COST (CH.7,8,9 & 12)

What is the general formula for Return on Investment (ROI)?

$$ROI = \frac{\text{Return}}{\text{Investment}}$$

How does the "Return" numerator in ROI differ between a cost accounting perspective and a financial accounting perspective?

Cost accounting uses operating income as return, whereas financial accounting uses net income.

Which section of the statement of cash flows captures long-term productive asset purchases and disposals?

Investing activities

What is the formula to compute the present value ($PV$) of a single future sum ($FV$)?

$PV = \frac{FV}{(1 + R)^N}$ where $R$ is the discount rate per period and $N$ is the number of periods.

What formula calculates the annual cash inflow provided by the depreciation tax shield?

$$\text{Tax Shield Cash Inflow} = \text{Depreciation Expense} \times \text{Marginal Tax Rate}$$

What does a Net Present Value ($NPV$) greater than or equal to zero indicate about a capital budgeting project?

The project meets or exceeds the required rate of return (hurdle rate).

What is the Internal Rate of Return (IRR) of a capital project?

The discount rate at which the Net Present Value ($NPV$) of all project cash flows equals zero.

What is the formula for the Profitability Index ($PI$) in capital budgeting?

$$PI = \frac{\text{Present Value of Future Cash Inflows}}{\text{Initial Investment}}$$

How does the Accounting Rate of Return (ARR) differ from NPV and IRR regarding cash flows?

ARR uses accrual net income rather than cash flows and ignores the time value of money.

What baseline financial metric represents the absolute floor for a firm's minimum required rate of return?

Weighted Average Cost of Capital (WACC)

What is the formula for the Weighted Average Cost of Capital (WACC)?

$WACC = \left(\frac{E}{V} \times r_e\right) + \left(\frac{D}{V} \times r_d \times (1 - T)\right)$ where $E$ is equity, $D$ is debt, $V = E + D$, $r_e$ is cost of equity, $r_d$ is pre-tax cost of debt, and $T$ is the corporate tax rate.

Which capital budgeting evaluation tools rely on cash flows, and which rely on accrual net income?

NPV, IRR, Payback, Discounted Payback, and Profitability Index use cash flows; ARR uses accrual net income.

What three cost components make up total manufacturing product costs?

Direct Materials (DM), Direct Labor (DL), and Manufacturing Overhead (MOH).

What is the main difference between normal costing and actual costing regarding Manufacturing Overhead (MOH)?

Normal costing applies MOH using a predetermined rate, whereas actual costing uses actual MOH rates known only at period-end.

How is the budgeted (predetermined) MOH rate calculated under normal costing?

$$\text{Predetermined MOH Rate} = \frac{\text{Total Budgeted MOH Costs}}{\text{Budgeted Usage of Cost Driver}}$$

What is the formula to calculate applied MOH for production under normal costing?

$$\text{Applied MOH} = \text{Predetermined MOH Rate} \times \text{Actual Usage of Cost Driver}$$

In the Manufacturing Overhead (MOH) Control clearing account, what do debits and credits represent?

Debits record actual MOH costs incurred; credits record applied MOH costs assigned to Work-in-Process Inventory.

Under what condition is Manufacturing Overhead considered underapplied at period-end?

When actual MOH incurred exceeds applied MOH (leaving a debit balance in the MOH Control account).

Under what condition is Manufacturing Overhead considered overapplied at period-end?

When applied MOH exceeds actual MOH incurred (leaving a credit balance in the MOH Control account).

What journal entry closes an underapplied MOH balance directly to Cost of Goods Sold?

Debit Cost of Goods Sold (COGS) and credit MOH Control.

What journal entry closes an overapplied MOH balance directly to Cost of Goods Sold?

Debit MOH Control and credit Cost of Goods Sold (COGS).

What is the journal entry to record direct materials issued into production for a specific job?

Debit Work-in-Process Inventory (Job Sub-ledger) and credit Raw Materials Inventory.

What is the journal entry to record indirect materials issued from raw materials storage?

Debit MOH Control (Actual MOH) and credit Raw Materials Inventory.

What is the journal entry to record direct labor worked on a job?

Debit Work-in-Process Inventory and credit Salaries and Wages Payable.

What is the journal entry to assign applied MOH to Work-in-Process Inventory?

Debit Work-in-Process Inventory and credit MOH Control.

What journal entry records the completion of a production job?

Debit Finished Goods Inventory and credit Work-in-Process Inventory.

What journal entry records the cost of goods sold when finished products are shipped to customers?

Debit Cost of Goods Sold (COGS) and credit Finished Goods Inventory.

What is the formula to calculate Cost of Goods Manufactured (COGM)?

$$COGM = \text{Beginning WIP} + \text{DM Used} + \text{DL} + \text{Applied MOH} - \text{Ending WIP}$$

What is the formula for unadjusted Cost of Goods Sold (COGS)?

$$COGS = \text{Beginning FG Inventory} + COGM - \text{Ending FG Inventory}$$

What document serves as the primary control document to accumulate DM, DL, and applied MOH for a specific job?

Job cost sheet

What asset account do service firms often use instead of Work-in-Process Inventory to accumulate client job costs?

Unbilled Receivables

How does using a single plant-wide cost driver distort product costs under traditional job costing?

High-volume standard products absorb excessive overhead, cross-subsidizing low-volume complex products that actually consume more overhead resources per unit.

What are the four levels of the cost hierarchy in activity-based costing (ABC)?

Unit-level, Batch-level, Product/Process-level, and Facility-level.

In the ABC cost hierarchy, what defines unit-level costs?

Costs incurred for each individual unit produced (e.g., direct materials, direct labor, machine energy).

In the ABC cost hierarchy, what defines batch-level costs?

Costs incurred each time a group of units is processed, regardless of the number of units in the batch (e.g., machine setups, material handling).

In the ABC cost hierarchy, what defines product/process-level costs?

Costs incurred to support a specific product line regardless of units or batches produced (e.g., product design, engineering changes).

In the ABC cost hierarchy, what defines facility-level costs?

Costs incurred to support overall plant operations that cannot be traced to specific products or batches (e.g., factory rent, plant security).

How is the activity-based rate (cost driver rate) calculated for an activity cost pool?

$$\text{Activity Rate} = \frac{\text{Budgeted Activity Cost Pool}}{\text{Budgeted Cost Driver Volume}}$$

How is the capacity cost rate per minute calculated under Time-Driven Activity-Based Costing (TDABC)?

$$\text{Capacity Rate per Minute} = \frac{\text{Total Budgeted Cost of Activity}}{\text{Practical Capacity (in minutes)}}$$

How is the cost allocated to a specific transaction calculated under TDABC?

$$\text{Cost per Transaction} = \text{Capacity Rate per Minute} \times \text{Minutes Required per Transaction}$$

How is unused (idle) capacity cost treated on the financial statements under TDABC?

It is expensed directly to the income statement as a period cost rather than loaded onto products.

What does the Pareto Principle imply when applied to customer profitability analysis?

Approximately $80\%$ of company profits are typically generated by $20\%$ of its customer base.

Which product cost components are capitalized into inventory under absorption costing?

Direct Materials, Direct Labor, Variable MOH, and Fixed MOH.

Which product cost components are capitalized into inventory under variable costing?

Direct Materials, Direct Labor, and Variable MOH (Fixed MOH is excluded).

How is Fixed Manufacturing Overhead treated under variable costing?

It is expensed in full on the income statement as a period cost in the period incurred.

When actual production volume exceeds sales volume, how does operating income under absorption costing compare to variable costing?

Operating income under absorption costing is higher because a portion of Fixed MOH is deferred into ending inventory.

When sales volume exceeds actual production volume, how does operating income under absorption costing compare to variable costing?

Operating income under absorption costing is lower because prior-period Fixed MOH is released from inventory into Cost of Goods Sold.

When actual production volume equals sales volume, how does operating income compare between absorption costing and variable costing?

Operating income is identical under both methods because no Fixed MOH is deferred to or released from balance sheet inventory.

What is the formula for the Fixed MOH volume variance under standard absorption costing?

$$\text{Volume Variance} = \text{Budgeted Fixed MOH} - \text{Applied Fixed MOH} = (\text{Planned Units} - \text{Actual Units Produced}) \times \text{Budgeted Fixed MOH Rate}$$

What causes an unfavorable Fixed MOH volume variance under absorption costing?

Actual production is less than planned denominator production volume, leaving fixed capacity underutilized.

What defines theoretical capacity as a denominator volume choice?

Production output at maximum plant efficiency 100% of the time, assuming zero downtime or interruptions.

What defines practical capacity as a denominator volume choice?

Theoretical capacity reduced by unavoidable operating interruptions such as maintenance, setups, and holiday shutdowns.

What defines normal capacity as a denominator volume choice?

The production volume required to satisfy average long-term customer demand over a multi-year horizon.

What sequence of events creates the "downward demand spiral" (death spiral)?

Falling sales spread fixed costs over fewer units $\rightarrow$ per-unit cost increases $\rightarrow$ selling price rises $\rightarrow$ customer demand falls further.

In cost-plus pricing models, how is the selling price per unit calculated?

$$\text{Selling Price} = \text{Unit Manufacturing Cost} \times (1 + \text{Planned Markup Percentage})$$

How does target costing establish the target product cost?

$$\text{Target Cost} = \text{Competitive Market Selling Price} - \text{Desired Profit Margin}$$

What is the structural difference between Gross Margin and Contribution Margin on an income statement?

Gross Margin equals Sales minus COGS; Contribution Margin equals Sales minus ALL variable expenses (both manufacturing and non-manufacturing).

What formula reconciles the difference in operating income between absorption costing and variable costing?

$$\text{Absorption Income} - \text{Variable Income} = (\text{Ending Inventory Units} - \text{Beginning Inventory Units}) \times \text{Budgeted Fixed MOH Rate}$$

If overapplied or underapplied MOH is material, to which accounts must it be prorated at year-end?

Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold (based on their relative ending balances).

What is the purpose of sensitivity analysis in capital budgeting?

To evaluate how changes in key variable assumptions (such as sales volume or cash flows) impact project outcomes like NPV or IRR.