocated manufacturing overhead is a significant amount, it should be distributed among the three accounts according to their balances as long as these balances are economically justifiable in terms of raising inventory valuations on the balance sheet.

What is sunk cost bias?

The phenomenon where people justify increased investment on the cumulative prior investment, despite new evidence suggesting that the cost, starting today, of continuing the decision outweighs the expected benefit

When the predetermined manufacturing overhead rate is calculated, why are estimated costs and cost driver levels used instead of actual dollars and amounts?

The predetermined manufacturing overhead rate is calculated at the beginning of the year to be used throughout the year. Since the actual amount of overhead will not be known until the end of the year, estimates are used so that overhead can be allocated to products as they completed throughout the year. This allows management to have product cost information during the year. The disadvantage of a normal cost system is that at the end of the year, there may be overapplied or underapplied overhead that usually gets closed to cost of goods sold. The alternative to use of a predetermined manufacturing overhead application rate (a normal cost system) is the use of an actual cost system. The disadvantage of an actual cost system is that if overhead costs and production are not even throughout the year, monthly overhead charged to products can vary widely. One can avoid the varying monthly charges by waiting until the end of the year when management knows for sure what its overhead costs were. The problem with this approach is that products cannot be costed until the end of the year. On balance the advantages of a normal cost system far outweigh its disadvantages when compared to an actual cost system.

Define the term "relevant range." Why is it important to managers?

The relevant range is the range of activity within which total fixed costs and variable costs per unit remain constant. It is important to managers to understand that cost behavior may change if they are making decisions that are outside the relevant range.

What is sunflower management bias?

The tendency for groups to align with the views of their leaders, whether expressed or assumed

What is the value chain? What are the six types of business activities found in the value chain? Which type(s) of business activities in the value chain generate costs that go directly to the income statement once incurred? What type(s) of business activities in the value chain generate costs that flow into inventory on the balance sheet?

The value chain is the activities that add value to a firm's products and services. The six types of business activities in the value chair are R&D, design, production or purchases, marketing, distribution, and customer service. These costs go directly to the income statement: For service companies - all costs along the value chain; for merchandisers, all costs except purchases of goods held for sale; for manufacturers, all costs except costs incurred in production. Purchases flow into inventory for a merchandiser and production flows into inventories for a manufacturer.

With respect to fixed costs per unit, what happens within the relevant range?

They will increase as production decreases

With respect to total fixed costs, what happens within the relevant range?

They will remain the same as production levels change

When calculating a departmental overhead rate, what is the numerator?

Total estimated departmental overhead cost pool

How can using a single predetermined manufacturing overhead rate based on a unit-level cost driver cause a high-volume product to be overcosted?

When a company uses a plantwide allocation system that is based on a volume-related driver, such as direct labor hours, the high-volume products will be allocated more cost than the low volume products simply because there are more of them produced, not necessarily because they consume more overhead resources. The result is cross-product cost subsidization, i.e., overhead costs that properly should be allocated to the low-volume product are allocated to the high-volume product.

What makes a cost relevant or irrelevant when making a decision? Suppose a company is evaluating whether to use its warehouse for storage of its own inventory or whether to rent it out to a local theater group for housing props. Describe what information might be relevant when making that decision.

When making a decision, a cost is considered relevant or irrelevant depending on whether it changes between the alternatives in the decision. Some relevant costs to consider in the evaluation of whether to use the warehouse for storage or whether to rent it would be the cost of storage elsewhere, how much rent could be charged for the warehouse, insurance costs, and so forth.

To record direct labor costs, debit what account?

Work in Process Inventory Account

To record the requisition of direct materials, debit what account?

Work in Process Inventory Account

What does a strong pattern between cost and volume show?

a linear pattern

What factor related to manufacturing costs causes the difference between operating income computed using absorption costing vs variable costing?

absorption costing "inventories" all fixed manufacturing costs

Manufacturing overhead would include

all manufacturing costs except direct materials and direct labor

When is the predetermined manufacturing overhead rate computed?

before the period

Depreciation is considered what type of cost?

committed fixed cost

When the job is completed, the journal entry is...

debit to finished goods, credit to work in process

When companies have established separate manufacturing overhead rates for each department, it is using what?

departmental overhead rates

What favors using departmental rates rather than a plantwide rate?

different jobs/products use the departments to different extents and different departments incur different types and amounts of manufacturing overhead

Manufacturing overhead is allocated based on..

direct labor hours, direct labor costs, machine hours

The output from regression does not give (R2, intercept coefficent, x variable 1 coefficient)

highest and lowest data points * x variable 1 coefficient

When absorption costing is used and management bonuses are related to operating income, managers are more likely to

increase inventory levels

When job costing is used at a service firm,

indirect costs are allocated to client jobs

Costs that remain the same among alternatives are

irrelevant costs

What will happen to the contribution margin if fixed costs related to a product increase while variable costs and sales prices remain the same?

it will not change

The use of either absorption or variable costing will make little difference for firms that use

just-in-time inventory methods

Which type of company has three types of inventory?

manufacturing

payroll - indirect labor charges are part of...

manufacturing overhead

What is a result of cost distortion?

overcosting of some products and undercosting of others

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

period cost

An example of indirect labor:

plant managers

What point can be used to solve for fixed cost component in the hi-lo method?

plug into either the highest or lowest point

Which element of the value chain would depreciation fall under?

production

A job costing system can be used by what types of companies?

service, manufacturing, and merchandising

The value chain is used by....

service, manufacturing, and merchandising businesses

When making a decision to buy a computer, all costs should be considered except

sunk costs

Manufacturing overhead is underallocated if....

the amount allocated during the period is less than the actual amount incurred

Manufacturing overhead is overallocated if....

the amount allocated during the period is more than the actual amount incurred

What should managers consider when predicting costs at different volumes?

the type of cost behavior, the relevant range of the cost

How do you calculate the predetermined manufacturing overhead rate?

total estimated overhead manufacturing costs/total estimated amount of the allocation base

A regression equation's variable cost per unit is represented by

x variable 1 coefficient