ACCT 3121 Exam 1 Extra Stuff

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True or False: Managers can use variance analysis to make decisions about the mix of products to make.

False (A deficiency of using budgeted input quantity information based on actual quantity data from past periods is that past inefficiencies are included.)

True or False: To prepare budgets based on actual data from past periods is preferred since past inefficiencies are EXCLUDED.

What is benchmarking, and how is it useful to a company?

Benchmarking is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance in competing companies or in companies having similar processes. Companies can examine aspects of their own operations in comparison to similar operations and see if they are operating at a disadvantage. Benchmarking might provide targets and opportunities to cut costs, and might even show where they have a competitive advantage over similar companies.

What are the differences between direct costs and indirect costs? Give an example of each.

Direct costs are costs that can be traced easily to the product manufactured or the service rendered. Examples of direct costs include direct materials and direct manufacturing labor used in a product. Indirect costs cannot be easily identified with individual products or services rendered, and are usually assigned using allocation formulas. In a plant that manufactures multiple products, examples of indirect costs include the plant supervisor's salary and the cost of machines used to produce more than one type of product.

What are the three types of manufacturing cost?

Direct materials costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. Examples of direct materials costs include steel used to manufacture cars, wood used in furniture, and semiconductor chips used in laptops. Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Examples of direct manufacturing labor include wages paid to assembly-line workers. Indirect manufacturing costs are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Examples of indirect manufacturing costs include plant insurance paid, plant rent, property taxes on plant.

Is it advisable to ignore facility-sustaining cost drivers during product costing?

Facility-sustaining cost drivers are ignored only when it is difficult to find a good cause-and-effect relationship between these costs and the cost-allocation base. So, some companies deduct facility-sustaining costs as a separate lump-sum amount from operating income rather than allocate them to products. Managers who follow this approach need to keep in mind that when making decisions based on costs (such as pricing), some lump-sum costs have not been allocated. They must set prices that are much greater than the allocated costs to recover some of the unallocated facility-sustaining costs. Allocating all costs to products or services ensures that managers have taken into account all costs when making decisions based on costs.

A company is considering buying a product at $15 per unit, the in-house manufacturing of the same product is $17. The fixed cost per unit is $3 is included in the $17 in-house product manufacturing cost. What should the company do in this scenario?

If the company purchases the product from the vendor it will incur a cost of $15 + $3 = $18, whereas it manufactures the product in-house for $17. Thus, the company saves $1 per unit by manufacturing in-house. Hence, it should manufacture the product in-house.

Cost object # 1 includes categories a, c, and f. Cost object # 2 includes categories b and g. Cost object # 3 includes categories d and e.

Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants. They are: Cost object #1: The physical buildings and equipment Cost object #2: The use of buildings and equipment Cost object #3: The availability and use of manufacturing labor The following manufacturing overhead cost categories are found in the accounting records: a. Depreciation on buildings and equipment b. Lubricants for machines c. Property insurance d. Supervisors salaries e. Fringe benefits f. Property taxes g. Utilities

Explain why managers of small businesses prefer 3-variance analysis over 4-variance analysis.

Managers of small businesses understand their operations better based on personal observations and nonfinancial measures. They find less value in doing the additional measurements required for 4-variance analyses. For example, to simplify their costing systems, small companies may not distinguish variable overhead incurred from fixed overhead incurred because making this distinction is often not clear-cut. Many costs such as supervision, quality control, and materials handling have both variable- and fixed-cost components that may not be easy to separate. Managers may therefore use a less detailed analysis that combines the variable overhead and fixed overhead into a single total overhead cost.

Explain how service-sector companies can benefit from variance analysis.

Service-sector companies such as airlines, hospitals, hotels, and railroads can benefit from variance analyses. The output measures these companies commonly use are passenger-miles flown, patient days provided, room-days occupied, etc. Few costs can be traced to these outputs in a cost-effective way. Most of the costs are fixed overhead costs, such as the costs of equipment, buildings, and staff. Using capacity effectively is the key to profitability, and fixed overhead variances can help managers in this task.

What are the factors that affect the classification of a cost as direct or indirect?

Several factors affect whether a cost is classified as direct or indirect: The materiality of the cost in question. The smaller the amount of a cost-that is, the more immaterial the cost is-the less likely it is economically feasible to trace it to a particular cost object. Available information-gathering technology. Improvements in information-gathering technology make it possible to consider more and more costs as direct costs. Design of operations. Classifying a cost as direct is easier if a company's facility (or some part of it) is used exclusively for a specific cost object, such as a specific product or a particular customer.

List the four steps to develop budgeted variable overhead cost-allocation.

Step 1: Choose the period to be used for the budget. Step 2: Select the cost-allocation bases to use in allocating the variable overhead costs to the output produced. Step 3: Identify the variable overhead costs associated with each cost-allocation base. Step 4: Compute the rate per unit of each cost-allocation base used to allocate the variable overhead costs to the output produced.

What are the two components of sales-volume variance? Explain why sales-volume variance could be helpful to managers.

The sales-volume variance is comprised of the operating income volume variance and the production volume variance. Production volume variance is the difference between the budgeted fixed overhead and the fixed overhead allocated on the basis of actual output produced. Operating income volume variance is the difference between the static-budget operating income and the budgeted operating income for actual sales. The sales-volume variance is useful because it helps managers understand the significant changes in contribution margin, which will occur as a result of selling fewer (or more) units than called for by the budgeted level. It assumes that the fixed costs remain at the budgeted level and can be helpful to managers as they perform sensitivity analysis to see the effects of potential changes in sales volume (up or down). Based on this type of information, they could potentially make more informed decisions on pricing and other strategies.

Describe both variable and fixed costs. Explain why the distinction between variable and fixed costs is important in cost accounting.

Total variable costs increase with increased production or sales volumes. Fixed costs are not influenced by fluctuations in production or sales volumes. However, variable cost per unit remains the same at all levels of production and fixed cost per unit reduces with increase in production. Without the knowledge of cost behaviors, budgets and other forecasting tools will be inaccurate and unreliable. Understanding whether a cost behaves as a variable or a fixed cost is essential to estimating and planning for business success.

True

True or False: A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time span.

True (A cost object could be anything management wishes to determine the cost of, for example, a department.)

True or False: A cost is a resource sacrificed or forgone to achieve a specific objective.

True

True or False: A cost may be direct for one cost object and indirect for another cost object.

True

True or False: A cost object is anything for which a cost measurement is desired.

False (A direct cost of one cost object can be an indirect cost of another cost object. For example, department A might perform some part of the processing of a product B. The costs incurred in department A would be direct costs of cost object department A but could be an indirect cost of cost object product B.)

True or False: A direct cost of one cost object cannot be an indirect cost of another cost object.

False (A favorable fixed overhead flexible-budget variance indicates that actual fixed costs were less than the lump-sum amount budgeted.)

True or False: A favorable fixed overhead flexible-budget variance indicates that actual fixed costs exceeded the lump-sum amount budgeted.

True

True or False: A fixed cost is fixed only in relation to a given wide range of total activity or volume and only for a given time span, usually a particular budget period.

True

True or False: A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume of output produced.

True

True or False: A lease for a store calls for a base monthly rent of $1,500 up to $10,000 of sales with a possible additional monthly cost of 2% of sales over $10,000. The rent is a fixed cost for the month for a relevant range of zero to $10,000 sales.

False (A standard price is a carefully determined price a company expects to pay for a unit of input.)

True or False: A standard price is the minimum price a company will have to pay for a unit of input.

True

True or False: A unit cost is also called an average cost.

True

True or False: A unit cost is computed by dividing total cost by the number of units.

True

True or False: ABC reveals opportunities to reduce costs on nonvalue added activities.

True

True or False: ABC system are likely to provide the most benefits to a company with significant amounts of indirect costs that are allocated using just one or two costs pools and products that make diverse demands on resources.

False (A cost is a resource sacrificed or foregone and the requirement of "spending" or cash expended is not part of the definition.)

True or False: Accountants define a cost as the amount of money spent on a resource.

True

True or False: Acquisition costs of direct materials include freight-in charges, sales taxes, and custom duties.

True

True or False: Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output.

False (A company can incur a cost without it being recorded in the accounting system. Examples include opportunity costs and environmental costs.)

True or False: All costs incurred by a company (sacrifice of a resource) are recorded in the accounting system.

True

True or False: Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for making decisions.

True

True or False: An actual cost is the cost incurred-a historical or past cost.

False (An effective activity-based cost system usually uses facility-sustaining cost drivers along with other cost drivers. Facility-sustaining cost drivers are ignored only when it is difficult to find a good cause-and-effect relationship between these costs and the cost-allocation base.)

True or False: An effective activity-based cost system always ignores facility-sustaining cost drivers.

False (An unfavorable price variance for materials-handling labor indicates that the actual cost per materials-handling labor-hour exceeds the budgeted cost per materials-handling labor-hour.)

True or False: An unfavorable price variance for materials-handling labor indicates that the actual cost per materials-handling labor-hour is less than the budgeted cost per materials-handling labor-hour.

False (An unfavorable production-volume variance does not always infer that management made a bad planning decision regarding the plant capacity.)

True or False: An unfavorable production-volume variance always infers that management made a bad planning decision regarding the plant capacity.

False (A favorable production-volume variance indicates an overallocation of fixed overhead costs. An unfavorable production-volume variance indicates an underallocation of fixed overhead costs.)

True or False: An unfavorable production-volume variance indicates an overallocation of fixed overhead costs.

False (Tracing direct costs is quite straightforward, whereas assigning indirect costs to a number of different cost objects can be very challenging.)

True or False: Assigning indirect costs is easier than assigning direct costs.

True

True or False: Banks provide services or what some might call "intangible products" to their customers.

True

True or False: Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance, either inside or outside the organization.

False (Computing standard costs at the start of the budget period simplifies record keeping because no records are needed of the actual overhead costs or of the actual quantities of the cost-allocation bases used.)

True or False: Computing standard costs at the start of the budget period results in a complex record keeping system.

True

True or False: Cost accounting and cost management include calculating various costs, obtaining financial and nonfinancial information, and analyzing relevant information for decision making.

True (Cost drivers are variables , such as the level of activity or volume, that casually affects costs over a given time span.)

True or False: Cost drivers casually affect total costs of a cost object over a given time span.

False (Cost of goods manufactured refers to the products brought to completion, whether they were started before or during the current accounting period.)

True or False: Cost of goods sold refers to the products brought to completion, whether they were started before or during the current accounting period.

False (Costs are accounted for in two basic stages: accumulation followed by assignment.)

True or False: Costs are accounted for in two basic stages: assignment followed by accumulation.

True

True or False: Department stores, such as Macy's and Khols, are examples of a merchandising company.

False (Direct material costs can be traced to the cost object.)

True or False: Direct material costs are the acquisition costs of all materials that eventually become part of the cost object and cannot be traced to the cost object in an economically feasible way.

True

True or False: Each cost pool will have one cost-allocation base.

True

True or False: Fixed cost per unit falls with an increase in production volume

True

True or False: For critical items such as product defects, a small variance may prompt investigation.

False (The actual costs will increase because of the additional sales and the other product lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had.)

True or False: If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run.

True

True or False: Improvements in information-gathering technologies are making it possible to trace more costs as direct.

False (Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object.)

True or False: Indirect manufacturing costs include the compensation of all manufacturing labor that can be traced to the cost object in an economically feasible way.

False (The adjusted allocation-rate method would be more accurate as it would adjust individual jobs based on the actual overhead cost rate, calculated when actual overhead costs are known at the end of the period.)

True or False: Management wants to prepare a profitability analysis of the company's customers and therefore the most accurate choice of disposing of underallocated or overallocated manufacturing overhead at year-end is the proration based on final balances of work-in-process, finished goods, and cost of goods sold.

False (Managers should not always view a favorable variable overhead spending variance as desirable. For example, the variable overhead spending variance would be favorable if managers purchased lower-priced, poor-quality indirect materials. These decisions, however, are likely to hurt product quality and harm the long-run prospects of the business.)

True or False: Managers can always view a favorable variable overhead spending variance as desirable.

False (Most managers implementing ABC systems for the first time start by analyzing actual costs to identify activity-cost pools.)

True or False: Managers implementing ABC systems for the first time always start by analyzing budgeted costs to identify activity-cost pools.

True

True or False: Managers use assigned cost information to make decisions and implement them.

False (Manufacturing companies normally hold three types of inventory: Materials, WIP, and Finished Goods.)

True or False: Manufacturing companies hold only one type of inventory: direct material.

True

True or False: Manufacturing sector firms normally hold three types of inventory: direct materials inventory, work-in-process inventory, and finished goods inventory.

True

True or False: Merchandising companies purchase products and sell them to customers without changing their basic form.

False (Managing complex technology and producing diverse products require additional support functions such as production scheduling, product and process design, and engineering.)

True or False: Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished.

False (Overtime premium is normally considered as part of indirect labor since it is usually not associated with a particular job.)

True or False: Overtime premium is normally considered as a component of direct labor.

False (Period costs are expensed as incurred and are not part of inventory costs. Inventoriable costs become expensed (cost of goods sold) when goods are sold.)

True or False: Period costs are included in the cost of goods sold.

True

True or False: Possible reasons for the larger actual materials-handling labor-hours per batch include the possibility of inefficient layout of production facilities.

True

True or False: Product-cost cross-subsidization is very common when costs are uniformly spread across various products.

False (Purchases of materials are debited to materials control.)

True or False: Purchases of materials are credited to materials control.

False (Even though service-sector companies have only few costs can be traced to their outputs in a cost effective way, service-sector companies can use variance analysis to good effect as most of their costs are fixed overhead costs.)

True or False: Service-sector companies have no use of variance analysis as only few costs can be traced to their outputs in a cost effective way.

True

True or False: The adjusted-allocation rate approach offers the benefit of a costing system that provides overhead cost data during the year so that pricing, budgeting, and interim reporting can occur and a year-end adjustment to manufacturing overhead allocations to individual jobs that are better aligned with actual manufacturing overhead costs that are known at year-end.

True

True or False: The broader the cost object definition (i.e., plant versus product), the more confident the manager will be about the accuracy of the direct cost amounts.

True

True or False: The cost of natural gas used to heat a production facility that makes three products (A,B, and C) would be classified as an indirect cost when the cost object is one of the products (either A, B, or C).

True

True or False: The planning of fixed overhead costs differs from the planning of variable overhead costs in terms of timing.

False (The proration approach to allocating overapplied or underapplied overhead adjusts only general ledger accounts and not subsidiary ledgers or individual job-cost records.)

True or False: The proration approach to allocating overapplied or underapplied overhead adjusts individual job-cost records.

False (The smaller the amount of a cost the less likely it is economically feasible to trace it to a particular cost object.)

True or False: The smaller the amount of a cost the more likely it is economically feasible to trace it to a particular cost object.

True

True or False: The variable overhead efficiency variance is the difference between actual quantity of the cost-allocation base used and budgeted quantity of the cost-allocation base allowed for actual output, multiplied by the budgeted variable overhead cost per unit of the cost-allocation base.

True

True or False: Tightly budgeted machine time standards can lead to unfavorable variable overhead efficiency variance.

False (Variable costs per unit are constant with the level of production or sales volume.)

True or False: Variable costs per unit vary with the level of production or sales volume.

False (When benchmarking, management accountants are more valuable when they analyze the costs and also provide management with insight as to why the revenues and costs differ between companies.)

True or False: When benchmarking it is best when management accountants simply analyze the costs and allow management to provide the insight as to why the revenues and costs differ between companies.

False (The shorter the time period, the greater the influence of seasonal patterns on the amount of costs.)

True or False: When calculating indirect cost rates, the longer the time period, the greater the influence of seasonal patterns on the amount of costs.

True

True or False: When making decisions for product mix and pricing, the focus should be on total costs and not unit costs.

True

True or False: Wood used to manufacture chairs is considered a direct variable cost when the cost object is the chair.

True

True or False: Work-in-process inventory are goods partially worked on but not yet completed.

$546,000/ 1,600 = $341.25 per unit

What is the per unit cost when producing 1,500 glasses?

[($200 + $40 + $70) × 1,600 units] + $50,000 = $546,000

What is the total cost of producing 1,600 glasses?

[($200 + $40 + $70) × 2,000 units] + ($50 × 1,000 units) = $670,000 Plant supervisor's salary is already included in fixed manufacturing overhead hence not added.

What is the total cost of producing 2,000 glasses?