Acct 380
What are the 3 procedures in reciprocal method?
1. Summary of the % of service costs assigned to each dept. 2. Establishment of simultaneous linear equations 3. Allocation of service department costs
3 important points about transferred-in goods
1. The cost of this material is the cost of goods transferred out computed in the prior department 2. the units started in the subsequent department correspond to the units transferred out from the prior department 3. the units of the transferring department may be measured differently than the units of the receiving department
Why allocate support dept costs?
1. To recover the cost of support dept & to establish the product price high enough to cover the costs involved. (if you don't include supp. dept. costs the selling price is underpriced & undercosted) 2. to influence operating managers' behavior positively (waste or overuse services, cannot be free. they will use the service more economically) 3. to motivate support managers to control their service costs more effectively. (oper. managers will watch the use of service and supp. dept will increase its quality of service. Prevent outsourcing)
steps in constant gross margin percentage method
1. compute the total gross margin percentage as a % of total revenue 2. multiply the total gross margin % by the sales revenue from each product to calculate gross margin for the product 3. subtract the additional processing cost from the total COGS to figure out the joint cost allocated to each product OR 1. Sales revenue 2. total JC 3. calc. FPC 4. Calc. total GM 5. divide total GM by revenue 6. apply to products 7. find GM for products 8. find allocated JC for products
Reasons for allocating joint costs
1. joint costs are part of product costs, which must be inventoried and included in part of COGS. All manufacturing companies are required to use joint-cost allocations for financial and tax reporting (external reporting). I/S for income measurement and B/S for inventory valuation 2. Joint costs are allocated in response to regulatory requirements that mandate assignment of such costs as a basis of price setting. 3. May be useful in determining inventory values for insurance purposes.
What are the 4 cost allocation methods?
1. physical-measures 2. Net realizable value 3. sales value at split-off 4. constant gross margin %
Transferred-in costs are always _______ complete in terms of prior department costs
100%
What would be the completion level of WIP in terms of Transferred-in costs (or prior departmental work)? and why?
100% ; because the product has been fully finished from the previous department
What kind of costs are accumulated in each department? 1st department and 2nd department
1st - Beg. WIP, DM, DL, MOH 2nd- Beg. WIP, DM, DL, MOH, Transferred-in Cost
is the key document for tracking manufacturing activities and costs in each process
The departmental "production cost report"
If the goods transferred in are measured differently than the goods being made in the department, what must happen?
The goods transferred in must be converted to the units of measure used by the 2nd dept.
Which method does not track prior period output and costs seperately from current period output costs? Combines costs in beg. WIP inventories and costs added during current period.
The weighted-average method
Where are costs assigned in process costing?
To departments, not individual products
Which of the following is NOT an appropriate justification for allocating support-service costs?
To minimize total internal accounting costs.
Costs that were incurred in a previous department that was carried forward to the current department
Transferred in costs
What is the difference between constant gross margin % and NRV method?
Under the NRV method, the gross margin as a % of the NRV is identical for each product, whereas under the Constant Gross Margin method, the gross margin as a % of the revenue is identical for each product
Types of output that need current period costs assigned for FIFO costing?
Units in Beg. WIP to be completed Units started & completed Units in End. WIP
Costs of units transferred-out - weighted average method
Units transferred-out x cost per EU
When not to use WA and why?
Used in settings where input costs are changing significantly from one period to the next because it can create a possibility for errors. the costs in departments could also be understated. It is desirable to exercise control by comparing the actual costs of the current period with the budgeted or standard costs for the period.
Does WA have a higher or lower EU than FIFO. Why or why not?
WA has a higher EU because it includes some of the past period's cost and output
_________ picks up beg. inventory costs and the accompanying equivalent output and treats them as if they belong to the current period. Prior-period output and manufacturing costs found in Beg WIP are merged with current period output manufcaturing costs
Weighted average method
What does the % of completion of spoiled units rely on?
When the spoilage is detected and what portion of work has been completed for those units
Under what conditions will the FIFO method produce the same cost of goods manufactured as the weighted-average method?
When there is no beginning inventory
What is the accuracy and cost for the direct method?
Worst and Best
are variables or activities within a producing department that provoke the incurrence of support costs
casual factors (activity drivers)
When _________________ managers choose the factor that is most easily measured and provides the most convincing relationship.
competing activity drivers
What are the advantages of NRV method?
considers the ability of individual products to absorb the costs. it can maintain the same level of profitability for each product after joint-cost allocation.
this method allocates joint costs such that gross margin percentage is the same for each joint product
constant gross margin percentage method
__________________ shouldn't change from one method to another. Must note on F/S as to why you should change the method.
cost allocation methods
it is important to keep a ____________ in choosing an allocation method
cost-benefit perspective
For the mass and continuous production of a single, homogenous, standarized product.
Process Costing
What are some examples of manufacturers that may adopt process costing?
Paper, chemicals, cement, flour, brick, beverages, oil.
Where do the costs of abnormal spoilage?
"loss from abnormal spoilage" account in an I/S as a period cost. Must be expensed immediately
Summarizes all of the activity and cost flows that take place in a department for a given period.
Production cost
What are the pros and cons of the direct method?
Pros: easy and simple Cons: less accurate than the other methods since it does not consider interdepartmental services. (may lead to distorted product or service costs). least accurate b/c doesn't recognize interactions and distorts costs
Pros and cons of reciprocal method
Pros: enables the most accurate cost allocation by considering reciprocal services fully Cons: the most complex and difficult way; may not be cost-effective
Pros and Cons of the step method
Pros: more accurate than the direct method because it recognizes some interactions among the support departments Cons: Does not recognize all interactions; more difficult and time consuming than the direct method
What are the benefits of FIFO costing?
Provides more precise measure of current period performance.
Gives full recognition to interdepartmental services. It allocates support department costs both forward and backward. Under this method, the usage of one support dept by another is used to determine the total cost of each support dept, where the total cost reflects interactions among the support depts. Then the new total of support dept costs is allocated to the production depts. It fully accounts for support dept. interaction.
Reciprocal Method
What is the major benefit of WA?
Simplicity
What is the logic of the direct method?
Since all support-department costs are ultimately allocated to production departments anyway, an interim allocation between support-departments is an unnecessary complication.
Two or more products produce simultaneously by the same process up to a "split off" point
Split-off point
Takes some reciprocal services into account, but not all of them. Cost allocations are perfromed in step down fashion, based on predetermined order of allocation. The allocation sequence typically begins with the dept. that provides the greatest amount of service to other support and production depts. After its costs have been allocated, the process continues, step by step, ending with the dept that provides the least amount of services to other depts.
Step (sequential) method
how to allocate joint costs to individual products produced in the joint process is called a what?
joint cost allocation decision
costs of processing joint products simultaneously prior to the split off point
joint costs (common costs)
a production process in which two or more products are produced simultaneously from the use of one raw material. It simultaneously converts a common input into several outputs
joint production
Which of the 4 methods are based on the ability to bear approach (revenue generating power based approach)?
marked based approaches. NRV, sales-value at split off, constant GM%
what is the objective of sell-or-process further decisions?
maximizing overall productivity
Using casual factors result in what?
more accurate product costs
once a support departments cost are allocated, it ______________ receives back a subsequent allocation from another support department. Except for the 1st support department, the costs to be allocated from a support-dept. will contain its ____________ departmental costs (direct costs) as well as _______________ from other support departments previously.
never ; own ; any costs received
when spoilage is assumed to be _____________, it is not tracked separately but is embedded in the total cost of good units.
normal
Once a support department's costs are allocated, it never receives back a subsequent allocation from another support department
one-way allocation approach
what are the two types of departments?
operating and supporting
performing the major activity (providing goods or services) of the company. It has "external" customers
operating department
assigns joint costs to products on the basis of some physical measures (volume, size, or weigh). Computationally, it allocates to each joint product the same proportion of joint cost as the underlying proportion of physical units
physical measures method
other names for operating departments
production dept, direct dept, line dept.
EU of outputs formula
units transferred-out + EU of end. WIP
Are FPC information relevant in a sell-or-process- further decision? why or why not?
yes because they are differential/incremental cost
What are the key characteristics of Process Costing?
1. A large # of homogenous products pass through a series of similar processes (manufacturing dept) 2. in each process, materials, labor & overhead inputs may be needed 3. Manufacturing costs are accumulated by a process (dept) for a period of time 4. There are separate WIP accounts for each process 5. Cost flows & journal entries are similar to JO costing 6. The departmental "production cost report" is the key document for tracking manufacturing activities and costs in each process 7. Unit costs are computed by dividing the departmental costs of the period by the output of the period. (averaging out approach)
2 stages of cost allocation
1. Allocation of support dept. costs to operating dept. 2. allocation of operating dept. costs to products
What are the 5 steps of process costing?
1. Analysis of the flow of physical units 2. Calculation of the period's output (EU) 3. Computation of unit cost 4.Valuation of inventories (goods transf.out and end WIP) 5. Cost reconciliation
Why can't a support department have an overhead rate?
A support department cannot have an overhead rate that assigns overhead costs to units produced, because products are not produced in support departments.
results from unusual or abnormal circumstances and would not arise under efficient operating conditions. It is considered avoidable and controllable.
Abnormal spoilage
Examples of joint productions
Agricultural & food industries: meat packing,dairy products, fishing Extractive industries: petroleum refining, copper mining, sawmill operation Chemical industries: soap making, coke manufacture
The Human Recourses (HR) Department uses Information Systems (IS) services, and IS Department uses HR services, but HR uses IS services more than IS uses HR services. Which of the following correctly describes the cost allocation procedure for the direct and step methods? [ ] A) The direct method will allocate no HR cost to IS, and no IS cost to HR. The step method will allocate some HR cost to IS, and no IS cost to HR. B) The direct method will allocate no HR cost to IS, and no IS cost to HR. The step method will allocate no HR cost to IS, and some IS cost to HR. C) The direct method will allocate no HR cost to IS, and no IS cost to HR. The step method will allocate some HR cost to IS, and some IS cost to HR. D) The direct method will allocate some HR cost to IS, and some IS cost to HR. The step method will allocate no HR cost to IS, and some IS cost to HR.
B
Which of the following would be classified as a service department rather than an operating department? A) The maternity department in a hospital. B) The employee training department of a computer manufacturer. C) An assembly department in a factory. D) The jewelry department of a department store.
B
If there is no beg. WIP inventory, WA and FIFO will lead to the same costing results. Why?
Because FIFO accounts for Beg. WIP and if there is none, it is zero whereas WA does not separately account for it so it equals the same as FIFO with no beg. WIP
When should you make a sell or process further decision?
Before the allocation of joint costs
What is the accuracy and cost for the reciprocal method?
Best and worst
Which of the following statements about the choice of cost-allocation method is false? [ ] A) Improper implementation of cost allocation methods can create distrust among internal departments. B) The direct method does not consider any interactions among service departments. C) The step-method considers all interactions among service departments. D) ABC cost-driver bases better reflect the cause-and-effect relationships between service resource spending and usage by internal departments than traditional cost-allocation bases.
C
Which of the following statements regarding joint cost allocation is false? [ ] A) There is no precise way to trace joint-process costs to joint products. B) Manufacturing companies are required to use joint-cost allocations for financial accounting and tax reporting purposes. C) Joint costs should not be allocated to products in estimating casualty losses because such allocation is too arbitrary in nature. D) Improper management decisions can be made if managers regard the average joint cost per unit as a unit-level or marginal cost.
C
the complete units that could have been produced given the total amount of productive effort expended for the period under consideration
Equivalent units of output
How does process costing account for spoiled units?
Calculations for spoiled units are the same way for good units but the EU computation must be split between good and spoiled units.
What are the disadvantages of NRV method?
Cannot be used inf sales prices are unknown in advance. Fluctuations in the market value of any one or more of the final products will change the apportionment of the joint costs, although the total joint cost to be allocated is unchanged
In effect, producing departments ______ support activities.
Cause
Where do the costs of normal spoilage go?
Cost of good units manufactured can inventory or capitalize
Costs to be accounted for - weighted average method
Costs of Beg. WIP inv + Costs added during the current period
Cost per EU formula
Costs to be accounted for / EU of Outputs
If there was no beginning work-in-process and no ending-work-in process under the weightedaverage costing method, the number of total equivalent units for direct materials, if direct materials were added at the start of the process, would be: [ ] A) equal to the units started. B) equal to the units completed and transferred-out. C) less than the units completed and transferred-out. D) Both A and B are correct.
D
Which of the following statements about a process costing system is NOT correct? A) In a process costing system, each processing department has a work in process account. B) In a process costing system, equivalent units are separately computed for materials and for conversion costs if they have different levels of completion. C) In a process costing system, overhead can be either under- or over-applied just as in job-order costing. D) In a process costing system, material costs are directly traced to units of products.
D
Which of the following statements about decision-making to maximize the profit of a joint production process is true? A) Joint processing costs incurred prior to split-off should be allocated before making such decisions. B) Only costs caused by management decisions to choose one or another set of products after split-off are relevant. C) Only revenues from selling and processing beyond the split-off point are relevant. D) Both B and C are true.
D
What is the controllability principle?
Evaluate people based on only things they can control
What does it mean if a company adds all materials at the end of the process?
DM= 0%
What does it mean if a company adds all materials at the beginning of the process?
DM=100%
what is the implication of different methods for service cost allocation for operating department managers' performance evaluation?
Different methods can make some managers happy and some sad. lower cost=happy which means bigger bonus higher cost= sad Reciprocal and step doesn't show true performance
Journal entry to record abnormal spoilage costs
Dr. Loss from abnormal spoilage Cr. WIP
What is the journal entry for transferred-in costs?
Dr. WIP-Dept. B Cr. WIP-Dept. A
3 categories of current-period output in FIFO
EU in end WIP, units started and completed, and EU of work necessary to finish the units in Beg WIP
Costs of units in End. WIP - weighted average method
EU of End. WIP x Cost per EU
If materials are added evenly (or uniformly) throughout the entire process like conversion costs, the completion level of WIP for materials will be?
Equal to conversion cost % Direct labor input is usually needed throughout the process, and overhead is normally assigned on the basis of direct labor hours.
Used to change or convert # of only partially completed products into EU of fully completed products
Equivalent Units
What is the main accounting problem with cost allocation among departments?
How to allocate the cost of support dept to operating dept?
the equivalent units and manufacturing costs in beg. WIP are excluded from the current period unit cost calculation. Recognizes the work and costs carried over from the prior period legitimately belong to that period.
FIFO costing method
What is the major difference with the production report for WA and FIFO?
FIFO has separate Beg. WIP & Started + Completed
What is the accuracy and cost for the step method?
Fair and fair
Why are allocations still needed?
Financial reporting (GAAP and federal income tax law require it. These product costs are somewhat useful in calculating the cost of special lots or orders, including government contracts.
What summarizes the total costs to be accounted for (beg. WIP costs & costs added), compute cost per EU for each cost category, and allocates the cost?
Flow of Costs
What summarizes the flow of physical units (input & output) and computes outputs (units completed + end. WIP) in terms of EU
Flow of Units
Why is it important to separate spoilage costs from the costs of good units produced?
For management to know how many units are being spoiled and to correct the issue
What is the accuracy and cost for the activity-based method?
Good and bad
What is the problem with allocating the cost of the common resource in joint production?
Indirect Costs
A product that requires further processing before it is sellable
Intermediate product
Which of the following statements regarding the physical-measures method of allocating joint product costs is false? [ ] A) Joint product costs are allocated based on the ability-to-bear approach. B) It is based on the relative volume, weight, or other physical measure of each joint product at the split-off point. C) It is preferred when prices of output products are highly volatile or unpredictable. D) The total profit of the company will be the same regardless of which physical measure is used to allocate joint-product costs.
Joint product costs are allocated based on the ability-to-bear approach.
What type of costs are service department costs?
MOH
GM as a % of what?
NRV
the measure of a product's contribution to profit after split-off
NRV
What are the market-based data approaches?
Net realizable value sales value at split-off constant gross margin % produce better allocations
assigns joint costs to individual products according to their ability to absorb joint costs. The relative ____________________ of each product at the split off point is used to prorate the joint costs
Net realizable value method NRV
Is the weighted average method accurate? Why or Why not?
No, it is not accurate because it does not provide accurate "period" performance measures because it combines prior period costs and current costs.
Are joint costs relevant in a sell-or-process- further decision? why or why not?
No, they are irrelevant b/c they are "sunk costs"
results from the regular operation of the production process. it arises even when the process is operated in an efficient manner.
Normal spoilage
The rationale for using ______ is the assumption that costs would not be incurred unless the jointly produced products together would yield enough revenue to cover all costs plus a reasonable return.
ability to bear
____________ is the least desirable guideline. It tends to "penalize" the most profitable division by allocating to it the largest proportion of support department cost.
ability to bear
The cost of beginning work-in-process inventory under the weighted-average method is:
added to current period costs in determining costs per equivalent unit for a given period.
How are transferred in costs treated?
as if they were a separate type of direct material added at the beginning of the current production process.
Unit costs are computed by dividing the departmental costs of the period by the output of the period.
averaging out approach
What is the accuracy and cost for the volume-based method?
bad and good
A __________ is a secondary product recovered in the course of manufacturing a primary product. It is a product whose total sales volume is relatively minor in comparison with the sales value of the main product
by product
what kind of costs are FPCs?
direct costs
ignores reciprocal services (interdepartmental services). service department costs are allocated only to production departments-bypassing other service departments.
direct method
3 approaches to allocate the costs of support-departments to operating departments
direct, step, or reciprocal
what is the disadvantage of physical measure method?
does not consider the ablity of individual products to absorb joint costs. "high-volume low-priced" products are assigned too much joint costs even though they have a lower ability to absorb the costs, whereas "low-volume high-priced" products are assigned too little joint costs although they have a greater ability to absorb the costs
If a company using the weighted-average method does NOT have ending WIP for direct materials and conversion costs, then the number of equivalent units will be:
equal to the number of physical units.
A product that is ready for sale without further processing
final product
costs incurred after the split-off point to process a part particular joint product further
further processing costs (separable cost)
2 key dimensions on how FIFO and WA differ:
how output is computed and what costs are used for calculating the period's unit cost
When joint production occurs, accountants must determine ________________________ to the jointly produced products.
how to allocate the cost of the common resource
What is the sell-or-process further decision rule?
if the incremental revenues exceed the incremental processing costs, the products should be processed further
what kind of costs are joint costs?
indirect
other names for support departments
indirect dept, service dept
interaction between service departments, like providing services to one another
interdepartmental services or reciprocal services
Examples of support departments
public accounting firm: payroll, supply purchasing, billing & collection dept automobile manfucaturer: engineering, maintenance, IT, HR, Factory adm. dept
examples of operating departments
public accounting firms- bookkeeping, auditing, taxation, consulting dept. automobile manufacturer- molding, assembly, painting and finishing dept.
Requires the use of simultaneous linear equations or matrix algebra to do the allocations.
reciprocal method
NRV Formula
sales revenue-additional processing costs (FPC)
Under this method, the higher the sales volume, the greater the share of joint costs charged to the product
sales value at split-off method
allocates joint costs based on the relative sales values of the joint products at their split-off point; so it does not consider additional processing costs after the split-off point
sales value at split-off method
by-products are basically what?
scraps, trimmings, etc.
whether to sell a joint product at the split off point or to process the product further?
sell or process further decision
what is the advantage of physical measure method?
simple and easy to use. can be used when the prices of output products are highly volatile or unpredictable
Accounting for spoilage is to determine the __________ and to distinguish between costs of __________ and __________.
size of spoilage costs ; normal spoilage and abnormal spoilage
the cost of wasted resources and defective products that cannot be recovered by rework or recycling
spoilage
If the FIFO method is used and all materials are added at the beginning of the period, the total equivalent units for materials will equal the number of units:
started into the production during the period.
Providing assistance or service to other internal department in an organization. It has "internal" customers
support department
The combined costs in the weighted-average method are treated as if _____________
they were incurred during the current period
Every ________________________ is an equivalent unit
transferred-out unit
