ACCT 500 - EXAM 2
Labor time to repair warranty products
Customer Service
Replacement parts for warranty repairs
Customer service
Training costs for customer call center staff
Customer service
Hours spent designing child-proof bottles
Design
Purchase of CAD software
Design
Reengineering of product assembly process
Design
What are the three categories that make up manufacturing costs?
Direct material direct labor manufacturing overhead
results from applied overhead in excess of actual overhead costs. It is a credit balance in the Manufacturing Overhead account. APPLIED (EST.) > ACTUAL
Overapplied overhead
Value chain classifications:
(Production, marketing, research and development, design, distribution, customer service)
Change with no current material effect, but reasonably certain to have an effect in future periods should be disclosed when financial statements are presented.
APB opinion 20
is a product costing system which includes all manufacturing costs (variable and fixed) that are absorbed into the cost of the product.
Absorption costing
is the accumulation of manufacturing overhead costs by production support activities (e.g. machine setup). It then applies manufacturing overhead to production based on the activity required for each job or product. It involves identifying the activity that causes the incurrence of a cost (a cost driver). Examples of cost drivers are: machine setup, quality inspection, production order preparation, and materials handling activities. more accurate in costing than traditional overhead methods and supported more effective management of the production, administrative, and marketing functions.
Activity-based costing (ABC)
is the amount of revenue realized for the firm to have neither profit nor loss (that is, operating income equal to zero). It is useful to managers because it expresses a minimum revenue target, and managers frequently find it easier to think in terms of revenues rather than variable and fixed expenses. = total fixed expenses/Contribution margin ratio Expenses = revenues
Break-even point
means an amount is the influence to fixed expenses and operating income from the sale of products or provision of services. For example, as revenues increase from selling more, variable expenses will increase proportionately, and so will contribution margin. Fixed expenses will not increase because they are not a function of the level of revenue-generating activity.
Contribution margin
is the ratio of contribution margin to revenues. It is the portion of each sales dollar that remains after covering the variable costs and is available to cover fixed costs or provide profits. contribution margin/sales x 100%
Contribution margin ratio
gives the identification of whether a cost is fixed or variable. Assumptions: - The behavior is true only within a relevant range of activity; if activity moves out of the relevant range, the cost will change. - The behavior identified is assumed to be linear within the relevant range, not curvilinear.
Cost behavior pattern
is "the process of using cost information from the accounting system to manage the activities of the organization." It is the review of information to reduce costs, the reporting of the results of the analysis to management with recommended actions, setting up controls, and monitoring of changes.
Cost management
is a product costing system in which product only include variable manufacturing costs. Fixed manufacturing costs are treated as operating expenses in the period incurred.
Direct(or variable) costing
Development of order tracking system
Distribution
Shipping Expenses
Distribution
How is the predetermined overhead rate calculated?
Est. manufacturing overhead cost/ est. total units in the allocation base The company should select an allocation base that has a cause and effect relationship with the incurrence of cost. Common allocation bases are direct labor hours, direct labor dollars, and machine hours.
POAR (per direct labor hours or other base) =
Estimated Total Overhead Cost/ Est. Total Direct Labor Hours (or other base)
does not change in total as the volume of activity changes, but it does change inversely per unit. Examples include supervisors' salaries, depreciation expense, insurance, factory rent, advertising, property taxes, and sales managers' salaries.
Fixed cost
Standardizes financial reporting by providing a uniform set of rules and regulations ● Set up guidelines for recognition, measurement, disclosure, and presentation ● Goal of standardization is to help credibility and stability of financial reporting and protect investors from false reporting ● Allows for companies to be compared to one another (depending on methods used) ● Auditors verify results ● Investors can be confident financial statements are accurate
GAAP
Halliburton change
Halliburton begins estimating the amount of the claim in periods where cost overruns occurred. When the claim amount is finally agreed to, the difference between the estimate and the actual recovery is credited to the income statement. Claims and change orders in the process of negotiation for extra work are included in revenue when collection is deemed possible.
Halliburton old way
Halliburton did not book revenues associated with claim agreement until agreement with client was reached on the amount that would be collected.
New Revenue Recognition Standard:
Identify Contract Identify Performance Obligations Identify Price Allocate Price to Performance Obligations Recognize revenue when (or as) performance obligations are satisfied
is the activity level that produces the same total cost when two different cost formulas or cost structures exist. For example, Company A's fixed cost + (variable cost per unit x volume) = Company B's fixed cost + (variable cost per unit x volume)
Indifference point
Why must companies use the predetermined overhead rate to apply overhead costs?
Managers would like to know how their system is doing before the end of the accounting period to be able to figure out how well they are performing. If the actual overhead is used often, then seasonal factors or fluctuations will throw off overhead rates. Predetermined overhead rates help simplify record keeping. Companies usually won't know the actual values until it is too late to be used for managerial decision making. Consequently, using a predetermined overhead rate based on estimated values allows us to set the overhead rate in advance, so that we can use it to apply the indirect cost to jobs throughout the accounting period. We then "settle up" at the end of the accounting period by adjusting for any difference between actual and applied manufacturing overhead.
On a monthly basis, overapplied or underapplied overhead is carried forward in the
Manufacturing Overhead account.
Advertising
Marketing
Printing cost of new product brochures
Marketing
Salary of website designer
Marketing
Sales commissions
Marketing
TV commercial spots
Marketing
What type of companies might process costing be used? (Provide examples of products that are most likely to be produced at this type of company.)
Oil refining, food production, and chemical processing industries use process costing. Examples include canned and bottled goods, petroleum products, perfume, toilet paper, dish washing detergent, and many other common household products
Electricity cost for office building
Period, Indirect, variable, fixed
Advertising expenses
Period, fixed
President's salary
Period, fixed
Real estate taxes for office building
Period, fixed
Salary of public relations manager
Period, fixed
Order processing clerks' wages
Period, variable
Outbound shipping costs
Period, variable
Sales force commissions
Period, variable
Electricity cost of retail stores
Period, variable, fixed
Research and development expense
Period, variable, fixed
Cost Classifications:
Product - indirect/direct period fixed variable
are inventory costs and converted to COGS. They include raw materials (ingredients of the product), direct labor (workers who operate or control machines or equipment), and manufacturing overhead (all other manufacturing costs including factory utilities, indirect materials, maintenance, housekeeping costs, and depreciation expense for the building, equipment and compensation of managers and/or supervisors).
Product costs
Production supervisors' salaries
Product- Indirect, fixed
Production workers' wages
Product-Direct, variable
Raw materials
Product-Direct, variable
Wages of assembly-line workers
Product-Direct, variable
Depreciation of plant equipment
Product-Indirect, fixed
Glue and thread
Product-Indirect, fixed
Real estate taxes for factory
Product-Indirect, fixed
Maintenance supplies used
Product-Indirect, variable
Production run setup costs
Product-Indirect, variable
Raw materials handling costs
Product-Indirect, variable
Staples used to secure packages
Product-Indirect, variable
Plant janitors' wages
Product-Indirect, variable, fixed
Plant utilities
Product-Indirect, variable, fixed
Direct manufacturing labor costs
Production
Installation of robotics equipment in manufacturing plant
Production
Manufacturing supplies
Production
Salary of Research Scientists
Research and Development
Testing of competitor's product
Research and Development
contribution margin format formula
Revenues - Variable Expenses = Contribution Margin - Fixed Expenses = Operating income
: recognizing additional revenue from change orders are only appropriate when claim results in additional revenue and can be measured reliably. If not, defer claim until collection amount is agreed upon and deemed probable
SOP 81-1
What is the difference between product cost and period cost?
The key difference between product costs and period costs is that product costs are only incurred if products are acquired or produced, and period costs are associated with the passage of time.
Will the manufacturing overhead cost applied to Work in Process equal the actual manufacturing overhead cost incurred?
The manufacturing overhead cost that is applied to Work in Process will not necessarily be equal to the actual manufacturing overhead cost incurred. The applied amount is based on a predetermined overhead rate that must be estimated in advance. This rate is then multiplied by the actual value of a secondary allocation base, which may not perfectly capture the actual incurrence of cost.
How do you determine the amount of overhead to APPLY to Work in Process?
To determine the amount of overhead to apply to Work in Process, you multiply the predetermined overhead rate by the actual value of the allocation base. Applied manufacturing overhead is a function of both actual and estimated data. The predetermined overhead rate is based on estimated values, but this rate is multiplied by the actual value of the allocation base.
COST FORMULA** MUST MEMORIZE
Total Cost = Fixed Cost + (Variable cost x units of activity)
Will the new revenue standard provide more decision-useful information than prior U.S. GAAP?
Under the new standard, firms will provide qualitative and quantitative information about contracts with customers and significant judgements Objectives of new revenue recognition standard New standard requires firms to use more judgement and estimation than prior guidance
results from actual overhead costs in excess of applied overhead. It is a debit balance in the Manufacturing Overhead account. APPLIED (EST.) < ACTUAL
Underapplied overhead
is one that changes in total as the volume of activity changes, but remains constant per unit change. Examples include raw materials, manufacturing labor wages, supplies used in production, shipping costs, sales commissions, and warranty costs.
Variable cost
If there is a balance in the Manufacturing Overhead Account at YEAR-END, what action should be taken? What if there is a balance at the end of the first quarter?
a. At the end of first quarter, overhead will be reported on the balance sheet as a current LIABILITY(overapplied) or current ASSET (underapplied) b. Closed at year-end to cost of goods sold: overapplied is a credit to COGS and underapplied is a debit to COGS. If the balance is material, it will be allocated proportionately between Cost of Goods Sold, Work-in-Process, and Finished Goods.
derives its name from the difference between revenues and variables expenses.
contribution margin format
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
core principle of new standard
are directly related to a product or activity and would not incur if the product or activity did not cease to exist. For example, the cost of manufacturing a toy and tracing the amount of pieces used to put together each toy would be easily visible
direct costs
is the cost of wages of individuals who are physically involved converting raw materials into a finished product. i. EX: wages of the person cutting the wood into specific lengths and wages of assemblers in the furniture factory. is the "hands-on" labor, such as the mechanic who does the actual work in an auto repair shop.
direct labor
is the cost of materials which become part of the finished product. i. EX: the cost of wood in the manufacture of wooden tables. are the major material inputs that can be directly and conveniently traced to specific jobs. For an auto repair shop, this would include the major parts that are needed for the repair.
direct material
pre-change standpoints
earned/conservatism,
(high cost - low cost)/(high activity - low activity) = variable rate
high-low method
are indirectly related to a product or activity and would STILL be incurred if the product or activity did not cease to exist. For example, the cost of manufacturing a toy and measuring the amount of electricity used to make each toy wouldn't be as easily visible
indirect costs
a product costing system used when discrete products, or "jobs" or manufactured. It is used by companies that offer customized or unique products or services, where each unit or service tends to be very different than the next. i. EX: sailboats
job order costing
is a product costing system that is used when discrete products, or "jobs," are manufactured. For example, sailboat manufacturing uses a job order costing systems.
job order costing system
2. What type of companies might job order costing be used? (Provide examples of products that are most likely to be produced at this type of company.)
manufacturing businesses use job order costing, such as clothing factories, food companies, air craft manufacturing. service businesses use job order costing, such as movie producers, accounting firms, law firms and hospitals. Job order costing is used in companies that offer customized products or services. Examples include any product that is specially built for a specific customer (e.g. custom home, custom built boat, custom made furniture), unique services provided to customers (e.g. an auto repair shop, a catering business), or industries that serve clients with unique needs (e.g. accounting firm, law firm, architecture firm).
would include all of the other costs of making a product (or providing a service such as an auto repair) other than direct material and direct labor. For an auto repair shop, this would include the cost of rent and utilities for the repair shop, supervision, depreciation on machines and tools, and incidental supplies such as lubricants, grease, rags, etc. i. EX: the wages of the inspector of the furniture and the depreciation the factory equipment.
manufacturing overhead
post-change standpoints
matching/realizability
Used when reporting fails to accurately portray the operations of a business ● Provides forward-looking statements ● Allows entities to show their own figures with the condition that they are disclosed ● Must provide reconciliation between adjusted and GAAP results ● Typically unaudited ● Typically does not allow for comparison between companies ● Shows readers how management views the company's performance
non-GAAP
Remove inconsistencies and weaknesses in existing requirements Provide a more robust framework Improve comparability of revenue recognition practices Provide more useful information to users of financial statements Simplify the preparation of financial statements by reducing requirements
objectives of new revenue recognition standard
depreciation on office equipment
period cost
Period costs are not considered a NECESSARY component of the manufacturing process. Period costs are usually associated with selling and administrative costs - these costs would be incurred whether or not any manufacturing occurred. Period costs are reported as expenses in the accounting period they occur. i. EX: general and administrative expenses - rent, office depreciation, office supplies and utilities.
period costs
are non-inventory costs that are not associated with production activities and relate to an accounting period. They include selling, general, and administrative expenses as they are incurred (EX: CEO Salary, insurance, advertising).
period costs
is the rate per unit of activity (e.g. direct labor hour) used to apply manufacturing overhead to work in process.
predetermined overhead application rate (POAR)
mass production of similar products, where the costs associated with individual units of output cannot be differentiated from each other. The cost of each product produced is assumed to be the same as the cost of every other product. is used in companies that offer standardized or homogeneous products or services, where each unit or service is very similar to the next. i. EX: processing corn into meal, starch, and syrup.
process costing
depreciation on factory equipment
product cost
Product costs are the direct materials, direct labor, and manufacturing overhead used in making the products of a manufacturer. Product costs are "inventoriable" costs. They are part of the balance sheet until the product is sold. Product costs are considered a necessary cost in the manufacturing process. i. EX: direct material, direct labor, manufacturing overhead ii. Sometimes broken into fixed and variable subcategories, which is useful for determining the break-even point.
product costs
Purchase of Raw Materials
production
are the expected or allowed times and costs to make a product or perform an activity.
production standards
is the range of activity over which the fixed or variable cost behavior pattern exists.
relevant range
is a cost that has both fixed and variable elements - a mixed cost. For example, a factory utility cost has a mixed behavior pattern because when the plant isn't operating, some lights have to be kept on for security, but as production increases more electricity is required. Also, marketers' commissions and salary.
semi-variable cost
a. At the end of the year if overhead (overapplied or underapplied) is small relative to total overhead costs incurred, it is _________________.If it is material in amount, it is ____________________.
transferred to cost of goods sold allocated between inventory and cost of goods sold in proportion to total overhead included in each.
is a high-level model developed by Michael Porter used to describe the process by which businesses receive raw materials, add value to the raw materials through various processes to create a finished product, and then sell the finished product to customers. It is can make a difference to a customer, and it starts with a product or service idea and results in the desired return on investment. functions:research and development, design, production, marketing, distribution, and customer service.
value chain
