Accounting 201 Exam 1 - Concepts

Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission?

$0.10 per unit

Sales salaries and commissions are $10,000 when 80,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the fixed portion of sales salaries and commissions?

$2,000

Job WR53 at NW Fab, Inc. required $200 of DM and 10 DL hours at $15 per hour. Estimated total OH for the year was $760,000 and estimated DL hours were 20,000. What would be recorded as the cost of job WR53?

$730

Fixed Cost

A cost that remains constant, in total, regardless of changes in the level of the activity.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity.

Activity Base (Cost Driver)

A measure of what causes the incurrence of a variable cost. Examples: units produced, machine hours, miles driven, labor hours.

Least-Squares Regression Method

A method used to analyze mixed costs if a scatterplot graph reveals an approximately linear relationship between X and Y variables.

Activity-Based Costing (ABC)

A number of allocation bases are used for assigning costs to products

Plantwide OH rate

A single OH rate used throughout an entire factory

Facility-Level

Activities: General factory administration, plant building and grounds. Activity Measure: direct labor hours

Unit-Level

Activities: Processing units on machines, processing units by hand, consuming factory supplies. Activity Measure: machine-hours, direct labor-hours, units produced

Batch-Level

Activities: processing purchase orders, processing production orders, setting up equipment, handling materials. Activity Measure: purchase orders processed, production orders processed, number of setups, pounds of material handled

Product-Level

Activities: testing new products, administering parts inventories, designing products. Activity Measure: hours of testing time, number of part types, hours of design

Administrative Costs

All executive, organizational, and clerical costs. Can be either direct or indirect.

Benchmarking

Can be used to compare activity cost information with world-class standards of performance achieved by other organizations

High-Low Method (formula)

Change in cost divided by change in hours.

Finished goods

Consist of completed units of product that have not been sole to customers

Work in process (WIP)

Consists of units of production that are only partially complete and will require further work before they are ready for sale to customers

Variable Cost Per Unit

Constant. Ex: Cost per text sent my be constant at 5 cents per text.

Mixed Costs

Contains both variable and fixed elements. Examples: Utility cost

Selling Costs

Costs necessary to assure the order and deliver the product. Can be either direct or indirect.

Direct Costs

Costs that can be easily and conveniently traced to a unit of product or other cost object. Example: Direct Material and Direct Labor

Indirect Costs

Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: Manufacturing Overhead

Sunk Cots

Costs that have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions.

Predetermined Overhead Rate (formula)

Estimated total manufacturing OH cost for the coming period / estimated total units in the allocation base for the coming period

Overapplied Overhead

Exists when the amount of OH applied to jobs during the period using the predetermined OH rate is greater than the total amount of OH actually incurred during the period

Underapplied Overhead

Exists when the amount of OH applied to jobs during the period using the predetermined OH rate is less than the total amount of OH actually incurred during the period

Activity-Based Management

Focuses on managing activities to eliminate waste and reduce delays and defects

Cost Behavior

How a cost will react to changes in the level of activity.

Period Costs

Include all selling and administrative costs.

Raw Materials

Include any materials that go into the final product.

Product Costs

Include direct materials, direct labor, and manufacturing overhead.

Cost of goods manufactured (CGM)

Include the manufacturing costs associated with the goods that were finished during the period

Common Costs

Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.

Manufacturing Overhead

Manufacturing costs that cannot be easily traced to specific units produced. Examples: indirect materials and indirect labor.

Indirect Materials

Materials used to support the production process. Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Suppose your car could be sold now for $5,000. Is this a sunk cost?

No, it is not a sunk cost

Which of the following costs would be considered a period rather than a product cost in a manufacturing company?

Property taxes on corporate HQ and Sales commissions

Direct Materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: a radio installed in an automobile.

Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop?

The cost of ice cream and the cost of napkins for customers

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another.

Direct Labor

Those labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers.

Total Fixed Cost (formula)

Total Cost - Total Variable Cost

Allocation Base

Used to assign manufacturing overhead to individual jobs. Example: direct labor hours, direct labor dollar, machine hours.

Activity Rates

Used to target areas where costs seem excessively high

Fixed Cost Per Unit

Varies inversely with changes in activity. Ex: the average _____ ______ per cell phone call made decreases as more calls are made.

Indirect Labor

Wages paid to employees who are not directly involved in production work. Example: maintenance workers, janitors, security guards.