What is the difference between managerial accounting and financial accounting?
Financial accounting reports financial information to external parties like stockholders and regulators. Managerial accounting provides information to employees within an organization to help formulate plans, control operations, and make decisions.
What are the purposes of cost classification in managerial accounting?
Cost classification helps in assigning costs to cost objects, accounting for costs in manufacturing companies, preparing financial statements, predicting cost behavior, and making decisions.
What is the difference between direct and indirect costs?
Direct costs can be easily traced to a specific product or cost object (e.g., direct materials and direct labor). Indirect costs cannot be traced directly and include overheads like manufacturing overhead.
What are some examples of manufacturing overhead?
Examples include depreciation of manufacturing equipment, utility costs, property taxes, and insurance premiums for operating a manufacturing facility.
What are prime costs and conversion costs in manufacturing?
Prime costs consist of direct materials and direct labor. Conversion costs include direct labor and manufacturing overhead.
What do product costs include in manufacturing?
Product costs include all costs involved in acquiring or making a product, such as raw materials, work in process, and finished goods.
Define fixed, variable, and mixed costs.
Fixed costs remain constant regardless of activity level (e.g., rent).
Variable costs change in direct proportion to activity levels (e.g., raw materials).
Mixed costs contain both fixed and variable elements (e.g., utility bills with a base charge and a per-usage charge).
How is a mixed cost represented mathematically?
The total mixed cost is expressed as Y = a+bX
where:
Y is the total mixed cost.
a is the total fixed cost.
b is the variable cost per unit.
X is the level of activity.
What is an opportunity cost?
It is the potential benefit given up when choosing one alternative over another. For instance, the opportunity cost of attending a class is the income that could have been earned by working instead.
Which costs are relevant in decision-making?
Relevant costs include differential costs, opportunity costs, and avoidable costs. Sunk costs are not relevant as they cannot be changed by future decisions.
If your fixed monthly utility charge is $40, and the variable cost is $0.03 per kilowatt-hour, what is the utility bill for 2,000 kilowatt-hours?
The utility bill is calculated as:
Y=40+(0.03×2,000)=40+60=100= 100
Thus, the total utility bill is $100.
Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
A. Depreciation of manufacturing equipment
B. Property taxes on corporate headquarters
C. Direct materials costs
D. Electrical costs to light the production facility
E. Sales commissions
Correct Answers:
B and E (Property taxes on corporate headquarters and sales commissions are period costs).
Which of the following costs would be variable with respect to the number of ice cream cones sold at a Baskin & Robbins shop?
A. The cost of lighting the store
B. The wages of the store manager
C. The cost of ice cream
D. The cost of napkins for customers
C and D (The cost of ice cream and the cost of napkins are variable costs).
Is the cost of a train ticket relevant when deciding whether to drive or take the train to Portland to attend a concert?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
Correct Answer:
A (The cost of the train ticket is relevant, as it can influence the decision).
Is the annual cost of licensing your car relevant in deciding whether to drive to Portland or take the train?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
B (The annual licensing cost is not relevant as it is a fixed cost that cannot be changed by the decision).
Suppose that your car could be sold now for $5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
B (The current sale value of your car is not a sunk cost, as it can still be realized).
What are the main steps in the flow of costs in a job-order costing system?
The flow includes recording raw material purchases, issuing materials for production, recording labor costs, applying overhead, and transferring completed goods to finished goods.
How do merchandising companies differ from manufacturing companies in their cost flows?
Merchandising companies buy and sell finished goods, while manufacturing companies buy raw materials, produce goods, and sell the finished products.
What are "Raw Materials," "Work in Process," "Finished Goods," and "Cost of Goods Manufactured"?
Raw Materials: Inputs that go into the final product.
Work in Process: Units that are partially completed.
Finished Goods: Products completed and ready for sale.
Cost of Goods Manufactured: Manufacturing costs associated with goods completed during a period.
How does the cost of goods sold for a manufacturing company differ from that of a merchandising company?
Manufacturing companies calculate cost of goods sold by adding cost of goods manufactured to beginning finished goods inventory and subtracting ending finished goods inventory.
What is the basic equation for inventory accounts?
Beginning balance + Additions to inventory - Withdrawals from inventory = Ending balance.
What journal entry is recorded for the purchase of raw materials?
The entry is:
Debit: Raw Materials
Credit: Accounts Payable.
What journal entry is used to record labor costs in a job-order costing system?
Debit: Work in Process (for direct labor)
Debit: Manufacturing Overhead (for indirect labor)
Credit: Salaries and Wages Payable.
How is manufacturing overhead applied to Work in Process?
Debit: Work in Process
Credit: Manufacturing Overhead. The amount is calculated using the predetermined overhead rate multiplied by the actual activity level.
What three types of costs are included in the schedules for cost of goods manufactured and cost of goods sold?
Direct Materials
Direct Labor
Manufacturing Overhead. The schedule calculates the cost of raw material and direct labor used in production, the amount of manufacturing overhead applied, and the costs associated with goods finished during the period.
How are non-manufacturing costs handled in the costing system?
Non-manufacturing costs are not assigned to individual jobs but are expensed in the period incurred. Examples include salaries of marketing, selling, and administrative employees, as well as advertising expenses.
What is the journal entry for transferring completed jobs from Work in Process to Finished Goods?
Debit: Finished Goods
Credit: Work in Process.
What is the journal entry for transferring finished goods to cost of goods sold?
Debit: Cost of Goods Sold
Credit: Finished Goods.
What are the five parts of the product cost flows process?
Raw materials are added to beginning inventory and deducted for ending inventory.
Direct materials used are recorded as they move to production.
Direct labor and applied manufacturing overhead are added to direct materials.
Beginning Work in Process is added, and ending Work in Process is deducted.
Finished goods inventory is adjusted to calculate the cost of goods sold.
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased.
At the end of the month, $28,000 of raw material was still present. What is the cost of direct materials used?
Formula in Words:
Direct Materials Used
=(Beginning Raw Materials Inventory) + (Purchases of Raw Materials)
- (Ending Raw Materials Inventory)
Solution: Direct Materials Used = $32,000 + $276,000 - $28,000 = $280,000
Direct materials used in production totaled $280,000.
Direct labor was $375,000, and $180,000 of manufacturing overhead was added. What were total manufacturing costs?
Formula in Words: Total Manufacturing Costs = (Direct Materials Used) + (Direct Labor) + (Manufacturing Overhead)
Solution: Total Manufacturing Costs = $280,000 + $375,000 + $180,000 = $835,000
Beginning work in process was $125,000. Manufacturing costs added were $835,000. $200,000 of partially finished goods remained in work in process inventory.
What was the cost of goods manufactured?
Formula in Words: Cost of Goods Manufactured = (Beginning Work in Process Inventory) + (Total Manufacturing Costs) - (Ending Work in Process Inventory)
Solution: Cost of Goods Manufactured = $125,000 + $835,000 - $200,000 = $910,000
Beginning finished goods inventory was $130,000. The cost of goods manufactured was $760,000. Ending finished goods inventory was $150,000.
What was the cost of goods sold?
Formula in Words: Cost of Goods Sold = (Beginning Finished Goods Inventory) + (Cost of Goods Manufactured) - (Ending Finished Goods Inventory)
Solution: Cost of Goods Sold = $130,000 + $760,000 - $150,000 = $740,000
What is Cost-Volume-Profit (CVP) analysis?
CVP analysis is a technique used to analyze the effect of changes in sales volume on costs, revenues, and profits.
What are the key assumptions made in CVP analysis?
Selling price remains constant regardless of volume.
Costs are linear and divided into fixed and variable components.
In multiproduct companies, the mix of products sold remains constant.
What is the formula for the Contribution Margin (CM) ratio?
CM Ratio = (Contribution Margin per Unit) / (Selling Price per Unit)
How is the variable expense ratio calculated?
Variable Expense Ratio = (Total Variable Expenses) / (Total Sales)
What is the basic equation to express the relationship between sales, costs, and profit?
Profit = (CM Ratio × Sales) - Fixed Expenses
How is the break-even point in units calculated?
Break-Even Point in Units = (Fixed Expenses) / (CM per Unit)
What is the formula for calculating the break-even point in sales dollars?
Break-Even Point in Sales Dollars = (Fixed Expenses) / (CM Ratio)
What is the formula to determine the number of units needed to achieve a target profit?
Target Profit Units = (Fixed Expenses + Target Profit) / (CM per Unit)
How is the degree of operating leverage calculated?
Operating Leverage = (Contribution Margin) / (Net Operating Income)
What is the margin of safety in sales dollars and how is it calculated?
Margin of Safety = (Total Sales) - (Break-Even Sales)
Coffee Klatch sells 2,100 cups per month at $1.49 each with a variable expense of $0.36 per cup. What is the CM Ratio?
CM Ratio = ($1.49 - $0.36) / $1.49 = 0.758
Coffee Klatch's average fixed expense per month is $1,300. What is the break-even sales in dollars?
Break-Even Sales
= Fixed Expenses / CM Ratio = $1,300 / 0.758 ≈ $1,715
If Coffee Klatch has fixed expenses of $1,300 per month, how many cups need to be sold to break even?
Break-Even Units
= Fixed Expenses / CM per Unit = $1,300 / ($1.49 - $0.36)
≈ 1,150 cups
Coffee Klatch wants to earn $2,500 in profit. How many cups need to be sold to achieve this?
Target Profit Units
= (Fixed Expenses + Target Profit) / CM per Unit
= ($1,300 + $2,500) / ($1.49 - $0.36) ≈ 3,363 cups
Coffee Klatch wants to achieve $2,500 in profit. What are the sales dollars needed?
Target Profit Sales
= (Fixed Expenses + Target Profit) / CM Ratio
= ($1,300 + $2,500) / 0.758 ≈ $5,013
Coffee Klatch sells an average of 2,100 cups per month. What is the margin of safety in cups?
Margin of Safety
= Total Sales in Cups - Break-Even Sales in Cups
= 2,100 cups - 1,150 cups = 950 cups
What are mixed costs?
Mixed costs contain both fixed and variable elements. For example, utility costs may include a fixed monthly charge and a variable cost per kilowatt-hour.
What is the general equation for mixed costs?
Total Mixed Cost (Y)
= (Fixed Cost) + (Variable Cost per Unit × Level of Activity)Expressed as:
Y=a+bX
a = Total fixed cost
b = Variable cost per unit
X = Activity level
How are costs classified in account analysis and engineering approaches?
In account analysis, costs are classified based on the analyst’s knowledge. In the engineering approach, costs are classified based on evaluations of production methods, materials, labor, and overhead requirements.
What are the steps to apply the high-low method?
Identify the periods with the highest and lowest levels of activity.
Calculate the change in cost divided by the change in activity to find the variable cost per unit.
Calculate the fixed cost by subtracting the total variable cost from the total cost at either high or low activity level.
If maintenance costs are $9,800 for 850 hours and $7,400 for 450 hours, what is the variable cost per hour?
Variable Cost per Hour
= (Change in Cost) / (Change in Hours)
= ($9,800 - $7,400) / (850 - 450)
= $2,400 / 400
= $6 per hour.
How is the fixed cost calculated using the high-low method?
Fixed Cost
= Total Cost at High Point - (Variable Cost per Unit × High Activity Level)
Example:
$9,800 - ($6 × 850) = $4,700.
What is the least-squares regression method?
This method uses all data points to estimate fixed and variable cost components.
It fits a straight line to the data that minimizes the sum of the squared errors, represented as Y=a+bX.
What do the slope (b) and intercept (a) represent in least-squares regression?
In the regression line Y=a+bX:
a represents the total fixed cost.
b represents the variable cost per unit of activity.
What is the key difference between the high-low method and least-squares regression?
The high-low method uses only two points of data to estimate costs, while the least-squares regression method uses all data points, making it more accurate.
How is a scattergraph plot used in analyzing mixed costs?
A scattergraph plot helps visualize cost behavior by plotting total costs (Y) against the level of activity (X) to determine if a linear relationship exists.
Sales salaries and commissions are $10,000 when 80,000 units are sold and $14,000 when 120,000 units are sold.
What is the variable portion using the high-low method?
Variable Portion per Unit
= (Change in Cost) / (Change in Units)
= ($14,000 - $10,000) / (120,000 - 80,000)
= $4,000 / 40,000
= $0.10 per unit.
Using the high-low method, what is the fixed portion of sales salaries and commissions when costs are $10,000 for 80,000 units and $14,000 for 120,000 units?
= $14,000 - ($0.10 × 120,000)
= $14,000 - $12,000
= $2,000.
What information does a scattergraph plot provide?
It shows whether a cost relationship between a dependent variable (total cost) and an independent variable (activity level) is linear, aiding in cost behavior analysis.
How does variable costing differ from absorption costing?
Variable costing includes only variable manufacturing costs in product costs, while absorption costing includes both variable and fixed manufacturing costs.
What are the three simplifying assumptions used in this chapter?
Actual costing is used rather than normal costing.
The actual number of units produced is used as the allocation base for assigning actual fixed manufacturing overhead costs.
Variable manufacturing costs per unit and total fixed manufacturing overhead costs remain constant.
How are product costs defined under variable costing and absorption costing?
Variable Costing: Includes direct materials, direct labor, and variable manufacturing overhead as product costs.
Absorption Costing: Includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead as product costs.
How is the income statement prepared under variable costing?
Sales - Variable Costs (Variable COGS + Variable S&A Expenses) = Contribution Margin
Contribution Margin - Fixed Costs = Net Operating Income
How is the income statement prepared under absorption costing?
Sales - Cost of Goods Sold = Gross Margin
Gross Margin - Selling & Administrative Expenses (Variable and Fixed) = Net Operating Income
How do you reconcile net operating income between variable costing and absorption costing?
Absorption Costing Net Operating Income
= Variable Costing Net Operating Income + (Fixed Manufacturing Overhead Costs Deferred in Inventory - Fixed Manufacturing Overhead Costs Released from Inventory)
How do changes in unit sales and production affect net operating income under variable and absorption costing?
Variable Costing: Net operating income is only affected by changes in unit sales.
Absorption Costing: Net operating income is affected by changes in both unit sales and production levels.
Why is variable costing useful in Cost-Volume-Profit (CVP) analysis?
Variable costing categorizes costs as either variable or fixed, which makes it easier to use the contribution margin format for CVP analysis.
How does variable costing support better decision-making compared to absorption costing?
Variable costing correctly identifies the additional variable costs to produce one more unit and emphasizes the impact of total fixed costs on profitability.
Absorption costing may give the false impression that fixed manufacturing overhead varies with production, which can lead to inappropriate pricing and product discontinuation decisions.
Which method will produce the highest values for work in process and finished goods inventories?
A. Absorption costing
B. Variable costing
C. They produce the same values
D. It depends...
A. Absorption costing includes fixed manufacturing overhead in inventory values, resulting in higher work in process and finished goods inventories.
What costs are included in unit product costs under variable costing versus absorption costing?
Variable Costing: Direct materials, direct labor, and variable manufacturing overhead.
Absorption Costing: Direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
How do you reconcile the difference between absorption costing and variable costing net operating incomes?
Absorption Net Operating Income = Variable Net Operating Income + Fixed Manufacturing Overhead Deferred in Inventory - Fixed Manufacturing Overhead Released from Inventory.
What is the difference between a traditional and a contribution format income statement?
Aspect
Traditional Income Statement
Contribution Format Income Statement
Focus
Categorizes costs by function (COGS, S&A expenses)
Categorizes costs by behavior (variable vs. fixed)
Order of Cost Deduction
1. COGS 2. All S&A expenses
1. Variable costs 2. Fixed costs
Key Measures
Focus on gross profit
Focus on contribution margin
COGS
Includes both variable and fixed manufacturing costs
Only variable COGS are subtracted to compute contribution margin
Selling & Admin Expenses
All selling & administrative expenses are combined
Split into variable and fixed categories
Usefulness
Used for external reporting (GAAP/IFRS compliance)
Used for internal decision-making (e.g., CVP analysis)
Profitability Insight
Shows gross profit and net operating income
Highlights how changes in sales affect contribution margin and profitability
Type of Costs Included
COGS = Direct Materials + Direct Labor + Overhead (fixed and variable) S&A Expenses = Combined (no distinction between fixed and variable)
Variable Costs = Direct Materials + Direct Labor + Variable S&A Fixed Costs = Fixed S&A
Schedules for COGS, COGM and Income Statement
Cost of Goods Sold Schedule
Amount ($)
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured (COGM)
=Cost of Goods Available for Sale
- Ending Finished Goods Inventory
=Unadjusted Cost of Goods Sold
-Overapplied Overhead
if asked for adj. COGS
=Adjusted Cost of Goods Sold
Cost of Goods Manufactured (COGM) Schedule
Direct Materials:
Beginning Raw Materials
+Purchases of Raw Materials
-Ending Raw Materials
=Raw Materials Used in Production
+Direct Labor
+Manufacturing Overhead Applied
=Total Manufacturing Costs
+Beginning WIP
-Ending WIP
=Cost of Goods Manufactured (COGM)
Income Statement
Sales Revenue
- Adjusted Cost of Goods Sold
=Gross Margin
-Selling Expenses
-Administrative Expenses
=Net Operating Income
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