acct 3210- exam 1
depreciation on office equipment during April was $7,000. The entry is as follows:
- debit: depreciation expense (or manufacturing overhead) for 7,000 - credit: accumulated depreciation for 7,000
T/F: In a job-order cost system, indirect labor is assigned to a job using information from the employee time ticket.-
False, you don't know exactly what was spent on an item
cost/managerial accounting
concerned with providing information to managers within an 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.
mixed costs
contains both variable and fixed elements. Consider the example of utility cost
Cost of Goods Manufactured
includes the manufacturing costs associated with the goods that were finished during the period
differential costs
· Or incremental costs are the difference in cost between any two alternatives · A difference in revenue between two alternatives is called differential revenue · Both are always relevant to decisions · Differential costs can either be fixed or variable
sunk costs
· Sunk costs have already been incurred and cannot be changed now or in the future · These costs should be ignored when making decisions
opportunity cost
· The potential benefit that is given up when one alternative is selected over another · These costs are not usually found in accounting records but must be explicitly considered in every decision
fixed costs
- A cost that remains constant, in total, regardless of changes in the level of the activity - If expressed on a per unit basis, the average on a per unit basis, the average fixed cost per unit varies inversely with changes in activity
variable costs
- A cost that varies, in total, in direct proportion to changes in the level of activity - A variable cost per unit is constant
job-order costing in service companies
- Although our attention has focused upon manufacturing applications, it bears reemphasizing that job order costing is also used in service industries. Job order costing is used in many different types of service companies. For example, law firms, accounting firms, and medical treatment
direct costs
- Costs that can be easily and conveniently traced to a unit of product or other cost object - Examples: direct material and direct labor
indirect costs
- Costs that cannot be easily and conveniently traced to a unit of product or other cost object - Ex: manufacturing overhead
manufacturing overhead
- Includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finish products. - Includes indirect materials that cannot be easily or conveniently traced to specific units of product - Includes indirect labor costs that cannot be easily or conveniently traced to specific units of product - ex: depreciation on manufacturing equipment, utility costs, property taxes, insurance premiums incurred to operate a manufacturing facility - Only those indirect costs associated with operating the factory are included manufacturing overhead
product costs
- Includes all the costs that are involved in acquiring or making the product - Product costs "attach" to a unit of product as it is purchased or manufactured, and they stay attached to each unit of product as long as it remains in inventory awaiting sale
common costs
- Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.
choosing an allocation base
- Job order costing systems often use allocation basis that do not reflect how jobs actually use overhead resources. The allocation base in the predetermined overhead rate must drive the overhead cost to improve job cost accuracy. A cost driver is a factor that causes overhead costs.
committed fixed costs
- Long-term, cannot be significantly reduced in the short term - Ex: depreciation on buildings equipment, real estate taxes
discretionary fixed costs
- May be altered in the short-term by current managerial decisions - Ex: advertising, research and development
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
Job-Order costing for financial statements to external parties
- The amount of overhead applied to all jobs during a period will differ from the actual amount of overhead cost incurred during the period 1. when a company applies less overhead to production than it actually incurs, it creates what is known as underapplied overhead 2. when it applies more overhead to production than it actually incurs, it results in overapplied overhead
income statement reporting
- The job cost sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in cost of goods sold on the income statement
balance sheet reporting
- The job costs sheets provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in work-in-process and finished goods on the balance sheet
schedule of cost of goods sold and cost of goods manufactures
- 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
direct labor
- Those labor costs that can be easily traced to individual units of product - Ex: wages paid to automobile assembly workers
T/F: actual overhead costs are not assigned to jobs in a job costing system.
- True
Multiple Predetermined Overhead Rates- an activity-based approach
- When a company creates overhead rates based on the activities that are performed, it is employing an approach called activity-based costing - activity based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects makes on overhead resources.
transfer of product costs
- When direct materials are used in production, their costs are transferred from Raw Materials to Work in Process. - Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. - Once units of product are completed, their costs are transferred from Work in Process to Finished Goods. - When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.
· If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your utility bill?
- Y = a + bx - Y = $40 + (.03 x 2,000) - Y = $100
y = a + bx
- Y = the total mixed cost - A = the total fixed cost (the vertical intercept of the line) - B = the variable cost per unit of activity (the slope of the line) - X = the level of activity
allocation base
- a measure of activity such as direct labor hours or machine hours that is used to assign costs to cost objects - such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs. - We use an allocation base because: a. It is impossible or difficult to trace overhead costs to particular jobs b. Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager's salary c. Many types of manufacturing overhead costs are fixed even though output fluctuates during the period
Predetermined Overhead Rate
- a rate used to charge manufacturing overhead costs the jobs that is established in advance for each period. It is computed using the following equation: - rely upon estimated data are often used because: 1. Actual overhead for the period is not known until the end of the period, thus inhibiting the ability to estimate job costs during the period 2. Actual overhead costs can fluctuate seasonally, thus misleading decision makers
accounting for nonmanufacturing costs
- are not assigned to individual jobs, rather they are expensed in the period incurred. · Examples: 1. Salary expense of employees who work in marketing, selling, or administrative capacity are expensed in the period incurred 2. Advertising expenses are expensed in the period incurred
Transferring finished goods to cost of goods sold: - for Ruger corporation, we will assume 750 of the 1,000 gold medallions in Job A were shipped to customers by the end of the month for total sales revenue of $225,000. Because 1,000 units were produced and the total cost of the job from the job cost sheet was $158,000, the unit product cost was $158. The following journal entries would record the sale (all sales were on account):
- debit: accounts receivable for 225,000 - credit: sales for 225,000 - debit: cost of goods sold for 118,500 - credit: finished goods for 118,500
advertising was $42,000 and other selling and administrative expenses in April totaled $8,000. The following entry records these items:
- debit: advertising expense for 42,000 - debit: other selling and administrative expense for 8,000 - credit: accounts payable for 50,000
Transferring completed Jobs from Work in Process to Finished Goods - job A was completed during April and job B was incomplete at the end of the month. Thus, the following entry transfers the cost of job A from work in process to finished goods:
- debit: finished goods for 158,000 - credit: work in process for 158,000
Recording Actual Manufacturing Overhead Costs: Assume that Ruger Corporation incurred the following general factory cost during April: 1. Utilities (heat, water, and power) $21,000 2. Rent on factory equipment $16,000 3. Miscellaneous factory overhead costs $3,000
- debit: manufacturing overhead for 40,000 - credit: accounts payable for 40,000
purchase of raw materials
- debit: raw materials - credit: accounts payable
Ruger Corporation incurred $30,000 ins selling and administrative salary costs during April. The following entry summarizes the accrual of those salaries:
- debit: salaries expense for 30,000 - credit: salaries and wages payables for 30,000
recording labor cost
- debit: work in process (direct labor) - debit: manufacturing overhead (indirect) - credit: salaries and wages payable (or cash)
issue of direct and indirect materials
- debit: work in process (direct) - debit: manufacturing overhead (indirect) - credit: raw materials
·Assume that Ruger corporations predetermined overhead rate is $6 per machine hour period also assume that during April, 10,000 machine hours were worked on job a in 5000 machine hours worked on Job B (at total of 15,000 machine hours). Thus, $90,000 in overhead cost ($6 per machine hour x 15,000 machine hours = $90,000) would be applied to work in process. The following entry records the application of manufacturing overhead to work in process:
- debit: work in process for 90,000 - credit: manufacturing overhead for 90,000
manufacturing product costs
- raw materials - work in process - finished goods costs
overhead application
- the process of assigning overhead cost to specific jobs using the following formula
single predetermined plantwide overhead rate
-Many companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead cost to jobs based on their usage of direct labor hours 1. it is often overly simplistic and incorrect to assume that direct labor hours is a company's only manufacturing overhead cost driver 2. if more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates
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
Northeast Hospital's radiology department is considering replacing an old inefficient x-ray machine with a state-of-the-art digital x-ray machine. The new machine would provide higher quality x-rays in less time and at a lower cost per x-ray. It could also require less power and would use a color laser printer to produce easily readable x-ray images. Instead of investing the funds in the new x-ray machine, the lab department is lobbying the hospital's management to buy a new DNA analyzer. Required: classify each item as a differential cost, a sunk cost, or an opportunity cost in the decision to replace the old x-ray machine with a new machine. If none of the categories apply for a particular item, select none.
1. Cost of the old x-ray machine- sunk cost 2. Cost of the new color laser printer- differential cost 3. Benefits from the new DNA analyzer- opportunity cost
a managerial perspective
1. Job-order costing systems can accurately trace direct materials and direct labor costs to jobs 2. Job-order costing systems often fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs
Job-order costing systems are 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.
1. Hamburger buns in a wendy's restaurant- 2. Advertising by a dental office- 3. Shipping canned apples from a del monte plant to customers- 4. Insurance on a baush and lamb producing contact lenses- 5. Insurance on IBM's corporate headquarters-
1. variable, product 2. fixed, period 3. variable, period 4. fixed, product 5. fixed period
cost of goods sold
= + Beginning Merchandise Inventory + Purchases -Ending Merchandise Inventory
cost of goods sold (finished goods)
= beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory
raw materials used in production
= beginning raw materials inventory + purchases of raw materials - ending raw materials inventory
cost of goods manufactured
= beginning work in process inventory + total manufacturing costs - ending work in process inventory
total manufacturing costs
= direct materials + direct labor + manufacturing overhead applied to work in process
POHR
= estimated total manufacturing overhead cost for the coming period/ Estimated total units in the allocation base for the coming period
Overhead applied to a particular job =
= predetermined overhead rate x amount of allocation base incurred by the job
absorption costing
A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of our product
Job-order costing
A costing system used in situations where many different products, jobs, or services are produced each.
The Linearity Assumption and the Relevant Range
A straight line closely approximates a curvilinear variable cost line within the relevant range
2) Which of the following would most likely NOT be included as manufacturing overhead in a furniture factory? A) The cost of the glue in a chair B) The amount paid to an individual who stains a chair C) The workman's compensation insurance of the supervisor who oversees production D) The factory utilities of the department in which production takes place
B) the amount paid to an individual who stains a chair
administrative costs
All executive, organizational, and clerical costs. Administrative costs can either be direct or indirect costs.
1) Vignana Corporation manufactures and sells hand-painted clay figurines of popular sport heroes. Shown below are some of the costs incurred by Vignana for last year: Cost of clay used in production- $70,000 Wages paid to the workers who paint the figurines- $96,000 Wages paid to the sales manager's secretary- $28,000 Cost of junk mail advertising- $45,000 What is the total of the product costs above? A) $0 B) $166,000 C) $73,000 D) $169,000
B) $166,000
2) The following costs were incurred in May: Direct Materials- $47,700 Direct Labor- $32,800 Manufacturing Overhead- $26,400 Selling Expenses- $17,900 Administrative Expenses- $35,000 Conversion costs during the month totaled: A) $159,800 B) $59,200 C) $74,100 D) $80,500
B) 59,200
3) Product costs that have become expenses can be found in: A) Administrative expenses B) Costs of goods sold C) Period costs D) Selling expenses
B) costs of goods sold
4) Which of the following costs would be considered a period rather than a product cost in a manufacturing company? A) Manufacturing equipment depreciation B) Property taxes on corporate headquarters C) Direct material costs D) Electrical costs to light the production facility E) Sales commissions
B) property taxes on corporate headquarters E) sales commissions
5) Which of the following costs would be variable with respect the number of ice cream cones sold at Baskin Robbins? A) The cost of lighting the store B) The wages of the store manager C) The cost of ice cream D) The cost of napkins for customers
C) The cost of ice cream D) The cost of napkins for customers
direct costs: a) Are incurred to benefit a particular accounting period b) Are incurred due to a specific decision c) Can be easily traced to a particular cost object d) Are the variable costs of producing a product
C) can be easily traced to a particular cost object
finished goods
Consists of completed units of product that have not yet been sold to customers
work in process
Consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer
selling costs
Costs necessary to secure the order and deliver the product. selling costs can be either direct or indirect
4) which of the following statements is true when referring to fixed costs? A) As volume increases, unit fixed cost and total fixed cost will change B) Fixed cost increases in total throughout the relevant range C) Committed fixed costs arise from the annual decisions by management D) Discretionary fixed costs can often be reduced to zero for short periods of time without seriously impairing the long-run goals of the company
D) Discretionary fixed costs can often be reduced to zero for short periods of time without seriously impairing the long-run goals of the company
raw materials
Includes any materials that go into the final product
1) Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be record as the cost of job wr53?
POHR= 760,000/20,000 = $38 per direct labor hours DM = $200 DL = $150 O/H = 38(10)= $380 TOTAL= $730 - D
traditional format
Sales $100,000 Cost of goods sold 70,000 Gross margin $30,000 Selling & admin. Expenses 20,000 Net operating income$10,000
contribution format
Sales $100,000 Variable expenses 60,000 Contribution margin $40,000 Fixed expenses 30,000 Net operating income$10,000
fixed costs and relevant range
The relevant range of activity pertains to fixed costs as well as variable costs.
normal costing
a costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job
job cost sheet
a form that records the direct materials, direct labor, and manufacturing overhead cost charged to a job
conversion costs
direct labor and manufacturing overhead
prime costs
direct materials and direct labor
overapplied overhead
exists when the amount of overhead applied to jobs during the period using the predetermined overhead rate is greater than the total amount of overhead actually incurred during the period
underapplied overhead
exists when the amount of overhead is applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period
