ACC 315 EXAM 2

ACC 315 COST MEASUREMENT EXAM 2 STUDY GUIDE

Job costing

A system that tracks costs separately for each customized job, order, or project.

Process costing

A system that averages costs across many similar units made through the same processes.

Manufacturing costs

Direct materials, direct labor, and manufacturing overhead. Direct materials and labor are traced to products; overhead includes indirect production costs.

Inventory cost flow

Costs move through Work in Process for unfinished goods, Finished Goods for completed unsold goods, and Cost of Goods Sold when goods are sold.

Job-cost sheet

A record of the direct materials, direct labor, and applied overhead assigned to one job.

Actual costing

Uses actual direct materials, actual direct labor, and actual manufacturing overhead.

Normal costing

Uses actual direct materials and direct labor, with overhead applied using a predetermined rate.

Cost-plus pricing

Setting a selling price by adding a markup to cost.

Cost allocation

Assigning indirect costs to products, departments, jobs, or other cost objects.

Cost pool

A group of costs collected together before being allocated.

Cost object

Anything for which costs are measured, such as a product, job, customer, or department.

Cost driver

A factor that causes costs to increase or decrease.

Allocation base

A measure used to distribute indirect costs, such as machine hours or direct labor hours. Ideally, it reflects a cost driver.

Predetermined overhead rate

Estimated total overhead divided by estimated allocation-base usage.

Applied overhead

Overhead assigned to production. Calculate it by multiplying the overhead rate by actual allocation-base usage.

Actual overhead

The indirect production costs a company actually incurs.

Underapplied overhead

Actual overhead exceeds applied overhead. Closing the difference to Cost of Goods Sold increases COGS.

Overapplied overhead

Applied overhead exceeds actual overhead. Closing the difference to Cost of Goods Sold decreases COGS.

Service department

A department that supports other departments, such as maintenance or custodial services.

Production department

A department that directly makes products, such as assembly or finishing.

Direct allocation method

Allocates service department costs only to production departments and ignores services exchanged between service departments.

Step-down allocation method

Allocates service department costs in sequence, recognizing some services between service departments. A closed department receives no later allocations.

Reciprocal allocation method

Fully recognizes services exchanged between service departments, usually by solving simultaneous equations.

Single-stage allocation

Assigns costs directly from a cost pool to final cost objects.

Two-stage allocation

First assigns costs to intermediate pools, then assigns those costs to final cost objects.

Traditional costing

Assigns overhead using broad volume-based measures, such as machine hours or direct labor hours. It is simpler but can distort product costs.

Activity-based costing (ABC)

Assigns overhead through activity cost pools based on each product’s use of activities. It can improve accuracy when products use support activities differently.

Activity rate

Estimated activity cost pool divided by estimated activity-driver usage. Multiply the rate by a product’s driver usage to assign costs.

Activity levels

Unit-level activities support each unit; batch-level support each batch; product-level support a product line; facility-level support the whole factory.

Cost distortion

Assigning too much cost to some products and too little to others, which can mislead pricing and profitability decisions.

Equivalent units of production

Partially completed units expressed as an equivalent number of fully completed units. Calculate separately for materials and conversion costs.

Conversion costs

Direct labor plus manufacturing overhead.

Weighted-average process costing

Combines beginning Work in Process costs with current-period costs to calculate an average cost per equivalent unit.

Weighted-average equivalent units

Units completed and transferred out plus the equivalent units in ending Work in Process. Calculate separately for materials and conversion.

Weighted-average cost per equivalent unit

Beginning Work in Process cost plus current-period cost, divided by equivalent units. Calculate separately for materials and conversion.

Assigning process costs

Multiply completed units by the full cost per unit. Value ending Work in Process using its equivalent units and the separate materials and conversion rates.

Capacity

The amount of output or activity that available resources can support.

Unused capacity

Available capacity that is not being used.

Theoretical capacity

Maximum output under ideal conditions with no interruptions.

Practical capacity

Output possible after allowing for unavoidable downtime, such as maintenance.

Capacity cost rate

Cost of capacity supplied divided by the amount of capacity supplied, commonly measured using practical capacity.

Unused capacity cost

Capacity cost rate multiplied by unused capacity.

Return on sales (ROS)

Operating income divided by sales. Measures operating profit earned per dollar of sales.

Return on investment (ROI)

Operating income divided by average operating assets. Measures how effectively assets generate operating profit.

Investment turnover

Sales divided by average operating assets. ROI equals return on sales multiplied by investment turnover.

Residual income

Operating income minus a capital charge equal to the required rate of return multiplied by operating assets.

Economic value added (EVA)

After-tax operating profit minus invested capital multiplied by the weighted-average cost of capital, often with accounting adjustments.

Transfer pricing

The price charged when one division sells goods or services to another division within the same company.

Transfer pricing methods

Market-based uses an external market price; cost-based uses a cost measure, sometimes plus markup; negotiated uses a price agreed on by the divisions.

Acceptable transfer price range

The seller’s minimum is incremental cost plus opportunity cost per unit. The buyer’s maximum is generally the relevant external purchase price.

Opportunity cost

The benefit given up by choosing one alternative over another. An internal transfer may have no opportunity cost when spare capacity exists and no other benefits are lost.

Correlation

Measures the strength and direction of a linear relationship between variables. Correlation does not prove causation.

Regression analysis

Estimates how an outcome relates to one or more predictor variables and can be used for prediction. It does not by itself prove causation.

Recommendations to management

Explain the results, compare alternatives using relevant costs and benefits, consider factors such as quality and capacity, and support a specific recommendation.