Chapter 19 BEC 2011 CPA

Gram Co. develops computer programs to meet customers' special requirements. How should Gram categorize payments to employees who develop these programs?

Direct costs may be defined as those that can be specifically associated with a single cost object and can be assigned to it in an economically feasible manner. Wages paid to labor that can be identified with a specific finished good are direct costs. Value-adding costs may be defined as the costs of activities that cannot be eliminated without reducing the quality, responsiveness, or quantity of the output required by a customer or by an organization. Clearly, the amounts paid to programmers add value to computer programs

In cost terminology, conversion costs consist of

Direct labor and factory overhead.

Process costing

Process costing is used when similar products are mass produced on a continuous basis. 1) Costs are attached to specific departments or phases of production. Examples are automobile and candy manufacturing. 2) Since costs are attached to streams of products rather than individuals, process costing involves calculating an average cost for all units. The two widely used methods are weighted-average and first-in, first-out (FIFO). 3) Some units remain unfinished at the end of the period. For each department to adequately account for the costs attached to its unfinished units, the units must be restated in terms of equivalent units of production (EUP).

Smile labs develops film using a 4 step process that moves progressively through four departments. Each department accumulates dl, dm and oh the cost system that smile lab is using is.

Process costing. process costing is a method of allocating production costs to products and services by avg the cost over the total units produced. costs are usually accumulated by department rather than by job.

Product costs only include what under variable costing.....

Product cost includes only variable manufacturing costs

What is assigned to goods that were either purchased or manufactured for resale?

Product cost includes the direct materials, direct labor, and overhead allocated to units of output manufactured for resale. Product cost also may be the costs of goods purchased for resale

When a firm prepares financial reports by using absorption costing,

Profits may decrease with increased sales even if there is no change in selling prices and costs. In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing because fixed overhead is carried over from the prior inventory. If sales exceed production, more than one period's fixed overhead is recognized as expense. Accordingly, if the increase in fixed overhead expensed is greater than the contribution margin of the increased units sold, less profit may result from an increased level of sales

Research and development costs are considered what type of costs? when comparing two possible product lines.

Research and development costs are considered sunk costs b/c they are in the past, unavoidable, and will not change with different alternatives.

Is sales commissions included in Gross margin?

Sales commissions ($10,000) are deducted from the gross margin in arriving at net operating income. They are not included in cost of goods sold.

Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott's fixed cost?

Sales minus the margin of safety equals the breakeven point ($200,000 - $80,000 = $120,000). Fixed costs equal the contribution margin at the breakeven point, so fixed costs are $24,000 ($120,000 × 20%).

Which one of the following considers the impact of fixed overhead costs?

Full absorption costing treats fixed manufacturing overhead costs as product costs. Thus, inventory and cost of goods sold include (absorb) fixed manufacturing overhead.

Which of the following cost allocation methods is used to determine the lowest price that can be quoted for a special order that will use idle capacity within a production area?

If idle capacity exists, the lowest feasible price for a special order is one covering the variable cost. Variable costing considers fixed cost to be a period cost, not a product cost. Fixed costs are not relevant to short-term inventory costing with idle capacity because the fixed costs will be incurred whether or not any production occurs. Any additional revenue in excess of the variable costs will decrease losses or increase profits.

For the year just ended, Abel Co. incurred direct costs of $500,000 based on a particular course of action during the year. If a different course of action had been taken, direct costs would have been $400,000. In addition, Abel's fixed costs were $90,000. The incremental cost was

Incremental cost analysis is typically used in make-or-buy, specialorder, and disinvestment decisions. The analysis considers only additional relevant costs, such as direct labor, direct materials, and variable overhead. Thus, Abel's incremental cost is $100,000 ($500,000 - $400,000). The fixed costs of $90,000 are not relevant.

Operating income

Operating income = Sales - Variable costs - Fixed costs

A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income increase is that, compared to budget, actual

Selling and administrative fixed expenses had decreased. Both variable and absorption costing income statements exclude fixed selling and administrative expenses from the calculation of gross profit (gross margin) and contribution margin.

Selling Price 150k Direct materials 20k Direct labor 15k VmOH 12k Fmoh 30k shipping and handling 3k Fixed selling and admin 10k total cost 90k expected to be 10k units, manufacturing OH which will increase by 20 perecent and materials by 10 percent. selling price will be 160 dollars a unit, what will be the new CM for teh next year?

Selling price = $160 DM = -22 DL= -15 VMFG oh -12 fixed mfg oh not included ******* variable selling -3 fixed sga not included ******* total costs 52 margin = $108 x10,000 units =1080k

In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold to maximize profits?

Separable costs after the A. split-off point Joint products are created from processing a common input. Joint costs are incurred prior to the split-off point and cannot be identified with a particular joint product.

Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott's fixed cost?

Since themargin of safety is $80,000 and sales are $200,000, breakeven sales must be $120,000 ($200,000 - $80,000). Breakeven sales $120,000 Contribution margin rate 20% Contribution margin $ 24,000 At breakeven, fixed cost equals contribution margin, or $24,000.

Lake Co. has just increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake's budgeted breakeven point and budgeted margin of safety?

The BEP is the sales volume at which total revenue equals total cost. The margin of safety is the excess of budgeted sales over the breakeven volume. Given that all other costs and revenues are constant, an increase in direct labor cost will increase the BEP and decrease the margin of safety.

company's target gross margin is 40% of the selling price of a product that costs $89 per unit. The product's selling price should be

The gross margin is calculated as [1 - (Unit cost ÷ Unit selling price)]. The question gives a company's target gross margin as 40%. Rearranging the gross margin equation, the unit selling price equals [Unit cost ÷ (1 - Gross margin)]. Thus, the product's selling price is $148.33 [$89 ÷ (1 - .40)].

Breakeven analysis assumes over the relevant range that

Total costs are linear Breakeven analysis assumes that the cost and revenue factors used in the formula are linear and do not fluctuate with volume. Hence, fixed costs are deemed to be fixed over the relevant range of volume, and variable cost per unit remains constant as volume changes within the relevant range.

Absorption Costing

Under absorption costing (sometimes called full or full absorption costing), the fixed portion of manufacturing overhead is "absorbed" into the cost of each product.

a. Normal spoilage

a. Normal spoilage is the spoilage that occurs under normal operating conditions. It is essentially uncontrollable in the short run. 1) Since normal spoilage is expected under efficient operations, it is treated as a product cost, that is, it is absorbed into the cost of the good output.

a. Relevant costs

a. Relevant costs are those future costs that will vary depending on the action taken. All other costs are assumed to be constant and thus have no effect on (are irrelevant to) the decision. 1) An example is tuition that must be spent to attend a fourth year of college.

a. Rework

a. Rework consists of end products that do not meet standards of salability but can be brought to salable condition with additional effort. 1) The decision to rework or discard is based on whether the marginal revenue to be gained from selling the reworked units exceeds the marginal cost of performing the rework.

breakeven point

a. The breakeven point is the level of output at which total revenues equal total expenses, that is, the point at which operating income is zero.

physical-unit method

a. The physical-unit method allocates joint production costs to each product based on its relative proportion of the measure selected.

Variable Costing

a. Variable costing (sometimes called direct costing) is more appropriate for internal reporting. The term "direct costing" is somewhat misleading because it suggests traceability, which is not what is meant in this context. "Variable costing" is more suitable.

b. Abnormal spoilage

b. Abnormal spoilage is spoilage that is not expected to occur under normal, efficient operating conditions. The cost of abnormal spoilage should be separately identified and reported to management. 1) Abnormal spoilage is typically treated as a period cost (a loss) because of its unusual nature.

b. Scrap

b. Scrap consists of raw material left over from the production cycle but still usable for purposes other than those for which it was originally intended. 1) Scrap may be used for a different production process or may be sold to outside customers, usually for a nominal amount.

b. Sunk costs

b. Sunk costs are costs either already paid or irrevocably committed to incur. Because they are unavoidable and will therefore not vary with the option chosen, they are not relevant to future decisions. 1) An example is 3 years of tuition already spent. The previous 3 years of tuition make no difference in the decision to attend a fourth year.

estimated net realizable value (NRV) method

b. The estimated net realizable value (NRV) method also allocates joint costs based on the relative market values of the products.

margin of safety

b. The margin of safety is a measure of risk. It is the excess of budgeted revenues over breakeven revenues (or budgeted units over breakeven units).

Under variable costing what is the formula to arrive at contribution margin.....

b. Variable cost of goods sold and the variable portion of selling and administrative expenses are subtracted from sales to arrive at contribution margin. CM is important b/c it shows how mush $ there is to cover fixed expenses.

c. Mixed costs

c. Mixed costs (or semivariable costs) are costs with both fixed and variable elements.

c. Waste

c. Waste consists of raw material left over from the production cycle for which there is no further use. 1) Waste is not salable at any price and must be discarded.

revenue (sales) mix

d. The revenue (sales) mix is the composition of total revenues in terms of various products, i.e., the percentages of each product included in total revenues. It is maintained for all volume changes.

e. Sensitivity analysis

e. Sensitivity analysis examines the effect on the outcome of not achieving the original forecast or of changing an assumption.

1) Prime cost

equals direct materials plus direct labor, i.e., those costs directly attributable to a product (DM + DL).

f. Unit contribution margin (UCM

f. Unit contribution margin (UCM) is the unit selling price minus the unit variable cost. It is the contribution from the sale of one unit to cover fixed costs (and possibly a targeted profit).

job-order

job-order costing is appropriate when producing products with individual characteristics or when identifiable groupings are possible. 1) Costs are attached to specific "jobs." Each job will result in a single, identifiable end product. Examples are any industry that generates custom-built products, such as shipbuilding

1) Period costs

1) Period costs are expensed as incurred, i.e., they are not capitalized in finished goods inventory and are thus excluded from cost of goods sold. Under GAAP, all manufacturing costs (direct materials, direct labor, variable overhead, and fixed overhead) must be treated as product costs, and all selling and administrative (S&A) costs must be treated as period costs.

Absorption must.....

1) Product cost thus includes all manufacturing costs, both fixed and variable. 2) Absorption-basis cost of goods sold is subtracted from sales to arrive at gross margin. 3) Total selling and administrative expenses (i.e., fixed and variable) are then subtracted from gross margin to arrive at operating income. 4) This method is required under GAAP for external reporting purposes and under the Internal Revenue Code for tax purposes. The justification is that, for external reporting, product cost should include all manufacturing costs.

Breakeven point in units

1) The UCM is $.40 ($.60 sales price — $.20 variable cost). Thus, to cover $10,000 of fixed costs, 25,000 units ($10,000 ÷ $.40 UCM) must be sold to break even.

When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that

Acceptance of the order will not affect regular sales.Granting a lower-than-normal price for a special order has potential ramifications for regular sales because other customers may demand the same price. Thus, the decision to consider only differential manufacturing costs should be based on a determination that all other costs are not relevant, that is, that these other costs do not vary with the option chosen

Inventoriable costs

Are regarded as assets before the products are sold. Inventoriable costs, also called product costs, are capitalized as part of finished goods inventory. Contrast this treatment with that of period costs, which are expensed as they are incurred and are not capitalized as assets. Under an absorption costing system, inventoriable costs include both variable and fixed costs of production; under variable costing, inventoriable costs include only variable production costs.

Backflush costing

Backflush costing delays the assignment of costs until the goods are finished. 1) After production is finished for the period, standard costs are flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated.

What is the cost of ending inventory given the following factors? Beginning inventory $ 5,000 Total production costs 60,000 Cost of goods sold 55,000 Direct labor 40,000

Beginning inventory, plus purchases (or other inventory additions), minus cost of goods sold, equals ending inventory. Thus, ending inventory equals $10,000 ($5,000 + $60,000 - $55,000). Direct labor is included in total production costs.

Sales = 200k CM= 120k fixed costs=90k income taxes=12k What is xcorps margin of safety?

Breakeven sales= 90k/(120/200k) =90k/.6=150k Margin of safety=200k-150k =50k

During the month just ended, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing process. The cost of units produced includes

C. Scrap and normal spoilage, but not abnormal spoilage. In the first case, the costs of scrap remain in WIP. In the second case, the amounts realized indirectly reduce the costs of all units. However, if scrap is applicable to a specific job, the realized amounts directly reduce the cost of specific units. Regardless of the accounting, good units continue to bear at least the costs of scrap that cannot be recovered by its sale. The net cost of normal spoilage is likewise included in the cost of good units.

Which one of the following is an example of just-in-time being used for competitive advantage? a. BAC Company has decreased the number of job classifications to just a few. b. Big Deal Car Manufacturer increases the number of its suppliers to be less dependent on just a few. c. AJAX Cement Company has built a new, huge warehouse to store inventory. d. Acme Company tells its maintenance department to intervene only if a machine breaks down.

Choice "a" is correct. A benefit of just-in-time is a more efficient use of employees with multiple skills.

A regression equation: a. Estimates the dependent variables. b. Is based on objective and constraint functions. c. Estimates the independent variable. d. Ignores the coefficient of determination.

Choice "a" is correct. A regression equation is a statistical model that estimates the dependent variables based on changes in the independent variable

Which of the following uses analysis of production processes to ensure that resource uses stay within target costs? a. Kaizen. b. Activity-based Costing. c. Value Chain Analysis. d. Just-in-time.

Choice "a" is correct. Kaizen occurs at the manufacturing stage where the ongoing search for cost reductions takes the form of analysis of production processes to ensure that resource uses stay within target costs.

Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?

Choice "a" is correct. Since a 15% profit is desired, the cost of $990,000 would be 85% of sales. (Remember that profit + cost = sales.) Thus, sales are $1,164,700 ($990,000 + 85%). $1 ,164,700 + 500 units equals $2,329 per unit.

Organic Enterprises cultivates potted plants and hybrids. Management conducted a careful engineering study of product requirements and has developed standards to control production. Standards of this type are also referred to as: a. Authoritative standards. b. Participative standards. c. Ideal standards. d. Attainable standards.

Choice "a" is correct. Standards imposed by management without employee input are referred to as authoritative standards.

Which of the following is a role of the project sponsor? a. Responsibility for overall project delivery. b. Communicate project metrics to stakeholders and team members. c. Develop, implement, monitor, control and end the plan when plan objectives have been met. d. Communicate project needs to the Board of Directors.

Choice "a" is correct. The project sponsor is an individual at the executive level of management who is responsible for allocating funding and resources to the project. The role of the project sponsor includes responsibility for overall project delivery.

Many firms have made significant strides in reducing their inventories. Which of the following would be least likely to encourage managers to reduce inventory? a. Using variable costing. b. Using absorption costing. c. Using throughput costing. d. Instituting a charge against the budget for managers based on the size of the inventory.

Choice "b" is correct. Absorption costing (as the name implies) absorbs fixed overhead cost into the units produced. Those units placed in inventory can absorb some of the manager's cost and raise profits. This method encourages larger inventories.

All of the following statements regarding project risk are correct, except: a. Planning for risk management includes risk assessment. b. Risk control includes anticipating everything that could go wrong throughout the project plans. c. There is always a tradeoff between risk and reward. d. Risk is inherent in every aspect of the project management process.

Choice "b" is correct. Anticipating everything that could go wrong throughout the project plans is a part of risk

Product-quality-related costs are part of a total quality control program. A product-quality-related cost incurred in detecting individual products that do not conform to specifications is an example of a(n): a. Prevention cost. b. Appraisal cost. c. Internal failure cost. d. External failure cost.

Choice "b" is correct. Appraisal costs would detect individual products that do not conform to specifications. Examples of appraisal costs include: Statistical quality checks Inspections Testing Maintenance of lab

Which of the following costs are included in product or inventoriable costs in an absorption costing system? a. Direct material , direct labor and variable overhead. b. Direct material , direct labor and all overhead. c. Direct material , direct labor, all overhead, and selling expenses. d. Direct material , direct labor, all overhead , and all period expenses.

Choice "b" is correct. In an absorption costing system, all product costs and no period expenses are put into product cost.

Which one of the following is not a benefit of the implementation of the Just-in-time management strategy? a. Cost reduction . b. Variability increase. c. Work-in-process reduction . d. Quality improvement.

Choice "b" is correct. Just-in-time is not designed to produce variability but to accommodate production cycles and reduce carried inventory by delivering goods to the manufacturing process just-in-time.

Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities? a. Actual cost. b. Standard variable cost. c. Actual cost plus mark-up. d. Negotiated price

Choice "b" is correct. Since the selling division is a cost center (not a profit center), its transfer price should be based on standard costs, not actual costs or even actual cost plus mark-up. Using actual costs will not provide an incentive for control of costs since the costs are simply passed on to the next division. Negotiated prices are also not relevant when the selling division is a cost center since profit is not a divisional goal.

A budget manual , which enhances the operation of a budget system , is most likely to include: a. A chart of accounts. b. Distribution instructions for budget schedules. c. Documentation of the accounting system software. d. Company policies regarding the authorization of transactions.

Choice "b" is correct. The budget manual provides guidance during the preparation of the budgets. Among other things, the budget manual would include instructions on the distribution of budget schedules.

In an income statement prepared as an internal report using the direct (variable) costing method , fixed selling and administrative expenses would: a. Not be used. b. Be treated the same as variable selling and administrative expenses. c. Be used in the computation of operating income but not in the computation of the contribution margin . d. Be used in the computation of the contribution margin .

Choice "c" is correct. Contribution margin is defined as net sales revenue less variable costs. Operating income equals contribution margin less fixed costs.

Which of the following is not a method for estimating the cost of a project? a. Judgment. b. Reserve Analysis. c. Project Management Simulation (PMS). d. Vendor bid analysis.

Choice "c" is correct. Project management simulation is not a method for estimating the cost of a project.

Performance of quality assurance occurs in which of the following processes? a. Authorization. b. Planning. c. Implementation. d. Close.

Choice "c" is correct. Quality assurance

The best basis upon which cost standards should be set to measure controllable production inefficiencies is: a. Normal capacity. b. Recent average historical performance. c. Engineering standards based on attainable performance. d. Practical capacity.

Choice "c" is correct. The best basis for setting standards is engineering standards based on attainable performance. Tight standards are good, but if unattainable, employees will not be motivated.

Comel, Inc. has two major product lines: stoves and dryers. Comel's management wants to evaluate whether discontinuing dryers will increase profits. Which of the following is best for evaluating the discontinuance of the dryer product line? a. Absorption cost. b. Variable cost. c. Relevant cost. d. Throughput cost.

Choice "c" is correct. When considering alternatives, such as discontinuation of a product line, management should consider relevant costs. Relevant costs are those costs that will change under different alternatives.

Which of the following is not consistent with full employment? a. An unemployment rate greater than zero. b. Structural unemployment. c. Cyclical unemployment. d. Frictional unemployment.

Choice "c" is correct. When the economy is operating at full employment, there is no cyclical unemployment. When the economy is operating at full employment, there is still some unemployment known as the natural

In recent years, much attention has been placed on product quality and total quality control. Which one of the following items would not normally be considered a cost of quality? a. Costs incurred in detecting defective products during production. b. Costs incurred in detecting defective products produced before they are shipped to customers. c. Costs incurred after defective products have been shipped to customers. d. Costs incurred in shortening production lead times and achieving on-time deliveries.

Choice "d" is correct. Costs incurred in shortening product lead times and achieving on-time deliveries are measures of performance and not a cost of quality. Choices "a", "b", and "c" are incorrect, which are all costs

All of the following would generally be included in a cost of quality report, except: a. Warranty claims. b. Design engineering. c. Supplier evaluations. d. Lost contribution margin

Choice "d" is correct. Lost contribution margin (an opportunity cost) would generally not be included in a cost of quality report. Choices "a", "b", and "c" are incorrect. Included in a cost of quality report would be: a. Warranty claims (an external failure cost). b. Design engineering (a prevention cost). c. Supplier evaluations (a prevention cost).

Which of the following is an example of prevention costs? a. Lost customers. b. Testing. c. Tooling changes. d. Redesign of processes.

Choice "d" is correct. Redesign of processes is an example of prevention costs.

Which of the following is a responsibility of the project manager? a. Carrying out the work and producing the deliverables. b. Interfacing between the organization and the project itself. c. Approving project deliverables. d. Identifying and managing internal and external stakeholder expectations.

Choice "d" is correct. The project manager is responsible for project administration on a day-to-day basis including identifying and managing internal and external stakeholder expectations.

The sale of scrap from a manufacturing process usually is recorded as a(n)

Decrease in factory A. overhead control.

What type of costs are as described? 1. joint production costs incurred, to be considered in a sell-at-split versus a process further decision? 2. the cost of obsolete inventory acquired several years ago, to be considered in a keep versus disposal decision.

sunk costs, are costs previous incurred unavoidable and not relevant to decision making. Joint production costs, before split off are considered sunk. The cost of obsolete inventory is also a sunk cost.

An Operation costing system is:

the same as a process costing system except that materials are allocated on the basis of batches of production

Special order with excess capacity available: Fixed costs 21,000 Variable costs 33,000 1. fixed costs include 3700 for in house design not used. 2. special job will instead use outside firm costing 7,750 what is minimum acceptable price for this job?

$40,750 ($33,000 VC + $7,750 cost of external design). Given excess capacity, the company presumably will not incur opportunity costs if it accepts the special order. Assuming also that fixed costs will be unaffected, the incremental cost of the order (the minimum acceptable price) will be

constant gross-margin percentage NRV method There are three steps under this method:

. The constant gross-margin percentage NRV method is based on allocating joint costs so that the gross-margin percentage is the same for every product. 1 There are three steps under this method: a) Determine the overall gross-margin percentage. b) Subtract the appropriate gross margin from the final sales value of each product to calculate total costs for that product. c) Subtract the separable costs to arrive at the joint cost amount.

1) Indirect costs

1) Indirect costs are ones that cannot be associated with a particular cost object in an economically feasible way and thus must be allocated to that object.

2) Conversion cost

2) Conversion cost equals direct labor plus manufacturing overhead, i.e., the costs of converting raw materials into the finished product (DL + OH).

3) Product costs

3) Product costs (also called inventoriable costs) are capitalized as part of finished goods inventory. They eventually become a component of cost of goods sold.

5) Direct costs

5) Direct costs are ones that can be associated with a particular cost object in an economically feasible way, i.e., they can be traced to that object.

As required by GAAP, the fixed portion of the semivariable cost of electricity for a manufacturing plant is a

A product cost is inventoried. A period cost is expensed when incurred. Electricity costs are a part of manufacturing overhead. Manufacturing overhead is a product cost, not a period cost.

Which method of inventory costing treats direct manufacturing costs and manufacturing overhead costs, both variable and fixed, as inventoriable costs?

Absorption (full) costing considers all manufacturing costs to be inventoriable as product costs. These costs include variable and fixed manufacturing costs, whether direct or indirect. The alternative to absorption is known as variable (direct) costing.

In the application of variable costing as a cost-allocation process in manufacturing,

Variable indirect costs are treated as product costs.

Activity-based costing (ABC)

Activity-based costing (ABC) attaches costs to activities rather than to physical goods. 1) ABC is a response to the distortions of product cost information brought about by peanut-butter costing, which is the inaccurate averaging or spreading of costs like peanut butter over products or service units that use different amounts of resources.

What is "Engineered Cost" refer to?

An engineered cost bears an observable and known relationship to a quantifiable activity base.

An increase in production levels within the relevant range would A.Not change variable costs per unit. B. Not change total variable costs. C. Not change fixed costs per unit. D. Change total fixed costs.

Answer (A) is correct. When production levels increase within a relevant range, the total costs will obviously increase. Although the total fixed costs will remain constant, the fixed costs per unit will decrease because more units are available to absorb the constant amount of total fixed costs. Furthermore, total variable costs will increase while unit variable costs will remain constant.

Direct materials $32 Direct labor 20 Variable manufacturing overhead 15 Fixed manufacturing overhead 6 Variable selling 3 Fixed selling 4 What are conversion costs?

Answer (B) is correct. Conversion costs are incurred in transforming raw materials into finished products. They include direct labor and manufacturing overhead. Thus, unit conversion costs equal $41 ($20 direct labor + $15 variable overhead + $6 fixed overhead).

Common costs

Common costs are another notable type of indirect cost. A common cost is one shared by two or more users. a) The key to common costs is that, since they cannot be directly traced to the users that generate the costs, they must be allocated using some systematic and rational basis.

Hoyt Co. manufactured the following units: Salable 5,000 Unsalable (normal spoilage) 200 Unsalable (abnormal spoilage) 300 Manufacturing costs totaled $99,000. What amount should Hoyt debit to finished goods?

Consequently, the cost of abnormal spoilage is removed from the manufacturing costs based on the relative number of units spoiling abnormally. Thus, the amount debited to finished goods is $93,600 {$99,000 - [300 ÷ (5,000 + 200 + 300) × $99,000]}.

When using a variable costing system, the contribution margin (CM) discloses the excess of

Contribution margin is the difference between revenues and variable costs. No distinction is made between variable product costs and variable selling costs; both are deducted from revenue to arrive at CM.

Contribution margin

Contribution margin is the intermediate figure when variable (direct) costing is used. All variable (and only variable) costs, both manufacturing and selling and administrative, are subtracted to arrive at contribution margin. 1) Contribution margin is the amount available to the firm to cover fixed costs. This calculation is often used for internal (managerial) reporting purposes.

Indirect labor is a

Conversion costs include direct labor and factory overhead. Because indirect labor is included in factory overhead, indirect labor is a conversion cost.

Gross margin

Gross margin is the intermediate figure between sales and operating income under absorption (full) costing. All manufacturing (and only manufacturing) costs, both variable and fixed, are subtracted to arrive at gross margin. 1) Only costs directly associated with manufacturing the product may be subtracted. 2) This is the only acceptable calculation under GAAP.

In an income statement prepared for internal purposes using variable costing methods, would 1. gross profit margin appear? 2. would operating income appear?

Gross profit (margin) is selling price minus CGS. The computation of CGS takes into account fixed manufacturing overhead in inventory Variable costing treats fixed manufacturing overhead as an expense in the period of incurrence. In variable costing, the contribution margin (sales - variable costs) is calculated, not a gross profit (margin). Both methods, however, compute operating income on their income statements.

Which one of the following statements is true regarding absorption costing and variable costing?

If finished goods inventory increases, absorption costing results in higher income nder variable costing, inventories are charged only with the variable costs of production. Fixed manufacturing costs are expensed as period costs. Absorption costing charges to inventory all costs of production. If finished goods inventory increases, absorption costing results in higher income because

Life-cycle costing

Life-cycle costing emphasizes the need to price products to cover all the costs incurred over the lifespan of a product, not just the costs of production. 1) Costs incurred before production, such as R&D and product design, are referred to as upstream costs. 2) Costs incurred after production, such as marketing and customer service, are called downstream costs.

The change in period-to-period operating income when using variable costing can be explained by the change in the

Unit sales level multiplied by a constant unit contribution margin. In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales, especially when the UCM (selling price per unit - variable costs per unit) is constant

In an income statement prepared as an internal report using the variable costing method, variable selling and administrative expenses are

Used in the computation of the contribution margin. In a variable costing income statement, the contribution margin equals sales minus all variable costs, which include the variable selling and administrative expenses as well as variable manufacturing costs (direct materials, direct labor, and variable factory overhead). Operating income equals the contribution margin minus all fixed costs.