Cost Accounting Final

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  1. Financial Accounting
    focuses on reporting to external parties such as investors, government agencies, banks, and suppliers
  2. Management Accounting
    Measures, analyzes, and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization
  3. Managers use management accounting to
    • develop 
    • communicate
    • implement strategy
    • coordinate product design 
    • production 
    • marketing decisions 
    • evaluate performance
  4. Management accounting information's key questions are
    • how will this information help managers do their job better 
    • do the benefits of producing this information exceed the costs
  5. Cost Accounting
    measures, analyzes, and reports financial and nonfinancial information relating to the cost of acquiring or using resources in an organization
  6. Cost Management is used
    to describe the approaches and activities of managers to use resources to increase value to customers and to achieve organizational goals
  7. Cost management decisions include
    • whether to enter new markets 
    • implement new organizational processes
    • change product design
    • incur additional costs
    • goal of enhancing revenues and profits
  8. Variable Cost
    changes in total in proportion to changes in the related level of total activity or volume
  9. Fixed Cost
    • remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume
    • cannot be quickly and easily changed to match the resources used or needed
  10. Cost Driver
    • A variable, such as the level of activity or volume that causally affects costs over a given time span 
    • event
    • task
    • unit of work with a specified purpose
  11. Costs that are fixed in the short run have no cost driver in the short run but may have a cost driver in the long run
  12. Activity-based costing system
    identify the cost of each activity such as testing, design, or set up
  13. Relevant Range
    band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question
  14. Although unit costs are used regularly used in financial reports and for making product mix and pricing decisions, managers should think of total costs rather than unit costs
  15. Cost Object
    anything for which a measurement of costs is desired
  16. Direct costs of a cost object
    costs related to a particular cost object that can be traced to the cost object in an economically feasible way
  17. Indirect Costs of a cost object
    costs related to a particular cost object that cannot be traced to that cost object in an economically feasible way
  18. Cost Assignment
    assigning costs
  19. Cost tracing
    assigning direct costs
  20. Cost allocation
    assigning indirect costs
  21. Cost Pool
    grouping of individual indirect cost items
  22. Cost-allocation base
    a systematic way to link an indirect cost or group of indirect costs to cost objects
  23. Actual Costing
    used actual indirect-costs rates calculated at the end of the year
  24. actual indirect-cost rate is calculated by
    dividing actual total indirect costs by actual total quantity of cost-allocation base 

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  25. Normal Costing Advantages
    • manufacturing costs of a job are available earlier 
    • corrective actions can be implemented much sooner
  26. Normal Costing
    uses budgeted indirect-cost rates
  27. Image Upload
  28. Manufacturing Overhead Costs Flow through the general ledger
    • first accumulated in the manufacturing overhead control account 
    • then allocated to individual jobs where they become part of work-in-process inventory
  29. Work in Process Control
    Is the total of all specific unfinished jobs
  30. The general ledgers is a _______-______ ________ of the costing system
    Bird's-eye view
  31. Under Normal Costing 
    Purchase of materials on credit
    • Materials Control           89000
    •         Accounts Payable                  89000
  32. Under Normal Costing 
    Usage of Direct Materials 81000
    And Indirect Materials   4000
    • Work-In-Process Control               81000
    • Manufacturing Overhead Control      4000
    •    Materials Control                        85000
  33. Under Normal Costing 
    Manufacturing Payroll 
    Direct Labor 39000
    Indirect Labor 15000
    • Work-In-Process Control   39000
    • Man OH Control               15000
    •     Cash                                    54000
  34. Under Normal Costing 
    Supervisor Salaries       75000
    Plant utilities, repairs   13000
    Plant Depreciation        18000
    • Man OH Control      75000
    •     Cash                           57000
    •     Acc Dep                       18000
  35. Under Normal Costing 
    Allocation of Man OH to specific jobs
    • Work-In-Process Control     80000
    •       Man OH Allocated              80000
  36. Under Normal Costing 
    Manufacturing overhead allocated is
    the amount of manufacturing overhead costs allocated to individual jobs based on the budgeted rate multiplied by actual quantity used of the allocation base
  37. Under Normal Costing 
    Completion and transfer of individual jobs to finished goods
    • Finished Good Control     188800
    •      Work-In-Process Control       188800

    • Cost of Goods Sold      180000
    •      Finished Goods Control      180000
  38. Flexible Budget
    • calculates budgeted revenues and budgeted costs based on the actual output in the budget period. 
    • prepared at the end of the period after the actual output is known 
    • the hypothetical budget that would have been prepared at the start of the budget period if actual output was known
  39. Static Budget
    • Master Budget 
    • based on the level of output planned at the start of the budget period
  40. Difference between static budget and flexible budget
    • static budget is prepared with a budgeted amount of output 
    • flexible budget is prepared with the actual amount of output
  41. Flexible Budget Variance
    Difference between an actual result and the corresponding flexible-budget amount
  42. Sales-Volume Variance
    difference between a flexible budget amount and the corresponding static-budget amount
  43. Price Variance
    difference between actual price and budgeted price multiplied by actual input quantity
  44. Efficiency Variance
    difference between actual input quantity used and budgeted input quantity allowed for actual output multiplied by budgeted price
  45. Unfavorable Variances
    • Always debits
    • decrease operating income
  46. Favorable Variances
    • Always Credits 
    • Increase operating income
  47. If variances are material in amount 
    Direct Material Price Variances is prorated among
    • Materials Control 
    • WIP Control 
    • Finished Goods Control 
    • Costs of Good Sold
  48. If variances are material in amount Direct Material Efficiency Variances is prorated among
    • WIP Control 
    • Finished Goods Control 
    • Costs of Goods Sold
  49. Variable Costing
    • a method of inventory costing in which all variable manufacturing costs (direct or indirect) are included in inventoriable costs 
    • All fixed manufacturing costs are excluded from inventoriable costs and are instead treated as costs of the period in which thay are incurred
  50. Absorption Costing
    • is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs 
    • Inventory ABSORBS all costs
  51. Production Volume Variance
    • exists under absorption costing 
    • only related to fixed manufacturing overhead
  52. Absorption Costing Advantages
    • cost effective 
    • less confusing for managers to use one common method of inventory costing 
    • helps prevent managers from taking actions to make their performance measures look good but that hurt the income they report to the shareholders 
    • measures all manufacturing costs
  53. Absorption Costing Disadvantage
    enables a manager to increase operating income in a specific period by increasing production
  54. Ways a manger can produce for inventory
    • switch to manufacturing products that absorbs the highest amount of fixed manufacturing costs
    • may accept a particular order to increase production even though another plant in the same company is better suited to handle that order
    • defer maintenance beyond current period
  55. Ways top management can control undesirable effects of absorption costing
    • focus on careful budgeting and inventory planning to reduce management's freedom to build up excess inventory 
    • incorporate a carrying charge for inventory 
    • change the period used to evaluate performance. When managers performance is evaluated over a three or five year period they will be less tempted to produce for inventory 
    • include nonfinancial as well as financial variables in the measures used to evaluate performance
  56. Strategy
    • specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives 
    • How an organization can create value for its customers while differentiating itself from its competitors
  57. Industry analysis focus on five forces
    • 1. Competitors 
    • 2. Potential entrants into the market 
    • 3. Equivalent products 
    • 4. Bargaining power of customers 
    • 5. Bargaining power of input suppliers 
    • the collective effect of these forces shapes an organization's profit potential
  58. Product differentiation
    an organization's ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors
  59. Cost Leadership
    is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost controls
  60. Balanced Scorecard
    • translates an organization's mission and strategy into a set of performance measures that provides the framework for implementing its strategy
    • does not focus solely on achieving short-run financial objectives
    • highlights the nonfinancial objectives that an organization must achieve to meet and sustain its financial objectives
  61. Balance Scorecard's four perspectives
    • financial - profits and value created for shareholders 
    • customer - the success of the company in its target market 
    • internal business processes - the internal operations that create value for customers 
    • learning and growth - the people and system capabilities that support operations
  62. The key point of a balanced scorecard
    the primary goal is to sustain long-run financial performance. Nonfinancial measures simply serve as leading indicators for the hard-to-measure long-run financial performance
  63. Strategy Map
    a diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in each of the four perspectives
  64. Features of a good balanced scorecard
    • it tells the story of a company's strategy, articulating a sequence of cause-and-effect relationships 
    • helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets 
    • motivates managers to take actions that eventually result in improvements in financial performance 
    • limits the number of measures, identifying only the most critical ones 
    • highlights less-than-optimal trade-offs that managers may make when they fail to consider operational and financial measures together
  65. Pitfalls to avoid in implementing a balanced scorecard
    • Managers should not assume the cause-and-effect linkages are precise - they are merely hypothesis - Understanding the scorecard will evolve over time help managers avoid unproductively spending time and money trying to design the perfect scorecard 
    • managers should not seek improvements across all of the measures all of the time 
    • managers should not use only objective measures in the balanced scorecard 
    • top management should not ignore nonfinancial measurements when evaluating managers and other employees -
  66. Direct Method of service department costs
    • allocates each support department's costs to operating departments only 
    • does not allocate support-department costs to other support-departments
  67. Step-Down method of allocating service-department costs
    • Most Common 
    • allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments 
    • once a support department's costs have been allocated, no subsequent support-department costs are allocated back to it
    • result is that this method does not recognize the total services that support-departments provide to one another
  68. Reciprocal method of allocating support-department costs
    • Most precise method because it considers the mutual services provided among all support departments
    • fully recognizes the mutual services provided among all support-departments.
    • fully incorporates interdepartmental relationships into the support-department allocations
    • Can use linear equations
  69. Common Costs
    • cost of operating a facility, activity, or like cost objects that is shared by two or more users 
    • exists because each user obtains a lower cost by sharing than the separate cost that would result if such a user were an independent entity
  70. Stand-Alone Cost-Allocation Method
    determines the weights for cost allocation by considering each user of the cost as a separate entity
  71. Incremental Cost-Allocation Method
    • ranks the individual users of a cost object in the order of users most responsible for the common cost and then uses this ranking to allocate cost among the users
    • first ranked user - primary user - allocated costs up to the costs of the primary user as a stand-alone user - usually receives the highest allocation of common costs 
    • second ranked - first-incremental user - allocated the additional cost that arises from two users instead of only the primary user
    • third ranked - second-incremental-user - allocated the additional cost that arises form three users instead of two users
  72. Shapley Value method
    allocates the average costs allocated as the primary user and as the incremental party
  73. "Rules of the game" between contracting parties
    • dispute can be reduced if in writing when signed 
    • definition of allowable cost items 
    • definitions of terms used 
    • permissible cost-allocation basis
    • how to account for difference between budgeted and the actual costs
  74. US Government reimburses contractors in one of two main ways
    • 1. a set price without analysis of actual contract cost data 
    • 2. paid after analysis of actual cost data - known as cost-plus contract
  75. When is Process Costing used
    when masses of identical or similar units are produced
  76. Normal Spoilage
    • spoilage inherent in a particular production process 
    • arises even when the process is operating in an efficient manner
    • cost is included in the cost of the good units completed 
    • Spoilage rates are computed by dividing units of normal spoilage by total good units completed
  77. Abnormal Spoilage
    • spoilage that is not inherent in a particular production process and would not arise under efficient operating conditions 
    • recorded in the Loss from Abnormal Spoilage account on the income statement
  78. Quality
    the total features and characteristics of a product or a service made or perform according to specifications to satisfy customers at the time of purchase and during use
  79. Design Quality
    how closely the characteristics of a product or service meet the needs and wants of customers
  80. Conformance quality
    the performance of a product or service relative to its design and product specification
  81. Costs of quality (COQ)
    • costs incurred to prevent, or the costs arising as a result of, the production of a low-quality product
    • very significant component of costs of quality is the opportunity cost if the contribution margin and income forgone from lost sales, lost production, and lower prices resulting from poor design and conformance quality
  82. Prevention Costs
    • costs incurred to preclude the production of products that do not conform to specifications
    • design engineering 
    • process engineering 
    • quality training 
    • testing new materials
  83. Appraisal costs
    • Costs incurred to detect which of the individual units of products do not conform to specifications
    • Inspection 
    • Product Testing
  84. Internal Failure Costs
    • Costs incurred on defective products before they are shipped to customers
    • spoilage
    • rework
    • machine repairs
  85. External Failure Costs
    • costs incurred on defective products after they have been shipped to customers
    • customer support 
    • warranty repair costs 
    • liability claims
  86. Advantages of COQ Measures
    • focus managers' attention on the costs of poor quality 
    • provides a measure of quality performance for evaluating trade-offs among costs 
    • assist in problem solving by comparing costs and benefits of different quality-improvement programs and setting prices for cost reduction
  87. Advantages of Non financial Measure of Quality
    • easy to quantify and understand 
    • direct attention to physical processes and hence helps managers identify the precise problem areas that need improvement
    • provide immediate short-run feedback on whether quality-improvement efforts are succeeding
    • some are useful indicators of long-run performance
  88. Explain how to manage bottlenecks
    keep bottlenecks busy and increase their efficiency and capacity by increasing throughput margin
  89. Bottleneck Operations
    • Step 1 - recognize that the bottleneck operation determines throughput margin (revenues - direct material costs of the goods sold) of the entire system
    • Step 2 - identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on
    • Step 3 - Keep the bottleneck operation busy and subordinate all nonbottleneck operations to the bottleneck operation - the needs of the bottleneck operation determines the production schedule of the nonbottleneck operation
  90. Identify six categories of costs associated with goods for sale
    • purchasing 
    • ordering
    • carrying
    • stockout
    • quality 
    • shrinkage
  91. Economic Order Quantity
    decision model that, under a given set of assumptions, calculates the optimal quantity of inventory to order
  92. Reorder Point
    the quantity level of inventory on hand that triggers a new purchase order
  93. Safety Stock
    inventory held at all times regardless of the quantity of inventory ordered using the EOQ model
  94. Materials Requirements Planning Systems
    • manufacturing products based on demand forecast
    • Push through manufacturing
  95. Just-in-Time manufacturing systems
    • manufacturing products only upon receiving customer orders
    • Also know as Lean Production 
    • Demand-Pull manufacturing
  96. Benefits of Decentralization
    • greater responsiveness to needs of customers, suppliers, and employees
    • faster decision making by managers 
    • increases motivation of managers 
    • assist management development and learning 
    • sharpens the focus of managers, broadens the reach of top management
  97. Costs of Decentralization
    • leads to sub-optimal decision making - Top management has given up control and the lower managers may not have the necessary expertise 
    • Focuses manager's attention on their unit rather than the company as a whole
    • Results in duplication of output
    • Results in duplication of activities
  98. Transfer Prices
    price one sub-unit charges another for product
  99. Criteria fore Evaluating Transfer Pricing
    • transfer prices should promote goal congruence 
    • They should induce managers to exert a high level of effort . Sub-units selling a product or service should be motivated to hold down their costs; sub-units buying a product or service should be motivated to acquire and use inputs efficiently 
    • The transfer price should help top management evaluate the performance of individual sub-units 
    • If top management favors a high degree of decentralization, transfer prices should preserve a high degree of sub-unit autonomy in decision making - A sub-unit has the right to buy from within the company or externally
  100. Methods of Transfer Pricing
    • Market-Based transfer price - management may choose to use the price of a similar product publicly listed
    • Cost-Based transfer price - management may choose a transfer price based on the cost of producing the product 
    • Hybrid transfer price - take into account both cost and market information.
  101. Describe the range of feasible transfer prices when there is unused capacity
    from variable cost to market price of the product transferred
Card Set:
Cost Accounting Final
2014-05-02 19:34:28
Cost Accounting

Cost Accounting Final 2014
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