Cost Accounting (Module 2)
Which of the following is not a benefit of implementation of ABC (activity-based costing)? (a) Allows management to examine value-added activities so they may be evaluated and implemented (b) Provides an understanding of complex product costs and product profitability (c) Allows management to focus on the nature of activities performed (d) Provides a more appropriate means of charging overhead costs to products
(a) Allows management to examine value-added activities so they may be evaluated and implemented
Which of the following is a value-added activity based on examining activity-based costing (ABC)? (a) An activity that enhances the product (b) Wait time (c) Move time (d) Inspection time
(a) An activity that enhances the product
What kind of company is most likely to use (a) job order systems (b) process order systems?
(a) CPA firms, custom furniture manufactures, advertising agencies, nursing homes, landscaping companies, law firms (b) oil refinery, tire manufacture, flour mill, orange juice concentrate producer, cell phone battery manufacturer
A company would most benefit from using an activity-based costing (ABC) system as opposed to a traditional costing system under which of the following conditions? (a) When indirect costs are a high percentage of total costs (b) When each department within the company has a single activity (c) When different products use the different activities of the department in the same proportions (d) When batch-level and product-sustaining costs are immaterial
(a) When indirect costs are a high percentage of total costs
In process 2, material G is added when a batch is 60% complete. Ending work-in-process units, which are 50% complete, would be included in the computation of equivalent units for: (a) conversion costs. (b) material G. (c) both conversion costs and material G. (d) neither conversion costs nor material G.
(a) conversion costs.
In computing the current period's manufacturing cost per equivalent unit, the first-in, first-out (FIFO) method of process costing considers current period costs: (a) only. (b) plus cost of beginning work-in-process inventory. (c) less cost of beginning work-in-process inventory. (d) plus cost of ending work-in-process inventory.
(a) only.
The use of activity-based costing normally results in: (a) substantially greater unit costs for low-volume products than is reported by traditional product costing. (b) substantially lower unit costs for low-volume products than is reported by traditional product costing. (c) decreased set-up costs being charged to low-volume products. (d) equalizing set-up costs for all product lines.
(a) substantially greater unit costs for low-volume products than is reported by traditional product costing.
Each of the following should be considered in the selection of appropriate cost drivers for an activity-based costing system, except: (a) volume-based production (b) behavioral effects (c) cost of measurement (d) degree of correlation
(a) volume-based production
In an activity-based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes? (a) A single cause and effect relationship (b) Multiple cause and effect relationships (c) Relative net sales values of the products (d) A product's ability to bear cost allocations
(b) Multiple cause and effect relationships
In an activity-based costing system, cost reduction is accomplished by identifying and eliminating: (a) all cost drivers. (b) nonvalue-adding activities. (c) all cost drivers and nonvalue-adding activities. (d) neither all cost drivers nor nonvalue-adding activities.
(b) nonvalue-adding activities
A basic assumption of activity-based costing (ABC) is that: (a) all manufacturing costs vary directly with units of production. (b) products or services require the performance of activities, and activities consume resources. (c) only costs that respond to unit-level drivers are product costs. (d) only variable costs are included in activity cost pools.
(b) products or services require the performance of activities, and activities consume resources.
A basic assumption of activity-based costing (ABC) is that: (a) all manufacturing costs vary directly with units of production. (b) products or services require the performance of activities, and activities consume resources. (c) only costs that respond to unit-level drivers are product costs. (d) only variable costs are included in activity-cost pools.
(b) products or services require the performance of activities, and activities consume resources.
A job order cost system uses a predetermined factory overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations? (a) Actual volume, greater than expected; Actual fixed costs, greater than expected (b) Actual volume, greater than expected; Actual fixed costs, less than expected (c) Actual volume, less than expected; Actual fixed costs, greater than expected (d) Actual volume, less than expected; Actual fixed costs, less than expected
(c) Actual volume, less than expected; Actual fixed costs, greater than expected
A CPA would recommend implementing an activity-based costing system under which of the following circumstances? (a) The client is a single-product manufacturer. (b) Most of the client's costs currently are classified as direct costs. (c) The client produced products that heterogeneously consume resources. (d) The client produced many different products that homogeneously consume resources.
(c) The client produced products that heterogeneously consume resources.
Limitations of an activity-based costing system include which of the following? (a) Control of overhead costs is enhanced. (b) Activity-based costing systems are less reliable. (c) The expense of obtaining cost data is relatively high. (d) It eliminates arbitrary assignment of overhead costs.
(c) The expense of obtaining cost data is relatively high.
In a job cost system, manufacturing overhead is: (a) an indirect cost of jobs. (b)a necessary element in production. (c) both an indirect cost of jobs and a necessary element in production. (d)neither an indirect cost of jobs nor a necessary element in production.
(c) both an indirect cost of jobs and a necessary element in production.
A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it? (a) electric expense (b) repair and maintenance expense (c) employee benefits expense (d) depreciation expense
(c) employee benefits expense
In a traditional job order cost system, the issue of indirect materials to a production department increases: (a) stores control. (b) work-in-process control. (c) factory overhead control. (d) factory overhead applied.
(c) factory overhead control.
In developing a predetermined factory overhead application rate for use in a process costing system, which of the following could be used in the numerator and denominator? (a) Numerator, actual factory overhead; Denominator, actual machine hours (b) Numerator, actual factory overhead; Denominator, estimated machine hours (c) Numerator, estimated factory overhead; Denominator, actual machine hours (d) Numerator, estimated factory overhead; Denominator, estimated machine hours
(d) Numerator, estimated factory overhead; Denominator, estimated machine hours
In a process cost system, the application of factory overhead usually would be recorded as an increase in: (a) finished goods inventory control. (b) factory overhead control. (c) cost of goods sold. (d) work-in-process inventory control.
(d) work-in-process inventory control.
What are other names for allocating overhead?
-assigning -apply
What are some examples of overhead cost?
-depreciation -repairs/maintenance for equipment -rent -indirect salaries--> janitor
How are costs determined under job order versus process costing systems?
-in process costing, unit cost are calculated by dividing total cost incurred by total number of units of output from the production process -in job costing, cost are assigned to jobs, making the job the cost driver, because every job is unique
What are the key differences between weighted-average and FIFO methods for computing equivalent units?
-weighted-average ignores the work completed in beginning WIP -FIFO takes into account the work completed in beginning WIP
What are the 3 ways to dispose of over/under allocated overhead?
-write off to COGS approach (close over/under allocated OH to COGS) -proration approach (pro rate under/over allocated) -adjusted allocation-rate approach (re-cost jobs based on the actual OH rate)
What is the general approach to job costing using normal costing?
1.) identify the job that is the chosen cost object 2.) identify the direct costs of the job 3.) select the cost allocation bases to use for allocating indirect cost to the job 4.) identify the indirect costs associated with each cost allocation base 5.) compute the rate per unit of each cost allocation base used to allocate indirect costs to the job 6.) compute the indirect costs allocated to the job 7.) compute the total cost for the job by adding all direct and indirect costs assigned to the job
What are the steps to evaluating and implementing job costing systems?
1.) identity the problem and uncertainties 2.) obtain information 3.) make predictions about the future 4.) make decisions by chopping among alternatives 5.) implement the decision, evaluate performance, and learn
proration approach
Spreads underallocated overhead or overallocated overhead among ending work-in-process inventory, finished goods inventory, and cost of goods sold.
How is ABC different than simple overhead application methods?
Traditional costing is the allocation of factory overhead to products based on the volume of production resources consumed. ABC is that costing in which costs are first traced to activities and then to products
cost pool
a grouping of individual indirect cost items; simplify the allocation of indirect cost because the costing system does not have to allocate each cost individually
product undercosting
a product consumes a high level of resources but is reported to have a low cost per unit
product overcosting
a product consumes a low level of resources but is reported to have a high cost per unit
When allocating overhead, what must you have?
a proxy/cost driver
materials requisition form
a source document that contains information about the cost of direct materials used on a specific job and in a specific department; has a number associated with it and is tied into the job cost record
cost allocation base
a systematic way to link an indirect cost or group of indirect costs to cost objects
What does it mean for overhead be under applied (under costed)?
actual overhead is greater then applied overhead
How do you calculate under/over applied overhead?
actual overhead minus applied/allocated/assigned overhead
cost object
anything for which cost data are desired
What does it mean for overhead be over applied (over costed)
applied overhead is greater then actual overhead
Output unit-level costs
are the costs of activities performed on each individual unit of a product or service
budgeted indirect cost rate
budgeted annual indirect costs / budgeted annual quantity of the cost-allocation base
Product (service)-sustaining costs
costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced
What are equivalent units?
derived amount of output units that (a) takes the quantity of each input (factor of production) in units completed and in incomplete units of work in process and (b) converts the quantity of input into the amount of completed output units that could be produced with the quantity of input
every job has...
direct material (DC), direct labor (DC), and Overhead (IDC)
adjusted allocation rate approach
restates all overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates
How do you find allocated overhead?
take predetermined OH rate (budgeted OH cost divided by budgeted activity in cost driver) and multiple it by actual activity in cost driver
process costing system
the cost object is masses of identical or similar units of a product or service
write off to COGS approach
the total under/over allocated OH is included in this years COGS
true or false: many companies have costing systems that are neither pure job costing or pure process costing
true; they have elements of both, tailored to the underlying operations
job-cost record/sheet
used to record and accumulate all the costs assigned to a specific job, starting when work begins
Cost Hierarchy
categorizes various activity cost pools on the basis of the different types of cost drivers, cost-allocation bases, or different degrees of difficulty in determining cause-and-effect relationships
labor-time sheet
contains information about the amount of labor time used for a specific job in a specific department
What is an example of a company who would use a combination of job and process costing?
contractors for housing developments, the standard house would be process, but upgrades would be job costing
indirect cost of a cost object
cost related to a a particular cost object that cannot be traced to that cost object in an economically feasible (cost effective) way
direct cost of a cost object
cost related to a particular cost object that can be traces to that cost object in an economically feasible (cost efficient) way
job costing system
costing system in which the cost object is a unit or multiple units of a distinct product or service called a job
batch-level costs
costs of activities related to a group of units of a product or service rather than each individual unit of product or service
Facility-sustaining costs
costs of activities that managers cannot trace to individual products or services but that support the organization as a whole
