Exam 2 cheat sheet PDF

Preview

Summary

Exam 2 cheat sheet...

Description

Ch. 4: Cost pool – grouping of individual indirect cost items. Simplifies allocation of indirect costs bc the separate cost items don’t have to be allocated individually. Cost-allocation base – Systematic way to link one/group of indirect cost to cost objects (different products). Ideal cost-allocation base is the cost driver of indirect costs bc there’s a cause & effect relationship between cost driver & indirect costs. Example: If indirect costs of operating metal-cutting machines is $500,000 based on running these machines for 10,000 hrs, the cost allocation rate is 500,000/10,000 = $50 per machine hour. If a product uses 800 machine hours, it will be allocated $50 x 800 = $40,000. Job costing system – cost object is a unit or multiple units of a distinct product/service called a job. Each job uses different amounts of resources. Used to accumulate costs separately for each product or service. Actual costing – direct costs are traced to a cost object based on the actual direct cost rates x actual quantities of the direct costs inputs used. Indirect costs are allocated based on the actual indirect cost rate x actual quantities of the cost allocation bases used or incurred. Actual indirect cost rate = actual annual indirect costs/actual annual quantity of the cost allocation base. Time period used to compute indirect cost rates: 1) Numerator reason (indirect cost pool) – the shorter the period, the greater the influence of seasonal patterns on the amount of costs in a cost pool. 2) Denominator reason (quantity of the cost allocation base) – to avoid spreading monthly fixed indirect costs over fluctuating levels of monthly output & fluctuating quantities of the cost allocation base. Process-costing system – cost object is masses of identical/similar units of a product or service. In each period, divide the total costs of producing an identical/similar product or service by the total number of units produced to obtain a per-unit cost. This is the avg unit cost that applies to each of the identical/similar units produced in that period. Normal costing – traces direct costs to a cost object by using the actual direct cost rates x the actual quantities of the direct cost inputs, & allocates indirect costs based on the budgeted indirect cost rates x the actual quantities of the cost allocation bases. Budgeted indirect cost rate = budgeted annual indirect costs/budgeted annual quantity of the cost allocation base. 1) Identify the job that is the chosen cost object – Gather info through source documents. Job-cost record (sheet) – used to record & accumulate all the costs assigned to a specific job, starting when work begins. 2) Identify the direct costs of the job. All costs other than direct materials & DML are classified as indirect costs. Materials requisition record – source doc that contains info about the cost of direct materials used in a specific job/dept. Labor time sheet – source doc that contains info about the amount of labor time used for a specific job/dept. 3) Select the cost-allocation bases to use for allocating indirect costs to the job. 4) Identify the indirect costs associated w/ each cost-allocation base. 5) Compute the indirect cost rate for each cost-allocation base – use budgeted indirect cost rate. 6) Compute the indirect costs allocated to the job – actual quantity of each allocation base x budgeted indirect cost rate of each allocation base. 7) Compute total cost of the job by adding all direct/indirect costs assigned to the job. Journal entries: Purchase of materials – materials control dr, AP control cr. Usage of direct & indirect materials – WIP control (DM) dr, manuf overhead control (IM) dr, materials control cr. Manuf payroll, direct & indirect labor – WIP control (DL) dr, manuf overhead control (IL) dr, cash control cr. Other manuf overhead costs, including depreciation – manuf overhead control (lump sum) dr, cash control cr, accumulated depreciation control cr. Allocation of manuf overhead to jobs – WIP control dr, manuf overhead allocated cr. Jobs transferred to finished goods – FG control dr, WIP control cr. COGS – COGS dr, FG control cr. Underallocated (overallocated) indirect costs = actual indirect costs incurred – indirect costs allocated. Adjusted allocation-rate approach – restates all overhead entries in the GL & SL using actual overhead cost rates rather than budgeted overhead cost rates. Offers benefits of both the timelines & convenience of normal costing during the year & the allocation of entire actual manuf overhead costs at year-end. Proration – spreads under/overallocated overhead among ending WIP, finished goods inv, & COGS. Writeoff approach – the total under/overallocated manuf overhead is included in this year’s COGS expense. COGS dr, manuf overhead allocated dr, manuf overhead control cr. Ch. 5: Product-cost cross-subsidization – if a company undercosts one of its products, it will overcost at least one of its other products, vice versa. Common when a cost is uniformly spread (broadly avged) across multiple products. Refined costing system – the use of broad avges for assigning the cost of resources to cost objects is replaced by better measurement of the costs of indirect resources used by different cost objects, even if they use the indirect resources to highly varying degrees. Helps managers make better decisions. Demand for refining cost systems: 1) Increase in product diversity – growing demand for customized products has led managers to increase the variety of products & services their companies offer. 2) Increase in indirect costs w/ different cost drivers – the use of product & process technology such as computer-integrated manuf (CIM) & flexible manuf systems (FMS) has led to an increase in indirect costs & decrease in direct costs, particularly DML costs. 3) Increase in product market competition – as markets become more competitive, managers feel the need to obtain more accurate cost info to help them make important strategic decisions. Guidelines for refining: 1) Trace more costs as direct costs – reduce the amt of costs classified as indirect to minimize the extent to which costs have to be allocated rather than traced. 2) Increase the number of indirect-cost pools – expand the nbr of indirect-cost pools until each pool is fairly homogeneous (all costs have the same/similar cause-and-effect or benefits-received relationship w/ a single cost driver or metric that is used as the cost-allocation base). 3) Identify cost drivers – Managers should use the cost driver as the cost-allocation base for each homogeneous indirect-cost pool. Activity-based costing (ABC) – refines a costing system by identifying individual activities as the fundamental source of indirect costs. Cost hierarchy – categorizes various activity-cost pools on the basis of the different types of cost drivers or cost-allocation bases, or different degrees of difculty in determining cause & effect relationship. ABC cost hierarchy: 1) Output unit level costs – costs of activities performed that vary w/ each individual unit of the cost object. 2) Batch level costs – costs of activities that vary w/ a group of units of the cost object rather than w/ each individual unit of the cost object. 3) Product (service) sustaining costs – costs of activities undertaken to support individual products/services regardless of the number of units or batches of the product produced/service provided. 4) Facility sustaining costs – costs of activities that managers cannot trace to individual cost objects (products/services) but that support the org as a whole. ABC benefits: 1) Significant amts of indirect costs are allocated using one or two cost pools. 2) All/most indirect costs are identified as output unit-level costs. 3) Products make diverse demands on resources bc of differences in volume, process steps, batch size, or complexity. 4) Products that a company is well suited to make/sell show small profits, & products that a company is less suited to make/sell show large profits. 5) Operations staff has substantial disagreement w/ the reported costs of manufacturing & marketing products & services. Activity-based management (ABM) – method of management decision making that uses ABC info to improve customer satisfaction & profitability. Ch. 6: Budget – quantitative expression of a proposed plan of action by management for a specified period, & an aid to coordinate what needs to be done to implement that plan. Budgeting cycle: 1) Before start of the fiscal year, managers consider the company’s past performance,

market feedback & anticipated future changes to initiate plans for the next period. 2) At beginning of the fiscal year, senior managers give subordinate managers a set of specific financial/nonfinancial expectations against which they will compare actual results. 3) During the year, management investigates any deviations from the plan. Master budget – expresses management’s operating & financial plans for a specified period. Includes a set of budgeted financial statements. Operating decisions – how best to use the limited resources of an org. Financing decisions – how to obtain funds to acquire those resources. Pro forma statements – budgeted financial statements. Advantages: 1) Coordination – meshing & balancing all aspects of production/service & all depts in a company is the best way to meet its goal. 2) Communication – making sure all employees understand those goals. 3) Budgets enable managers to measure actual performance against predicted performance. Limitations: 1) Past results often incorporate past miscues & substandard performance. 2) Future conditions may differ from the past. Rolling budget (continuous budget/rolling forecast) – always available for a specified future period. Created by continuously adding a month, quarter, or year to the period that just ended. Financial budget – Made up of the capital expenditures budget, cash budget, budgeted balance sheet, & budgeted statement of cash flows. Focuses on how operations & planned capital outlays affect cash. Activity-based budgeting (ABB) – focuses on the budgeted cost of the activities necessary to produce & sell products/services. Financial planning models – mathematical representations of the relationships among operating & financing activities, & other factors that affect the master budget. Sensitivity analysis – a “what-if” technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes. Org structure – arrangement of lines & responsibility within an org. Companies choose the structure that best meets their needs, making the tradeoff between efciency & end to end business authority. Responsibility center – a part, segment, or subunit of an org whose manager is accountable for a specified set of activities. Managers are accountable for: 1) Cost center – costs only. 2) Revenue center – revenues only. 3) Profit center – revenues & costs. 4) Investment center – investments, revenues, & costs. Responsibility accounting – system that measures the plans, budgets, actions, & actual results of each responsibility center. Variances – differences between actual results & budgeted amts. Feedback: 1) Early warning – variances alert managers early to events not easily/immediately evident. 2) Performance evaluation – variances prompt managers to probe how well the company has implemented its strategies. 3) Evaluating strategy – variances sometimes signal to managers that their strategies are ineffective. Controllability – degree of influence a specific manager has over costs, revenues, or related items for which they’re responsible. Controllable cost – any cost primarily subject to the influence of a given responsibility center manager for a given period. A responsibility accounting system could either exclude all uncontrollable costs from a manager’s performance report or segregate such costs from the controllable costs. Budgetary slack – practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve. Kaizen budgeting – incorporates continuous improvement anticipated during the budget period into the budget numbers. Ch. 7: Management by exception – managers focus more closely on areas that are not operating as expected & less closely on areas that are. Static budget – based on the level of output planned at the start of the budget period. Static budget variance – difference between the actual result & the corresponding budgeted amt in the static budget. Favorable variance – in isolation, increases operating income relative to the budgeted amt. Actual rev > budgeted rev. Actual costs < budgeted costs. Unfavorable (adverse) variance – in isolation, decreases operating income relative to the budgeted amt. Static budget variance for operating income = actual result – static budget amt. Flexible budget – calculates budgeted costs based on the actual output in the budget period. Prepared at end of period. Hypothetical budget for the start of the period if it had been correctly forecast. Sales-volume variance = flexible budget amt – corresponding static budget amt. Flexible budget variance = actual result –flexible budget amt. Budget input prices/quantities: 1) Actual input data from past periods – (advantages) past data represent quantities & prices that are real rather than hypothetical benchmarks. Easy to collect at a low cost. (disadvantages) a firm’s inefciencies are incorporated in past data. Does not incorporate changes expected for budget period. 2) Data from other companies that have similar processes – (advantages) provide useful info about how a firm is performing relative to competitors. (disadvantages) input price/quantity data from other companies are often not available & may not be comparable. 3) Standards developed by the firm itself – (advantages) standard times aim to exclude past inefciencies & take into account changes expected to occur in the budget period. (disadvantages) standards might not be achievable bc they aren’t based on realized benchmarks, & workers could get discouraged trying to meet them. Standard – carefully determined price, cost, or quantity that’s used as a benchmark for judging performance. Expressed on a per-unit basis. Standard input – determined quantity of input required for one unit of output. Standard price – determined price a company expects to pay for a unit of input. Standard cost – determined cost of a unit of output. Price (rate) variance – difference between actual & budgeted price, multiplied by the actual input quantity (ex: direct materials purchased). Efficiency (usage) variance – difference between actual input quantity used & budgeted input quantity allowed for actual output, multiplied by budgeted price. Journal entries: Direct materials purchased – direct materials control dr, direct materials price variance cr, AP control cr. Direct materials used – WIP control dr, direct materials efciency variance dr, direct materials control cr. Liability for DML costs – WIP control dr, DML price variance dr, DML efciency variance dr, wages payable control cr. Direct cost variance account write off – COGS dr, direct materials price variance dr, direct materials efciency variance cr, DML price variance cr, DML efciency variance cr. Causes of variance: 1) Poor designs of products/processes. 2) Poor work on production line bc of underskilled workers or faulty machines. 3) Inappropriate assignment of labor/machines to specific jobs. 4) Congestion caused by scheduling rush orders. 5) Not manufacturing materials of uniformly high quality. Benchmarking – continuous process of comparing one company’s performance levels against the best levels of performance in competing companies. Prepare operating budget: 1) Revenues budget. 2) Production budget (in units). 3) Direct materials usage & purchases budget. 4) DML budget. 5) Manufacturing overhead budget. 6) Ending inv budget. 7) COGS budget. 8) Nonmanufacturing costs budget. 9) Budgeted income statement. Flexible budget: 1) Identify actual quantity of output. 2) Calculate flexible budget for revenues based on budgeted selling price and actual qty of output. 3) Calculate flexible budget for costs based on budgeted variable cost per output, actual qty of output, and budgeted fixed costs. Budgeted indirect cost rate = budgeted indirect costs / budgeted direct labor hours. Actual indirect cost rate = actual indirect costs / actual direct labor hours....