ACCT 314 Test 1

Budgeted MOH rate

Budgeted MOH cost/ Budgeted Total Quantity of cost allocation base

Opening WIP + DM used + DL + MOH- ending WIP=

COGM which is transferred into FG

Opening FG+ COGM- ending FG=

COGS income statement

Overtime labor cost

Considered part of overhead due to the inability to precisely know the true cause of these costs

Opening DM+DM Purchased - Ending DM=

DM used which is transferred into WIP

T or F? ABC systems attempt to trace more costs as indirect costs.

FALSE Explanation: ABC systems attempt to trace more costs as direct costs.

T or F? An activity-based costing system is necessary for costing services that are similar.

FALSE Explanation: An activity-based costing system is only necessary when services are dissimilar and different amounts of resources are used by each service.

T of F? Estimating the degree of completion for the calculation of equivalent units is usually easier for conversion costs than it is for direct materials.

FALSE Explanation: Estimating the degree of completion is easier for the calculation of direct materials since direct materials can be measured more easily than conversion costs.

T of F? The weighted average method of process costing assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory.

FALSE Explanation: The FIFO method of process costing assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory.

T of F? The accounting entry to record the transfer of rolls from the assembly department to the finishing department is: Work in Process-Assembly Department Work in Process-Finishing Department

FALSE Explanation: The correct accounting entry is the opposite of the entry shown here.

T of F? The last step in a process-costing system is to compute cost per equivalent unit.

FALSE Explanation: The last step in a process-costing system is to assign total costs to units completed and to units in ending work in process.

T of F? A major advantage of the weighted-average process costing is that it provides managers with information about changes in the costs per unit from one period to the next

FALSE Explanation: This is an advantage of FIFO, not the weighted-average method.

T of F? Traditional systems are likely to overcost complex products with lower production volume.

FALSE Explanation: Traditional systems are likely to undercostcomplex products with lower production volume.

T or F? Simply because activity-based costing systems employ more activity-cost drivers, they provide more accurate product costs than traditional systems.

FALSE Explanation: When there are more activity-cost drivers, there is also more room for error, which may not result in more accurate products costs.

Indirect cost Normal

Indirect cost based on the budgeted indirect cost rate times the activity consumption

Why do we need job costing

Need a system to: 1. cost individual product, calculate the real cost of a product or perform a service from start to finish 2. We need a system to track the flow of costs incurred for a product or service

If Overhead control < Overhead allocated

Over allocated overhead

Inventoriable cost

Product manufacturing costs. DM DL MOH. Capitalized as assets (inventory) until they are sold

Cross subsidation

The overcosted product absorbs too much cost, making is seem less profitable than it really is (TOO HIGH no one wants it) The undercosted product is left with too little cost, making it seem more profitable than it really is (YOU arent covering costs)

Cross subsidation

The result of overcosting one product and undercost another

T of F? A distinctive feature of the FIFO process costing method is that the work done on beginning inventory before the current period is kept separate from work done in the current period

True

T of F? A top-selling product might actually result in losses for the company.

True

T of F? Activity-based management refers to the use of information derived from ABC analysis to analyse and improve operations.

True

T of F? Companies that overcostproducts will most likely lose market share.

True

T of F? Equivalent units in beginning work in process PLUS equivalent units of work done in the current period MINUS equivalent units completed and transferred out in the current period EQUALS equivalent units in ending work in process.

True

T of F? The first-in, first-out (FIFO) process costing method assigns the cost of the previous accounting period's equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process.

True

T of F? The first-in, first-out process-costing method assumes that the earliest equivalent units in work in process are completed first.

True

T of F? The weighted-average process costing method does NOT distinguish between units started in the previous period but completed during the current period and units started and completed during the current period.

True

T of F? Weighted-average cost per equivalent unit is obtained by dividing the sum of costs for beginning work in process plus costs for work done in the current period by total equivalent units of work done to date.

True

T or F? For service organisations, activity-based cost systems may be used to clarify appropriate cost assignments.

True

If Overhead control > Overhead allocated

Under allocated overhead

Undercosting

a product consumes a high level of resources but is allocated low cost per unit

Cost pool

any logical grouping of related objects

Finished goods

completed and ready for sale

Period cost

have no future value and are expensed as incurred. (marketing, distribution, ... they are expected to benefit revenues in only that period

ABC cost Hierarchies (cont)

o Product sustaining level- cost of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced o Facility sustaining level- level of activities that cannot be traced to individual products or services but that support the organisation as a whole

ABC cost Hierarchies

o Unit level (output level)- cost of actiivites performed on each individual unit of product or service o Batch level- cost of activites related to a group of units of a product or service rather than each individual unit

WIP

products started but not yet finished

Prime cost

refers to all direct manufacturing cost (labor and material)

Conversion cost

refers to direct labor and factory overhead

Direct materials

resources in stock and available

Job costing

system accounting for distinct cost objects called jobs. Each job may be different, EG. wedding arrangement, aircraft, advertising

Process costing

system for accounting for mass production of identical or similar products. EG. oil refining, orange juice, soda pop

Process costing 2 (FIFO)

• Assigns the cost of the previous accounting period's equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process. • Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to started and complete new units, and lastly to units in ending work-in-process inventory. • A distinctive feature of FIFO process-costing method is that work done on beginning inventory is kept separate from work done in the current period.

Weighted Average Process Costing Method

• Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done). • Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units in still-in-process. • Weighted-average costs is the total of all costs in the work-inprocess account divided by the total equivalent units of work done to date. • The beginning balance of the work-in-process account (work done in a prior period) is blended in with current period costs

Result - FIFO Method

• The amount of the journal entry transferring the allocated cost of units completed and sent from work in process inventory to finished goods inventory. • The ending balance of the work in process inventory account that will appear on the balance sheet.

Results - Weighted Average Method

• The amount of the journal entry transferring the allocated cost of units completed and sent from work in process inventory to finished goods inventory. • The ending balance of the work in process inventory account that will appear on the balance sheet.

A method of management that uses ABC as an integral part in critical decision-making situations, including

•Cost reduction and process improvement decisions by managing activities •Design decisions •Accurate job/product costing •Accurate pricing •Should one product be "pushed" over another (product-mix decisions)? •Should one product be dropped?

ABC conclusion

•Each method is mathematically correct. •Each method is acceptable. •Each method yields a different cost figure, which will lead to different gross margin calculations. •Only overhead is involved. Total costs for the entire firm remain the same—they are just allocated to different cost objects within the firm. •Selection of the appropriate method and drivers should be based on experience, industry practices, as well as a cost-benefit analysis of each option under consideration.

Signs that ABC can Help a business

•Significant overhead costs allocated using one or two cost pools. •Products that consume different amounts of resources. •Products that a firm should successfully make and sell consistently show small profits. •Operations staff disagreeing with accounting over manufacturing and marketing costs. •Most or all overhead is considered unit-level.

Indirect costs Actual

-allocates: Indirect cost based on the actual indirect cost rates times activity consumption

Decision making applications

1. How much profit are we making on a product or service 2. How can we lower our cost 3. How should we price the product or service 4. Should we continue producing, buying or providing the service

Steps of Cost of Costomers

1. ID the activities 2. ID the Cost drivers 3. Compute the driver rates 4. Assign cost using ABC

Job costing steps

1. Identify the job that is the chosen cost object. 2. Identify the direct cost for the job 3. Select the cost allocation base 4. Calculate the over head rate 5. Allocate overhead cost to the job 6. Compute the job cost by adding all direct and indirect cost

Process costing steps

1. Summarise the flow of physical units of output. 2. Compute output in terms of equivalent units, and compute cost per equivalent unit. 3. Assign total costs to units completed and to units in ending workin-process.

Closing out overhead accounts

1. adjusted allocation rate approach- all allocations are recalculated with the actual, exact allocation rate 2. Proration approach- the difference is allocated between COGS, WIP, and FG based on their relative sizes 3. Write off approach the difference is simply written off to COGS

A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis: A) can be used to eliminate nonvalue-added activities B) is easy to analyse and interpret C) takes the choices and judgment challenges away from the managers D) emphasises how managers can achieve higher sales

A

Cost allocation base

A cost driver is used as a basis upon which to build a systematic method of distributing indirect cost

Over costing

A product consumes a low level of resources but is allocated high costs per unit

Simple and ABC compared

ABC is generally perceived to produce superior costing figures due to the use of multiple drivers across multiple level ABC is only as good as the drivers selected, and their actual relationship to costs. Poorly chosen drivers will produce inaccurate costs, even with ABC