Accounting 102 discussion questions PDF

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Professor Robins Accounting 102 05 September 2019

Chapter 1 Discussion Questions (pg. 47 # 1-5) 1. The three major types of product costs in a manufacturing company are direct materials, direct labor and manufacturing overhead. 2. Direct materials are an integral part of the finished product and whose costs can be conveniently traced to it. Indirect labor are the costs of labor such as janitors, supervisors, materials handlers and other factory workers. Indirect materials are small items such as glue and nails not easily traced. Direct labor in factories cost that can be easily traced to individual units. Manufacturing overhead is all manufacturing costs except direct material and direct labor. (machine labor, utilities, property taxes) 3. Product costs are all the costs that are involved in acquiring or making a product. Period costs are the cost taken directly to the income statement as expenses. 4. Variable costs are costs varies, in total, in direct proportion to changes in the level of activity. Fixed costs are costs that remains constant, in total, regardless of changes in activity. Mixed costs are costs that contains both variable and fixed cost elements. 5. A. Decrease B. Increase C. No Change D. Increase

Chapter 1Page 47 #6-14 6. Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. Relevant Range refers to a specific activity level that is bounded by a minimum and maximum amount. 7. An activity base is a measure of what causes the incurrence of a variable cost. Example: Units produced, machine hours, labor hours. 9. Committed fixed cost is long term and cannot be significantly reduced in the short term. Discretionary may be altered in the short term by current managerial decisions.

10. 11. Traditional format is used primarily for external reporting. Contribution format is used primarily by management. 12. Contribution margin is a product's price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. 13. Differential cost is the difference in cost between two alternatives. Opportunity cost is the potential benefit that is given up when one alternative is selected over another. Sunk costs have already been incurred and cannot be changed by any decision made now or in the future. 14. Differential cost can be either fixed or variable. Chapter 2 Discussion questions #1-8 pg 83 1. Job-order costing is a costing system used in situations where many different products, jobs, or services are produced each period ( custom orders for example) a. Kitchen remodels… b. A job that fits your needs 2. Absorption costing a costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in unit product costs 3. Normal costing a costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job 4. Under job order costing, the cost is normally divided into three parts, namely Direct Materials, Direct Labor and Manufacturing overhead 5. 1. Estimate the total amount of allocation base, 2. Estimate total fixed MOH for the current period; 3.Use cost formula to estimate total MOH cost; 4.Compute predetermined OverHead rate using the formula 6. The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost.

a. Where everything is summarized to determine where we want to sell a product at 7. Some production costs such as a factory manager's salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products. 8. If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or variations in output. For this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs.

Chapter 2 9-13 pg 83 9. The “cost driver” is the base used in computing the predetermined rate. The measure of activity used as the allocation base should drive the overhead cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted. 10. Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs. 11. Applied overhead is the overhead allocated to a product based upon the predetermined overhead rate. Predetermined overhead rate is calculated by dividing the estimated overhead cost by the estimated hours usage of labor or machine. Therefore, applied overhead is estimated overhead cost allocated to a product for a period which is calculated by multiplying the predetermined overhead rate to the actual hours usage which can be labor hours or machine hours. Actual overhead cost is the cost actually incurred by the Company on a product over a period.

12. Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was understated. Overapplied overhead is deducted from cost of goods sold. a. Overapplied overhead is a situation where the overhead applied is more than the cost incurred b. Underapplied overhead is a situation where the overhead applied is less than the cost incurred.

13. A plantwide overhead rate is a single overhead rate used throughout a plant. In a multiple overhead rate system, each production department may have its own predetermined overhead rate and its own allocation base. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive.

Chapter 3 #1-3 pg 122 1. To calculate the cost of goods sold, the change in finished goods inventory is added to/subtracted from the cost of goods manufactured. a. The cost of goods manufactured schedule is used to compute the cost of products manufactured during the period. The cost of goods manufactured shall be transferred to the finished goods account during the period and the same shall be used in computing the cost of goods sold in the income statement. b. Cost of manufactured sold schedule reports the total manufacturing cost incurred during the period that are added back to work in progress and adjust the work in progress inventory to arrive at the cost of goods manufactured

2. The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred because the predetermined overhead rate is based on estimates.

3. Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Underapplied or overapplied overhead is disposed of by closing out the amount to Cost of Goods Sold. The adjustment for underapplied overhead increases Cost of Goods Sold whereas the adjustment for overapplied overhead decreases Cost of Goods Sold.

Chapter 3 #4-5 4. Overhead may be underapplied for a number of reasons. Poor control over overhead spending can result in actual overhead costs exceeding estimated overhead costs. Also, if some of the overhead is fixed and the actual amount of the allocation base for the period is less than estimated at the beginning of the period, overhead will be underapplied. 5. The adjustment that is made on the schedule of cost of goods sold for under applied overhead is to add the unapplied amount to the unadjusted cost of good sold balance because not enough cost were applied to jobs. The adjustment that is made on the schedule of cost of goods sold for over applied overhead is to subtract the unadjusted cost of goods sold balance by the over applied amount, because too much cost were applied.

Chapter 3 # 6-8 6. Cost of raw materials used in the production is computed by adding opening inventory and purchases made during the year and shall be deducted by closing inventory as shown below. a. Cost of Raw material= opening inventory+purchases during the period - closing inventory 7. The cost of goods manufactured schedule is used to calculate the cost of producing products for a period of time. a. The total manufacturing cost= cost of direct material used + cost of direct labor factory activity + manufacturing overhead applied in work process

8. The cost of goods manufactured equation is calculated by adding the total manufacturing costs; including all direct materials, direct labor, and factory overhead; to the beginning work in process inventory and subtracting the ending goods in process inventory.

Chapter 3 #9-10 9. Unadjusted cost of goods sold a. Unadjusted cost of goods sold = beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory 10. Raw materials -> Work in process -> Finished goods -> Cost of goods manufactured/ sold a. The schedule of cost of goods manufactured and cost of goods sold use the same generic equation (transferred out= beginning balance + additions - ending balance) three times to track the flow of costs through raw materials, work in process, and finished goods inventories. The application of this general equation to each of the three inventory accounts.

Chapter 4 # 1-4 1. The three common approaches for assigning overhead cost to products are a. Plantwide overhead rate b. Departmental overhead rates c. Activity-based costing 2. Many companies question the assumption, implicit in conventional costing systems. That overhead cost is proportional to direct. Automation decreases amount of direct labor and overhead costs have increased, they handle more products different in volume, batch size, complexity. Activity based costing appeals to these companies because it attempts to more accurately assign overhead costs to products based on activities required to make products and the resources consumed by those activities. 3. The departmental approach to assigning overhead cost to products usually assures that overhead costs are proportional to direct labor hours or machine hours. However, overhead costs are often driven by other factors, including the number of batches run and product complexity, that are only loosely related if at all to volume . Activity based costing attempts

to more accurately assign overhead costs to products based on the activities that they cause rather than just on the direct labor hours required to make a unit.

4. The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility sustaining costs. Output unit-level costs are the costs of activities performed on each individual unit of a product or service.

Chapter 4 #5-6 5. Activity Based Costing (ABC) is a two-stage product costing method because it assigns costs to activities and then to the products based on each product's use of activities. 6. A company using activity Based Costing will be able to shift overhead cost from higher volume products to low-volume products, because high volume products have less usage of each activity. A product having volume production, will consume less resources of the activity. The cost of each activity is identified alongside its measurable units. A products using more of an activity will be recovered higher overhead cost. Hence, activity-based costing is based on the concept that products consume activities consume Chapter 4 #7-8 7. Activity-based costing improves the accuracy of product costs in three ways. First, activity-based costing increases the number of cost pools used to accumulate overhead costs. Rather than accumulating all overhead costs in a single, plantwide pool, or accumulating them in departmental pools, costs are accumulated for each major activity. Second, the activity cost pools are more homogeneous than departmental cost pools. In principle, all of the costs in an activity cost pool pertain to a single activity. In contrast, departmental cost pools contain the costs of many different activities carried out in the department. Third, activity-based costing changes the bases used to assign overhead costs to products. Rather than assigning costs on the basis of direct labor or some other measure of volume, costs are assigned on the basis of the activities that presumably cause overhead costs. 8. The limitations for the activity based costing are as: a. Cost of implementing activity-based costing

i.

The implementation of activity based costing requires costs to be incurred. Proper costing system needs to be designed, which will be customised as per the requirement. This will involve a cost of designing, implementation and maintenance data. Hence care should be taken to ensure that the benefit of the costing system should be more than the costs incurred.

b. The activity cost method is designed and used with some assumption. These assumptions may be related to the number of activities, time , cost, and the flow of costs. The costing will be true till the time these assumptions are correct In case of any change in actual, the costing system will need to be revised. Chapter 5 #1-3 1. The contribution margin ratio is the percentage of sales, service revenues or selling price that remains after all variable costs and variable expenses have been covered. In other words, the contribution margin ratio is the percentage of revenues that is available to cover a company's fixed costs, fixed expenses, and profit. (The contribution margin ratio is different from the gross margin ratio or gross profit percentage and cannot be computed directly from rom the reported amounts on the company's external income statement.) a. Ratio Can be used in cost-profit calculations. Used in target profit and break even analysis and can be used to quickly estimate the effects on profits of a change in sales revenue. 2. Focuses on the changes in revenues and costs that will result from a particular action. 3. Cost accumulation is simpler under process costing because costs only need to be assigned to departments—not individual jobs. a. cost accumulation is simpler in a process costing system than a job-order costing system. In a process costing system, instead of having to trace costs to hundreds of different jobs costs are traced to any a few processing departments." It states that a separate work in process account maintained for each processing department. In contrast, in a job-order costing system the entire company may have only one work in Process account."

Chapter 5 #4-6 4. A company maintains as many Work in Process as the number of processes it uses. a. Can have as many as we want 5. Journal Entry: a. Work In Process-Firing XXXX i.

Work in Process-Mixing XXXX

6. The cost that might be added in the Firing Department would include: a. Cost transferred in form the Mixing Department b. Material costs added in the Firing Department c. Labor cost added in the Firing Department d. Overhead costs added in the Firing Department

Chapter 5 #7-8 7. Weighted average method blends together units and costs from the current period with units and costs from the prior period. In a weighted average method, the equivalent units of production for a department are the number of units transferred to the next department of finished goods plus the equivalent units in the department's ending work-in-progress inventory 8. The company needs to distinguish between the cost of the metals used to make medallions, but the medallions are otherwise identical and got through the same production process. The metals are identical but the only difference is the metal used to make the medallions. Thus , operations costing is ideally suitable for the company's needs.

Chapter 6 #1-2 1. Contribution margin ratio is the percentage of sales, shows how the contribution margin will be affected by a change in total sales. a. Can be used in cost-profit calculations. Used in target profit and break even

analysis and can be used to quickly estimate the effects on profits of a change in sales revenue. 2. An analytical approach that focuses only on those costs and revenues that change as a result of a decision. (incremental analysis) Chapter 6 # 3-4 3. When sales increases, variable cost also increases. Company A 's costs are mostly variable, so when sales increases its variable cost also increases. Hence there won't be any change in profits. Company B's costs are mostly fixed. So when sales increases, as fixed costs are fixed so company B will earn more profits. 4. Operating Leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales.

Chapter 6 # 5-6 5. Break-even point is the level of sales at which profit is zero 6. A. the total revenue will be less if the selling price per unit decreases. Also, if the selling price per unit decreased, more units would have to be sold, making the break-even point a higher unit volume B. The fixed line are the total cost line will shift upwards if fixed costs increased, This will also make the break-even point as a higher unit of volume. C. The total cost line will be steeper if the variable cost increases. This will make the break-even point to be a higher unit of volume.

Chapter 6 #7-9 7. Margin of Safety: the excess of budgeted or actual dollar sales over the break-even dollar sales. 8. Sales mix: the relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales. a. The assumption is usually made in CVP analysis that the sales mix will not change. Under the constant sales mix assumption, the break-even level of sales dollars can be computed using the overall contribution margin (CM) ratio. In essence, the assumption is made that the firm has only one product that consists of

a basket of its various products in a specified proportion. The contribution margin ratio of this basket can be easily computed by dividing the total contribution margin of all products by total sales. 9. A higher break-even point and lower net operating income could result if the sales mix shifted from high contribution margin products to low contribution margin products. Such a shift would cause the average contribution margin ratio in the company to decline, resulting in less total contribution margin for a given sales. With a lower contribution margin ratio, the break-even point would be higher since it would require more sales to cover the same amount of fixed costs. CHapter 7 #1-5 1. Absorption costing and variable costing are differentiated on the basis of fixed manufacturing overhead. Under absorption costing, fixed manufacturing is considered as product cost and assets till the products are sold. Under variable costing, it i...