Cost Accounting
Conversion costs
All product costs necessary to convert raw materials into finished goods (direct labor and manufacturing overhead added together)
Direct materials and conversion costs
Which costs make up the work-in-process inventory costs in the processing centers?
Mixed costs
Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level. Electricity Rent that increases as sales revenue increases
Fixed Costs Rent for a restaurant
Costs that remain constant in total regardless of activity level
Stepped Costs
Costs that change in total in a stair-step fashion (in large amounts) with changes in volume of activity.
Variable cost Food materials for a restaurant
Costs that change in total in direct proportion to changes in activity level
Future costs
If a cost analysis is based on differential costs, which type of costs will differ among the alternatives presented?
Job Order Costing
The process of tracking the costs of an individual product
Cost pool
Total cost being generated by a specific overhead cost activity.
Direct materials + Direct labor + MO (conversion costs
Total cost per unit formula
Wages and salaries in admin offices Utilities in admin building Advertising costs Interest expense Salaries and commission of sales people
5 examples of period costs
33,000 35,000+5,000-7,000=33,000
A company had 5,000 partially completed units in beginning work-in-process inventory. This period, after the 5,000 beginning inventory units were completed, another 35,000 units were started. At the end of the period, 7,000 units were in ending work-in-process inventory. How many units were completed and transferred out during this period?
Debit Work in Process Inventory Credit Raw Materials Inventory
A company has accrued but has not paid direct labor wages in cash. What is part of the journal entry to record the amount of direct labor wages earned?
Process Costing
A method of product costing whereby costs are accumulated by process or work centers and averaged over all products manufacturing costs for each product.
Return On Sales Revenue
A measure of operating performance; computed by dividing net income by total sales revenue. Similar to profit margin.
Cost objects
A product or division for which costs are accumulated and tracked
$159,360 of goods transferred out and $4,320 of ending work-in-process inventory
According to Kretsmart's schedules above, the total dollars spent on work transferred out and ending inventory totaled $163,680.
Facility Support Activities Property taxes Security Landscaping
Activities are necessary to have a facility in order to participate in the development and production of products or services; activities are not related to any particular line of products or services. What are 3 examples
Product-line Activities
Activities associated with the capability to produce different types of products Engineering product design Storage in special warehouses
Unit-level activities
Activities that take place each time a unit of product is produced. Machine maintenance/depreciation Electricity and other energy costs
Batch-level activities Inspections, machine setups, movement of and accounting for materials
Activities that take place in order to support a batch or production run, regardless of the size of the batch. What are 3 examples
margin of saftey
Amount of sales units or sales dollars above the break-even point
Employee time logs and employee interviews
An ABC system is being implemented at a certain factory. An analyst finds that one of the cost drivers for overhead costs relates to manufacturing staff time. Which information needs to be gathered next to properly allocate overhead costs in this situation?
Only the direct materials costs and conversion costs of the current period
At Kretsmart, in the current period, the total cost per unit was $1.66. Which costs are used to calculate per unit price?
All the manufacturing costs except for direct materials and direct labor
An entrepreneur identifies a business opportunity to produce and market custom-printed T-shirts to local organizations. The entrepreneur plans to use activity-based costing. Which type of costs should be associated to the production of each custom-printed T-shirt in the future using cost drivers?
Differential cost
An individual is deciding whether to expand a business. What is the amount that the individual must pay to hire more workers called?
Manufacturing overhead is overapplied by $3,000.
At the end of an accounting period, the manufacturing overhead account has debits totaling $25,000 and credits totaling $28,000. In this case, which statement is true?
(Sales*X) - (Var*X) - Fixed costs = 0 200X-110x-63,000=0 90X=63,000 X=700
Break-even example Sales price per unit = 200 Variable costs = 110 Fixed costs = 63,000 How many units must Corporation sell to break even
Total Manufacturing Costs (Direct Materials, Direct Labor, and Applied Overhead) +Beginning Work-in-Process Inventory -Ending Work-in-Process Inventory =Cost of Goods Manufactured
COGS manufactured journal entry formula
Cost of Goods Manufactured +Beginning Finished Goods Inventory -Ending Finished Goods Inventory =Unadjusted Cost of Goods Sold+/-Underapplied or Overapplied Overhead =Adjusted Cost of Goods Sold
Computation of COGS Adjusted COGS
The cost per meeting is $25 (50,000/2,000) The overhead cost is assigned to the academic department based on the number of that department's students
Cost driver example The chief financial officer of Grantsville College is deciding how to assign college overhead costs to the different academic departments on campus. She is wondering how to assign the cost of a general academic counselor who is available to all students on campus. If 2,000 students meet with the counselor and the counselor's wage is 50,000
Traditional is based on assigning overhead to products by a single measure of activity such as direct labor hours. ABC assigns overhead to products based on several different measures of activity that creates overhead costs
Difference between traditional overhead and ABC overhead
work in process
Inventory that is partly completed in the production process but not yet ready for sale to customers
A single manufacturing process for a single period
For which process in process costing is the number of equivalent units of production calculated for?
$85,200, Direct labor 72,00 + MO 13,200 = 85,200
Here are data for Bullzai for the month of January: Direct material costs: $14,800 Direct labor costs: $72,000 manufacturing Overhead: $13,200 What is Bullzai's total conversion costs for the per
$100,000 All types of manufacturing costs Materials 14,800 + Labor 72,000 + MO 13,200 = 100,000
Here are data for Kretsmart for the month of March: Direct material costs: $14,800 Direct labor costs: $72,000 Manufacturing overhead: $13,200 What was Kretsmart's total cost of production for the month of March?
Employee interviews
Implementation of an activity-based costing (ABC) system requires an analysis of the percentage of time employees spend on each overhead cost activity. Through which activity can these data be gathered?
Total fixed cost
In a CVP graph, what is represented by the vertical-axis intercept of the total cost line?
They are carried forward as beginning work-in-process inventory for the next period.
In a process costing system, what happens to the total production costs remaining in work-in-process inventory at the end of the period?
Analyze what fraction of the machine cleaners' time is typically taken up in activities associated with changing ice cream batches
In an ice cream production setting, how does the management accountant determine how much of the factory machine cleaners' total wages should be assigned to the "changing ice cream batches" cost pool?
To assign direct labor costs to the products being manufactured
In using a job order costing system, the cost accountant for Paradigm Toys made an entry debiting work-in-process inventory and crediting salaries and wages payable.
0 If all direct materials were added in the prior period there are no equivalent units for direct materials this period for the beginning WIP inventory The costs per unit of both direct materials and conversion costs are different for the beginning work-in-process inventory and costs incurred during the current period.
Jaunty Coffee Company has 1,000 units in beginning work-in-process inventory that are 100% complete with respect to direct materials. A total of 5,000 units were started during the period. A total of 2,000 units were in the ending work-in-process inventory. 1. What are the equivalent units for direct materials in the beginning work-in-process inventory for the current period? 2. Using the data for Jaunty Coffee Company, which statement is true regarding costs per unit and ending work-in-process inventory?
Products produced are distinct from each other, and the manufacturing processes used are different for different products.
Job order costing is appropriate with which two factors
Actual costs go in as debit as costs are incurred (underapplied= debit to COGS credit MO) Applied costs go in as a credit as production takes place (overapplied =Debit to MO credit to COGS)
Journal entry for Manufacturing Overhead Actual vs applied
Debit Manu overhead 11,400 (total of all costs) Credit AP 1,200 Credit Rent/P 6,450 Credit prepaid insurance 850 Credit Accumulated Depreciation 2,900
Journal entry for example During the current production period, these costs include $1,200 for repairs to equipment, $6,450 for monthly rent allocated to the production facility, $850 for liability insurance, and $2,900 in depreciation of manufacturing equipment.
Debit WIP inventory 300 (50*6) Credit Raw materials inventory 300 Purchase IN WIP OUT Debit WIP 75 Credit RM inventory 75
Journal entry for issuing direct materials to production 50 board feet of mahogany at $6 per foot Issued direct materials to production-packaging material
Debit Raw materials inventory $30,000 (5,000*6) Credit AP 30,000
Journal entry for purchasing 5,000 boards feet at $6 per foot on credit
150x=50x+200,000 100x=200,000=2,000 backpacks * $150= 300,000 expected to sell 5,000-2,000 margin of safety is 3,000
Margin of safety example sale price 150 var price 50 fixed 200,000 Expects to sell 5,000
current sales - break even sales Breakeven sales=Fixed costs/CM ratio
Margin of safety formula
Equivalent units of production
Measure the production output during a period; essentially the "work done" by the center or department in terms of units of output
Activity-based costing (ABC)
Overhead is allocated based in several different measures of activity called cost drivers Identify the activities that drive overhead costs and allocate overhead based on those activities
Budgeted overhead/budgeted labor hours
Predetermined overhead rate formula
$25 per direct labor hours Budget overhead 500,000/ budgeted direct labor hours 20,000=25
Quiet Flag Industries has decided that direct labor hours are a good basis on which to apply overhead costs to production. Budgeted manufacturing overhead costs for the coming year are $500,000. Budgeted direct materials purchases are $400,000. The budgeted direct labor cost is $720,000, and budgeted direct labor hours for the coming year are 20,000 hours. What is Quiet Flag Industries' predetermined overhead rate?
Sales Revenue-Var-Fixed=%(sales) 200X-110X-63,000=.20 * sales (200 200x-110x-63,000=40X 200x-110x-40x=63,000 50x=63,000 1,260
Return on sales formula example sales 200 Var 110 Fixed 63,000 target income of a 20% return on sales
Contribution margin
Sales - Variable Costs The amount of revenue that remains to cover fixed costs and provide a profit for an organization
Fixed Costs / CM Ratio
Sales mix breakeven formula
Target sales = (Fixed costs + Target income)/Average CM Ratio
Target sales formula
Cost-volume-profit (CVP) analysis
Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization.
break-even point (Sales revenue * X) - (Var Costs * X) - Fixed Costs = 0
The amount of sales at which total costs of the number of units sold equal total revenues; the point at which there is no profit or loss.
To record indirect labor costs to manufacturing overhead
The cost accountant for Bullzai, Inc., made a journal entry debiting manufacturing overhead and crediting salaries and wages payable. What was the purpose of the entry?
Product line activity
The cost of preparing documents to order ingredients from various suppliers is an example of which type of ABC support activity?
Batch activity
The cost of special machine maintenance, which is necessary because of the frequent starting and stopping of the machines, is an example of which type of ABC support activity?
The cost of beginning work-in-process inventory, both materials and conversion costs; the cost per equivalent unit required to complete those units in beginning inventory; and the cost per equivalent unit of the items started and completed this period, both materials and conversion costs
The costs that are associated with units completed and transferred out this period are the sum of which components?
Facility support activity
The depreciation of the factory building is an example of which type of ABC support activity?
Contribution Margin Ratio
The percentage of net sales revenue left after variable costs are deducted; Contribution margin/net sales revenue.
Sales mix
The relative proportion of total sales dollars that are represented by each of a company's products.
Raw materials Wages of the factory employees Utilities of the factory building Depreciation or rent of the factory building Salaries of the plant manager
What are 5 examples of product costs
1. Determine work done (equivalent units) 2. Determine production costs and compute the costs per unit 3. Compute the total cost associated with the units completed and transferred out (cost of goods manufactured) 4. Compute the total cost of the units remaining (ending WIP inventory)
What are the 4 steps in process costing
1. Raw materials are input into the process 2. Labor and overhead are incurred in the process 3. Some of the inventory is completed some are not 4. When finished inventory is transferred to finished goods
What are the four steps of the flow of costs in process costing
1. Identify overhead cost activities. What activities are causing miscellaneous costs associated with the problem 2. Analyze individual overhead costs in terms of those cost activities. 3. Identify measurable cost drivers. 4. Assign overhead. 5. Use the ABC data to make decisions.
What are the steps in implementing an ABC system
Raw materials inventory, manufacturing overhead, work-in-process inventory, finished goods inventory, and cost of goods sold
What are the steps in the manufacturing cost flow
Identify the product or project, trace direct costs, and allocate overhead
What are the three steps required to implement a job order costing system?
When Actual is more than applied it is underapplied and the remaining debit balance is subtracted from the COGS (underapplied= debit to COGS credit MO) When Applied is more than actual its is overapplied and remaining credit balance is - from COGS (overapplied= debit to MO credit COGS)
What determines overapplied and underapplied for actual and applied MO costs
A debit represents the into inventory the purchase of RAW, and a debit to WIP represents inflow of materials labor and overhead costs A credit represents out of inventory. A credit to RAW records the introduction of RAW into production, and a credit to WIP records the outshipment of goods to finished goods and a credit to finished goes to the customer
What does a debit and credit in journal entries represent for raw materials, WIP, labor and overhead
A design change
What is a change, or measurable factor, directly related to the amount of overhead cost associated with the production of a specific item?
Purchasing lower quality materials
What is a common cause for a favorable materials price variance?
The units go through process centers when being produced.
What is a unique feature of process costing?
The number of design change requests a customer makes while creating a customer-ordered machine
What is an example of a cost driver
Determining what factors are causing overhead costs to be incurred
What is important to consider when determining how to allocate overhead costs to a product or a production process?
Total cost of items for which production was completed during the period.
What is represented by the amount of cost of goods manufactured?
Sales revenue - Variable costs - Fixed Costs = Profit (Sales*X)-(Var.*X)-Fixed Costs = profit
What is the CVP equation
Debit Work in Process Inventory Credit Manufacturing Overhead
What is the correct debit in a journal entry to record the allocation of manufacturing overhead to production?
Sum of the materials cost and the conversion cost of the unfinished units. Materials cost is the cost per equivalent unit this period times the materials equivalent units in ending inventory Conversion Costs is the conversion cost per equivalent unit this period times the conversion cost number of equivalent units (ending inventory direct materials times the % of completion for C.C.)
What is the formula for Ending WIP inventory Materials cost Conversion Costs
Total costs spent / Equivalent number of units 30,000 / (5,000*30%)= 20
What is the formula for total costs per unit for conversion costs Costs 30,000 Ending inventory 5,000 % completed 30%
An estimate of what the total overhead will be for the product being made based on some allocation method such as machine hours or direct labor hours
What is the manufacturing overhead rate that is applied to work-in-process during the manufacturing of products?
1. The activities performed in each processing center are basically identical for all units. 2. The units produced as a result of passing through the process centers are basically the same. Ketchup bottles in a grocery store are all priced the same
When is process costing used
Cost of Goods Sold (COGS)
When manufacturing is completed on specific products, their costs are transferred to which account?
products or services are similar The benefits of tracking costs exceed the costs of tracking costs
When should you not use job order costing?
Producing individual discrete products or services and you want to cost those Pickup trucks are similar but discrete and each truck can be tracked
When should you use job order costing
Work in Process (WIP)
Which account are the costs of the raw materials, direct labor, and miscellaneous manufacturing overhead transferred to when the product is being manufactured?
The cost of materials placed into production.
Which cost item does the cost of goods manufactured schedule begin with?
debit finished goods inventory credit work in process inventory
Which journal entry is used to record a transfer of completed products from a factory to the finished goods warehouse?
Sales and production volume
Which output measures are most important to a manager when maximizing operational performance?
The cost of goods transferred out to finished goods is the sum of the costs to make the finished goods in all processes, both in the current or prior period.
Which statement accurately describes the cost of goods transferred out?
The equivalent number of units is not the same as the number of physical units transferred to finished goods.
Which statement accurately describes the equivalent number of units?
Direct Materials Direct Labor Manufacturing Overhead
Which three elements can the costs of manufacturing be broken down into
The plant manager
Who is responsible for the manufacturing overhead spending variance?
Because direct labor hours are routinely tracked as part of tracing direct labor costs to products, projects, and processes
Why is a traditional overhead allocation system of using direct labor hours to allocate overhead to products, projects, or processes simple to implement?
Cost driver
With an ABC overhead allocation method, overhead is allocated based on several different measures of activity called what?
manufacturing overhead rate = estimated manufacturing overhead costs / number of units of the activity base being used
the rate at which manufacturing overhead costs are assigned to products; What is the formula
