ACFM 330 Exam 2

why do companies care about the cost/unit rate?

to know how much to sell it to customer for

more specific cost equates to more…and better…

efficient operations, decisions made

dropping a product only reduces

some OH

what are the 2 effects of dropping a product

1. raise price of remaining product

2. customer will either need product/continue to buy or goes into death spiral

what is a death spiral

when the prices increase to cover cost but demand is decreases

death spiral can also occur in firms with

increasing demand

how can death spiral occur for companies with increasing demands

added capacity (increasing fixed oh) without a similar increase in output

alternative to pohr is

two stage allocation

what is the first and second stage of a two stage allocation

first stage: allocate oh cost to department

second stage: allocate department oh cost to product/services

in two stage allocation cost, each department has…, making it more…

unique rate, detailed

what are the cost pools in a two stage cost allocation

dm, dl, manufacturing oh

if the salary of someone is the solely fix the machine, this cost is allocated to

machine related cost

assembly is usually based on

machine hours

packaging is usually based on

labor cost or hours

what are the 2 things managers need to think about related to cost

1. why a product is not selling

2. why competitor prices are so low

what is plantwide allocation method

all oh cost recorded in one cost pool and applied to product using 1 oh allocation rate

in plant wide allocation method, one set of…allocate oh for product for all department

rates

when is plantwide allocation method used

when products being made is similar and the department does similar work

what is department allocation method

oh cost traced to separate department and applied to products using the department allocation rate

in department allocation method, there is one…for each department

cost pool

when do we use department allocation method

if each department has specialized and individualized work, multiple products using resources differently

we assign oh cost based on how

incurred

why would we not opt for a more detail cost breakdown

it is more costly, cost may not outweigh the benefits

what is ABC

assigns cost to activities then assigns them to products based on products consumption of activities

describe stage 1 and 2 in ABC

stage 1: assign cost to activities

stage 2: assign cost to products based on use of each activities

how do we define activity in abc

how product is actually made

why do we use ABC (2)

1. any products can be broken into activity

2. every activity consumes resources

abc is the most…product costing

granular

what is a cost driver

factor that causes activity cost

for every activity there is a

rate

what is a production run

how many run can be done before need to refill materials (running through one cycle)

what are cost hierarchies

classification of cost drivers

what is volume related in cost hierarchies

based on dl cost, machine hours, number of units

what is batch related in cost hierarchies

set up hours, production runs, number of shipments

what is product related in cost hierarchies

number of products

what is facility related in cost hierarchies

direct cost, value added

what are the 4 hierarchy levels

1. volume related

2. batch related

3. product related

4. facility related

for abc, dm and dl debited to

respective activity in WIP which is split based on product line

for abc every activity has its own

rate that is assigned to wip

we have seen a shift away from labor cost towards…

machine hours or cost

if we allocate oh based on labor now,…

oh will be high

abc can be used in the service industry as we assign based on

service engagement

why would we not use abc (2)

1. costly, cost may exceed benefit

2. if not updated based on activity, could be worse than other cost allocating method

abc can also be used towards

clients

process costing takes place for a company that has

identical product made in the same way

what are equivalent units

number of finish product we have

how do we get average completion for ending WIP

take average of individual % of completion

what is the two questions we ask in process costing

1. at end of current month, how much work was done

2. what was done in the prior month

why do we have process costing

to keep track of cost within the process

what are the 5 steps in product costing in process industry

1. measure physical flow of resources

2. compute equivalent units of production

3. identify the costs to assign to products

4. compute the cost per equivalent units

5. assign product cost to batches of work

what does WIP BB at beginning of the month tell us

how many products are still in process at the beginning

total units to account for =

WIP BB month + units started in month or

total units accounted for

Transferred out + WIP EB for month

what does transferred out indicate

mean we are done with this step in the process

WIP EB indicated that the products

are still work in process

what does % complete with respect to conversion cost mean

these units in term of (said conversion cost like labor) is only % done

the physical units does not…equivalent units

equate

if materials are transferred out, we assume they are

100% completed

why do we want material/conversion cost on a per unit basis

to help see what did year after year per unit

weighted average unit cost =

total cost/total EU or

(WIP cost + current period cost)/(WIP EU + current period EU)

what is FIFO cost divided into

WIP unit cost and current period unit cost

WIP unit cost for FIFO =

WIP cost/WIP EU

current period unit cost =

Current period cost/current period EU

when assigning unit we only care about the

total cost

what does $0.90 cost per EU for materials mean

for every unit made, $0.90 attributed to materials

the total cost consist of (2)

1. total cost of unit transferred out

2. cost of WIP units

what is a production cost report

summarize production and cost results for a period

what is the purpose of a production cost report

for managers to monitor production and cost flow

in FIFO method,…are the first amount transferred out

WIP BB

when BB WIP is only % complete, it means that we have

xxx units worth of work to finish what was in process during the current month

Under FIFO WIP BB will always be

transferred out

changing how we keep track of cost doesn’t change the

total cost

between FIFO and weighted average… is different

EU

what is the main difference between weighted average and FIFO

weighted average does not separate prior period and current period activities, FIFO does and traces prior period and current period cost to respective units

total transferred out is also

COGS

between weighted average and FIFO which is more simple

weighed average

if COGS transferred out is similar to total cost assigned, we use

weighted average

what is prior department cost

cost incurred in one department and transferred to a subsequent department

prior…and…cost are not the same

period and department

what is operation costing

hybrid of job and process costing

how to describe job, process, and operation costing simply

job costing: discrete cost

process costing: uniform cost

operation costing: mix of job and process costing

what is a job

product that is easily distinguishable from another unit

what is a job shop

firm that produces jobs

what is a job cost sheet

record of the cost of job (info, name, purchaser, direct material, direct labor, overhead)

what is a subsidiary ledger account

account that records elements within the overall account

what is a control account

account that summarizes the subsidiary account

raw material consist of (2)

1. direct materials

2. indirect materials

Indirect materials doesn’t mean its…to the production, but that it is hard to…

not related, keep track of

indirect material and indirect labor goes directly to…in the flow chart

overhead

direct materials will be split up/assigned based on…

job

the total value of the subsidiary account will be…

total WIP

labor consist of (2)

1. direct labor

2. indirect labor

direct labor is…by job just like direct material

split up

OH cost is allocated based on…

estimate

OH cost are applied to each job using the

POHR

when it is in…inventory, it is ready to be cost

finish goods

if something is still in WIP inventory by 1-1, we anticipate…

more cost to be added

finish good inventory…is set in stone

cost

all inventory has a…balance

debit

you debit materials inventory when you…, you credit materials inventory when you

receive raw materials, use direct materials for WIP inventory