question

CHP 4

answer

CHP 4

question

When do you use a Job order costing system?

answer

Use if customize or have highly differentiated products

question

JOC: Assign DM used, DL, and OH applied to:

answer

WIP Inventory (assigned to each job)

question

When do you use a Process Cost System?

answer

Use if mass produce homogenous products in a continuous production process

question

PCS: Assign DM used, DL, and OH applied to:

answer

WIP Inventory (assigned by department)

question

Which costing system is more COSTLY to use?

answer

Job order costing

question

Operation Costing System

answer

-a *hybrid* system that employs elements from both job order and process costing -use if produce products that have some common characteristics and some unique characteristics -often assign DM to each batch and DL and OH by department

question

How are Job order costing and process cost system similar?

answer

-similar in the way that production costs are recorded -accumulation of materials, labor, and OH costs to inventory is the same

question

How are Job order costing and process cost system different?

answer

-the methods of assigning the cost to individual units of inventory differ -in a process costing environment, materials, labor, and manu OH are added in multiple departments.

question

Cont...Process Costing elaboration

answer

-must be recorded as WIP inventory in EACH manufacturing department -cost flow in sequence from one department to another -cost accumulate as inventory moves through the departments. THEREFORE, must have WIP account for each manu department.

question

Costing Inventory in a Process Costing Environment

answer

Costing Inventory in a Process Costing Environment

question

Why compute cost/unit

answer

for management decisions and inventory valuation, costs must be allocated between: 1. cost of completed units 2. cost of ending WIP

question

Cost per unit equation

answer

DM Used + DL + OH Applied / Units produced

question

What is the problem with computing cost/unit?

answer

partially completed inventory

question

what is the accounting solution?

answer

-partially completed units are translated into the finished units -then compute a cost/equivalent unit to value inventories

question

Equivalent Units

answer

a measure of the work done during the period, expressed in fully completed units; this allows accountants to calculate cost per unit when some units are partially completed.

question

How many columns might be needed in your calculation?

answer

1, 2 , or 3 (DM, DL, OH)

question

Cost of Production Report

answer

-an internal document for management -shows production quantity and cost data for department -provides basis for evaluating productivity and cost control of each department, setting prices, etc.

question

CALCULATING COST/EU

answer

CALCULATING COST/EU

question

Weighted average method

answer

-calculate average cost/eu ---- average all costs (beginning and current) over all EU - *Most widely used method*

question

First in First Out method

answer

-transfer between finished goods into 2 layers 1. beginning layer 2. current layer--calculate current cost / EU

question

Transferred In costs

answer

costs that were incurred in a previous process and brought into a later process as part of the product costs --> requires a separate cost per equivalent unit in calculation

question

6 steps to preparing a production cost report (using weighted avg method)

answer

1. Account for physical flow of units 2. Accumulate Costs 3. Calculate Equivalent Units 4. Calculate Cost per Equivalent Unit 5. Value Inventories 6. Cost Reconciliation

question

Step 1: account for physical flow of units

answer

-show the number of units to be accumulated for during a period, regardless of % of work performed. Beg WIP + Units Started = Ending WIP + Units completed

question

Step 6: Cost Reconciliation

answer

-Flow of Costs is similar to the flow of products Beg Costs + Current Costs = Cost of End WIP + Cost of Units Completed

question

CHP 5

answer

CHP 5

question

What does the Contribution Margin income statement classify?

answer

-classifies costs as variable or fixed and computes a contribution margin Sales - VC = CM

question

What is contribution margin?

answer

the amount of sales remaining after variable expenses have been deducted; the amount that remains to cover fixed costs and generates a profit

question

Can CM also be stated as a total amount, a per unit amount, or a ratio?

answer

Yes! but how?

question

Total Contribution Margin

answer

Total Sales-Total Variable Costs

question

Contribution Margin per unit

answer

Unit Selling Price - Unit Variable Costs

question

Contribution Margin Ratio

answer

Contribution Margin/unit (divided by) Sales Price/unit OR Total Contribution Margin / Total Sales $

question

Variable Cost Ratio

answer

Total Variable Cost / Total Sales $ Variable Cost/unit (divided by) Sales Price/unit

question

Cost Volume Profit

answer

is the study of effects of changes in costs and volume on a company's profits -important profit planning tool -useful in setting selling prices, determining product mix, and maximizing use of production facilities

question

CVP Analysis considers the inherent interrelationships among:

answer

a. Volume or level of activity b. Unit selling prices c. Variable cost per unit d. Total Fixed Costs e. Sales mix

question

Assumptions underlying CVP analysis

answer

-cost and revenues are linear throughout the relevant range (sales price & VC per unit are constant; total FC is constant) -costs can be classified as either variable or fixed with reasonable accuracy -all units produced are sold -sales mix will remain constant (relative proportion of sales for each product line)

question

Breakeven Point

answer

the level of sales where the company will realize no income and will suffer no loss; (where revenues = expenses, and profit = 0)

question

Target Net Income

answer

the profit objective for the company or an individual segment

question

Margin of safety

answer

the difference between actual (past) or expected (future) sales and breakeven sales.

question

Margin of safety (in sales $)

answer

Expected Sales - Breakeven Sales

question

Margin of Safety %

answer

margin of safety / expected sales

question

Sensitivity Analysis

answer

the analysis of the effect of a change in a variable on profit ("what-if analysis")

question

Equation Method of CVP

answer

Revenues - VC - FC = Desired Profit Let SP = Sales Price and X = Sales Volume SP (X) - (VC/unit)(X) - FC = desired profit

question

Contribution Margin (Formula) Method

answer

X= Total FC + Desired Income Before Tax / Contribution Margin per unit -gives sales in UNITS

question

Contribution Margin Ratio Approach (Desired Profit)

answer

Sales $= Total FC + Desired Income Before Tax / CM Ratio -provides answer in sales $ -use if sales price and/or VC per unit is not available

question

Cost-Volume-Profit Graph

answer

the graph allows management to see what profit will be at various levels of sales.

question

Sales Mix

answer

the relative proportion in which each product is sold (when a company sells more than one product)

question

Why is sales mix important to managers?

answer

some products are more profitable than others

question

What two formulas do you use for sales mix?

answer

-Breakeven in sales: Total Fixed Costs + Desired Profit / Overall CM Ratio = Sales $ -Required Sales for each product: overall BE * sales mix

question

Cost Structure

answer

the relative proportion of fixed vs variable costs that a company incurs-- can have a significant effect on company profitability

question

Operating leverage

answer

the degree to which a company net income reacts to a change in sales; provides a measure of the company's earnings volatility

question

Degree of Operating Leverage

answer

Total Contribution Margin / Net Income

question

Percentage Change in net operating income

answer

% change in sales * degree of operating leverage

question

When a company's sales revenue is increasing, high operating leverage is good because it means that profits will ___________________.

answer

increase rapidly

question

When sales are declining, too much operating leverage will cause profits to ___________________.

answer

decrease rapidly

question

BEG CHP 6

answer

BEG CHP 6

question

Absorption (Full) Costing

answer

Accumulate all product costs with inventory

question

What costs are assigned to inventory in absorption costing?

answer

DM Used, DL, Variable OH, Fixed OH

question

What type of income statement does absorption costing use?

answer

sales -COGS =GM -Op Exp =Net Income (PRODUCT VS PERIOD format)

question

Absorption costing is used for _____________ reporting

answer

external -does not facilitate CVP Analysis and other mgmt decisions

question

Variable Costing

answer

Accumulate only variable product costs with inventory

question

what costs are assigned to inventory in variable costing?

answer

DM Used, DL, Variable OH

question

Fixed OH is _______________

answer

expensed in full in the period incurred (treat as period cost)

question

What type of income statement does variable costing use?

answer

Contribution Margin (variable/fixed format) sales -variable cost =CM -Fixed cost =income

question

Variable costing is used for _____________ reporting

answer

internal -facilitates planning (CVP analysis), evaluation of segments, etc.

question

What causes the difference in operating income?

answer

-treatment of fixed OH *not always greater in absorption costing

question

IF production=sales volume

answer

Net income will be equal under the two costing approaches

question

IF production > sales volume

answer

income will be higher under absorption costing

question

IF production < sales volume

answer

income will be higher under variable costing

question

Period cost

answer

NEVER assign to inventory -SO, the amount of selling and administrative costs expensed is always the amount incurred

question

what are the potential advantages of variable costing?

answer

1. Variable costing is consistent with cost-volume-profit analysis and supports decision making 2. Net income computed under variable costing is unaffected by changes in production levels. -management may be tempted to overproduce in a given period in order to increase net income under absorption costing

question

Segmented Income Statements

answer

managers need more than a single, companywide income statement that focus on the various segments of a company.

question

Definition of a segment:

answer

is any part or activity of an organization about which a manager seeks cost, revenue or profit data

question

What are segments used for?

answer

-to facilitate performance evaluation and decision-making, segmented income statements can be prepared at various levels -sales and variable costs are generally traceable to a given segment but fixed costs may or may not be

question

examples of segments:

answer

geographic regions, product line, department

question

Direct and Indirect (common) fixed costs

answer

A cost is either traceable or common with respect to a particular segment

question

Direct Fixed cost

answer

exist because the segment exists (traceable) -ex: salary of a manager of cstat store to the cstat store

question

Common fixed cost

answer

exists because of multiple departments; must be allocated, but the allocations are not useful for evaluating segments -ex: salary of a manager of stat store to each of the 5 product lines

question

Segmented income statements

answer

Sales -Variable costs =CM -Direct Fixed Costs =Segment margin (most useful for performance evaluation) -Common Fixed Costs =Division income

question

common mistakes of preparing segmented income statements

answer

1. omission of costs that are traceable 2. inappropriate allocation base used/arbitrarily dividing common costs among segments

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