Accounting Exam 1

Computing Predetermined Overhead Rates

-The predetermined overhead rate is computed before the period begins using a four-step process. 1. Estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2. Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3. Use the following equation to estimate the total amount of manufacturing overhead: Y = a + bX Where, Y = The estimated total manufacturing overhead cost a = The estimated total fixed manufacturing overhead cost b = The estimated variable manufacturing overhead cost per unit of the allocation base X = The estimated total amount of the allocation base 4. Compute the predetermined over head rate

Purpose of Cost Classification

1. Assigning costs to cost objects 2. Accounting for costs in manufacturing companies 3. Preparing financial statements 4. Predicting cost behavior in response to changes in activity 5. Making decisions

Types of Fixed Costs

1. Committed - long-term (cannot be edited in short term. 2. Discretionary - short-term (can be altered by decisions

purpose of statement of cash flows

1. are we generating sufficient cash flows from its ongoing operations to remain valuable? 2. can we pay or debts? 3. can we pay our usual dividends? 4. why do net income and net cash flow differ? 5. to what extent will we have to borrow money in order to make needed investments?

manufacturing overhead examples

1. depreciation of manufacturing equipment 2. utility costs 3. property taxes 4. insurance premiums incurred to operate. manufacturing facility *only indirect costs associated with operating the factory are included*

flow of costs: key definitions

1. raw materials - include any materials that go into the final product 2. work in process - consists of units of production that are only partially complete and will require further work before they are ready for sale to customers 3. finished goods - consist of completed units of product that have not been sold to customers 4. cost of goods manufactured - includes the manufacturing costs associated with the goods that were finished during the period.

financial adjustment for overhead applied

1. the adjustment for underapplied overhead increases cost of goods sold and decreases net operating income. 2. the adjustment for overapplied overhead decreases cost of goods sold and increases net operating income.

free cash flows

Definition: measures a company's ability to fund its capital expenditures and dividends from its net cash provided by operating activities Formula: = net cash provided by operating activities - capital expenditures (P.P.E) - Dividends

Conversion Cost

Direct Labor + Manufacturing Overhead

4. What is the total amount of the costs listed above that are NOT direct costs of the Northridge Store?

everything that does NOT say Northridge store: 82,600 + 60,100 + 15,500 = 158,200

Chapter 14

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Statement of cash flows

highlights the major activities that impact cash flows and hence, affect the overall cash balance

External Reports

income statement balance sheet statement of cash flows

sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

indirect costs

Costs that cannot be easily and conveniently traced to a unit of product or other cost objective Ex: manufacturing overhead

Prime Cost

Direct Materials + Direct Labor

POHR =

Estimated total manufacturing overhead cost for the coming period / Estimated total units in the allocation base for the coming period (ideally, the allocation base is a cost driver that causes overhead)

common costs

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

Chapter 2

Keep going!!

Important formulas for practice Q's

LAST ONES

2. If 5000 units are produced, the total amount of manufacturing overhead cost is closest to:

MOC = variable manufacturing overhead x # of units + fixed manufacturing overhead: 1.25 x 5000 + 16500 = 22750

*cost classifications in manufacturing companies (chart)* Part 2: Non-manufacturing costs

Non-manufacturing costs 1. selling costs: a) all costs necessary to secure customer orders and get the finished product or service to the customer (sales commissions, advertising, and depreciation of delivery equipment and finished goods warehouses). 2. administration costs: a) all costs associated with the general management of the company as a whole (executive compensation, executive travel costs, secretarial salaries, and depreciation of office buildings and equipment)

overhead application - part 1

PearCo's actual overhead for the year was $650,000 with a total of 170,000 direct labor hours worked on jobs. PearCo's predetermined overhead rate is $4.00 per direct labor hour. Overhead Applied During the Period: Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = $4.00 per DLH × 170,000 DLH = $680,000

Chapter 3

SO CLOSE

Chapter 1

We GOT DIS

differential cost (incremental cost)

a difference in cost between two alternatives.

Operating Act. - indirect method

accrual net income is adjusted to a cash basis

3. If 4500 units are sold, the variable cost per unit sold is closest to:

add up all cost per unit costs (direct materials, direct labor, variable manufacturing overhead, variable administrative expense, sales commission): 5.25 + 3.90 + 1.40 + 1.80 + 0.30 = 12.65

administrative costs

all executive, organizational, and clerical costs. can be either direct or indirect.

Manufacturing Overhead

all manufacturing costs except direct materials and direct labor. these costs cannot be readily traced to finished products. *includes indirect materials and labor*

subsidary ledger

all of a company's job cost sheets

Period Costs

all selling and administrative costs

Fundamental principle

change in cash balance = change in non cash balance sheet accounts

Job Order Costing - cost flow 1

charge direct material and direct labor costs to each job as work is performed

Managerial Accounting

concerned with providing information to managers for use within the organization so that they can formulate plans, control operations, and make decisions

financial accounting

concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators

1. What is the total of the conversion costs above?

conversion cost = direct labor hours (wages paid to the workers who paint the figurines) + manufacturing overhead (none) = 90,000

#4: cost classifications for predicting cost behavior

cost behavior - how a cost will react to changes in the level of activity classifications: 1. variable costs 2. fixed costs 3. mixed costs

variable costs

cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost per unit is constant.

selling costs

costs necessary to secure the order and deliver the product. can be direct or indirect.

Direct Costs

costs that can be easily and conveniently traced to a unit of product or other cost objective Ex: direct material & direct labor

fixed costs

costs that remain constant, in total, regardless of changes in the level of the activity.

#1 Assigning costs to cost objects

direct & indirect

#2: Accounting for costs in manufacturing companies

direct material, direct labor, manufacturing overhead

Manufacturing Costs

direct materials, direct labor, manufacturing overhead

Product Costs

direct materials, direct labor, manufacturing overhead

5. The incremental manufacturing cost that the company will incur if it increases production from 4500 to 4501 units is closest to:

incremental manufacturing cost = direct materials + direct labor + variable manufacturing overhead cost x increase in units of production: 7.00 + 3.70 + 2.05 x 1 = 12.75

Indirect Labor

labor costs that are difficult to trace to specific products

Direct Labor

labor costs that can be easily traced to individual units of product Ex: wages paid to automobile assembly workers

*cost classifications in manufacturing companies (chart)* Part 1: manufacturing costs

manufacturing costs: 1. direct materials 2. direct labor 3. manufactoring overhead a) all costs of manufacturing a product other than direct materials and labor (such as indirect materials & labor, factory utilities, & depreciation of factory buildings and equipment) -prime cost = direct labor + direct materials -conversion cost = manufacturing overhead + direct labor

Job Order Costing - cost flow 2

manufacturing overhead, including indirect materials and labor, are allocated to all jobs rather than directly traced to each job.

Indirect Materials

materials whose costs are difficult to trace to specific products

statement of cash flows: 3 types of activities

operating activities - revenue and expense transactions that affect net income investing activities - acquiring or disposing of concurrent assets financing activities - borrowing from and repaying principle to creditors and transactions with stockholders

8. Crich Corporation uses direct labor-hours in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 22,060 hours and the total estimated manufacturing overhead was $560,324. At the end of the year, actual direct labor-hours for the year were 22,000 hours and the actual manufacturing overhead for the year was $560,324. Overhead at the end of the year was:

overhead at the end of the year: 1. actual manufacturing overhead / estimated direct labor hours - hours = BLANK 2. BLANK x actual direct labor hours = BLANK 3. BLANK - actual manufacturing overhead for the year = ANSWER (-1524 = $1524 underapplied)

6. Gilchrist Corporation bases its predetermined overhead rate on the estimated machine-hours for the upcoming year. At the beginning of the most recently completed year, the Corporation estimated the machine-hours for the upcoming year at 45,900 machine-hours. The estimated variable manufacturing overhead was $7.53 per machine-hour and the estimated total fixed manufacturing overhead was $1,290,708. The predetermined overhead rate for the recently completed year was closest to:

predetermined overhead rate: 1. variable manufacturing overhead x machine hours = BLANK 2. BLANK + fixed manufacturing overhead = BLANK 3. BLANK / machine hours = THE ANSWER: 1. 7.53 x 45900 = 345627 2. 345627 + 1290708 = 1636335 3. 1636335 / 45900 = 33.65 per machine hour

cost classifications for preparing financial statements:

product costs and period costs

Direct Materials

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

Operating Act. - direct method

reconstructs the income statement on a cash bias from top to bottom

nonmanufacturing costs

selling costs and administrative costs

operating activities using the indirect method

step 1: net income step 2: add depreciation: a) BB, Sold, Deprec. (?), EB Step 3: analyze net changes in current non cash balance sheet accounts: a) current assets: A,I,P (increase = subtract) b) current liabilities: A,A,I (increase = add) Step 4: adjust for gains and losses (subtract the gain ; add the losses)

opportunity cost

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

Manufacturing Overhead Application

the predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins

Schedules of Cost of Goods Manufactured and Cost of Goods Sold

the schedule contains three types of costs: 1. direct materials 2. direct labor 3. manufacturing overhead the schedules calculate: 1. the cost of raw material and direct labor used in production and the amount of manufacturing overhead applied to production 2. the manufacturing costs associated with goods that were finished during the period.

Mixed costs:

the total mixed cost line can be expressed as an equation: Y=a+bx y = the total mixed cost a = the total fixed cost b = the variable cost per unit of activity x = the level of activity

7. The following data have been recorded for recently completed Job 450 on its job cost sheet. Direct materials cost was $2088. A total of 33 direct labor-hours and 273 machine-hours were worked on the job. The direct labor wage rate is $18 per labor-hour. The Corporation applies manufacturing overhead on the basis of machine-hours. The predetermined overhead rate is $25 per machine-hour. The total cost for the job on its job cost sheet would be:

total cost for the job on its job cost sheet: 1. direct materials 2088 2. direct labor = direct labor wage rate per hour x direct labor hours 3. manufacturing overhead = predetermined overhead rate per machine-hour x machine hours - add direct materials + direct labor + manufacturing overhead work: 1. DM = 2088 2. DL = 594 - (18*33) 3. MOH = 6825 -(25*273) add all up = 9507

cash equivalents =

treasury bills, commercial paper, and money markets

Job Order Costing - overview

used when: 1. many different products are produced each period 2. products are manufactured to order 3. the unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.

underapplied overhead

when a company applies less overhead to production than it actually incurs (-)

overapplied overhead

when a company applies more overhead to production than it actually incurs (+)