Accounting Chapter 14,15,17

exam 1

What is a cost object?

Anything we want to assign costs to (e.g., a job, product, department, or service), such as Job #245 for a client.

What are direct costs?

Costs that can be easily traced to one specific job, such as direct materials and direct labor.

What are indirect costs?

Costs that benefit many jobs and cannot be traced to a single job (e.g., factory rent, utilities).

What is Job Order Costing?

A costing system that assigns costs to individual jobs or orders as they are produced.

What is a job cost sheet?

A document that records and summarizes the costs charged to a specific job (materials, labor, overhead).

What are the main product cost flow stages in job order costing?

Raw materials inventory → Work in process inventory → Finished goods inventory → Cost of goods sold.

What is a materials receiving report?

The source document that records materials received from suppliers.

What is a materials ledger card?

A ledger card updated when materials are purchased and issued to production.

What is a materials requisition?

A document authorizing the use of materials in production.

What is a labor time ticket?

A document used to record the amount of direct labor hours and cost charged to a job.

What is a predetermined overhead rate (POHR)?

A rate used to apply overhead to jobs, based on a chosen cost driver (e.g., direct labor cost).

How is overhead applied to jobs?

Overhead applied = POHR × actual activity base used (e.g., direct labor cost).

What is the difference between overapplied and underapplied overhead?

Overapplied overhead occurs when applied overhead exceeds actual overhead; underapplied occurs when actual overhead exceeds applied. Both are closed at period end.

How does job order costing differ for service firms?

Service firms often have no raw materials or finished goods; they use supplies, and direct labor is used to apply overhead; accounts may include Services in Process Inventory and Services Overhead.

How is job order costing used in pricing services?

Costs for each job are tracked; total costs include labor and overhead and are used to price services.

What is the Schedule of Cost of Goods Manufactured (COGM)?

A schedule showing total manufacturing costs (direct materials, direct labor, manufacturing overhead) and the cost of goods manufactured for the period.

What are the main cost flow accounts linked to financial statements in job order costing?

Raw materials, Work in process, Finished goods, and Cost of goods sold, with overhead allocated via POHR to WIP/FG and adjusted at period-end.

What is an example of a POHR-based overhead application used in the notes?

Road Warriors uses a POHR based on direct labor cost to apply overhead to jobs.

Plantwide overhead rate method

Allocates all overhead costs using a single overhead rate applied to every product; base is usually direct labor hours or machine hours; rate = total budgeted overhead costs divided by the allocation base.

Allocation base

The metric used to assign overhead to products (e.g., direct labor hours, machine hours).

Product cost object

The unit or item (product) for which overhead costs are assigned.

Departmental overhead rate method

Allocates overhead using two or more rates, one per department; each department uses its own allocation base to apply overhead to products.

Activity-Based Costing (ABC)

Allocates overhead by identifying activities, grouping costs into cost pools, computing an overhead rate for each pool, and assigning costs to cost objects based on usage.

Activity cost pool

A group of costs related to performing a specific activity (e.g., setup, inspection, machining).

Activity driver (cost driver)

A factor that causes the cost of an activity to change (e.g., number of setups, number of batches, machine hours).

Cost object

Any item for which cost data is desired (product, service, or customer).

Budgeted overhead cost

Estimated total overhead cost assigned to an activity cost pool for the budgeting period.

Budgeted activity usage

Forecasted quantity of activity usage (e.g., hours, setups, batches) used to compute activity rates.

Unit-level activity

Activities performed for each unit produced (e.g., unit-level handling or processing).

Batch-level activity

Activities performed for a batch regardless of unit count (e.g., setups, inspections).

Product-level activity

Activities related to sustaining a product line (e.g., design, advertising).

Facility-level activity

Activities necessary for the overall operation of the plant (e.g., plant management, depreciation).

ABC for service providers

Applying ABC to service companies by classifying costs into activity levels: unit, batch, service, and facility.

Activity rate

Budgeted overhead cost for a pool divided by budgeted activity usage; used to apply overhead to cost objects.

Cost pool

An aggregation of costs associated with a single activity that feeds into ABC.

Product cost distortion

Distortion of product costs that can occur with simpler costing methods; a disadvantage cited for traditional methods compared to ABC.

Not GAAP compliant

A disadvantage of ABC; ABC is not always aligned with GAAP, while plantwide/departmental methods often are.

Customer profitability

Assessment of the profitability of each customer, often via a customer profitability report and a customer activity rate (budgeted support cost divided by budgeted base).

Direct materials

Costs for materials that can be traced to the product cost‑effectively (e.g., bike tires, frames).

Direct labor

Wages and salaries for workers who can be traced to the product cost‑effectively (e.g., bike assembly wages).

Factory overhead

All manufacturing costs not direct materials or direct labor; includes indirect labor, indirect materials, and other indirect costs (e.g., utilities, depreciation).

Prime costs

Direct materials plus direct labor.

Conversion costs

Direct labor plus factory overhead.

Product costs

Costs tied to manufacturing the product (DM, DL, FOH).

Period costs

Costs not tied to production; selling and general/administrative expenses.

Total manufacturing costs

Direct materials used plus direct labor plus factory overhead used.

Schedule of Cost of Goods Manufactured

A schedule that summarizes direct materials used, direct labor, and factory overhead, plus beginning and ending WIP to compute COGM.

Cost of Goods Manufactured (COGM)

Total cost of goods completed and transferred from WIP to Finished Goods; Beginning WIP + Total Manufacturing Costs - Ending WIP.

Beginning Work in Process

WIP inventory at the start of the period.

Ending Work in Process

WIP inventory at the end of the period; used to compute COGM.

Raw Materials Inventory

Inventory of raw materials on hand; materials waiting to be processed.

Work in Process Inventory

Partially completed goods in production.

Finished Goods Inventory

Completed goods ready for sale.

Cost of Goods Sold (COGS) – manufacturers formula

Beginning finished goods + Cost of Goods Manufactured - Ending finished goods = COGS.

Flow of manufacturing costs

Materials activity (raw materials), Production activity (work in process), Sales activity (finished goods) and related balances on financial statements.

Lean manufacturing

Goal: eliminate waste while satisfying the customer; continuous improvement.

Just-In-Time (JIT)

Receive materials and schedule production so materials arrive just in time for production; reduces inventory.

Value chain

Series of value-adding activities; lean principles increase efficiency and profits.

Triple bottom line

Profit, people, and planet (financial, social, environmental) considerations.

ESG

Environmental, Social, and Governance metrics; framework for responsible corporate behavior.

Data analytics (four types)

Descriptive, Diagnostic, Predictive, Prescriptive analysis to identify relations and trends.

Data visualization

Graphical presentation of data (e.g., Tableau dashboards) to help decision making.

Raw materials inventory turnover

Raw materials used ÷ Average raw materials inventory; measures how quickly materials are used/replaced.

Days’ sales in raw materials inventory

Ending raw materials inventory ÷ Raw materials used × 365 (approximately 38.4 days in the example).

Internal controls

Procedures to ensure reliable accounting, protect assets, uphold policies, and promote efficient operations.

Fraud cost (ACFE estimate)

Average U.S. business loses about 5% of annual revenues to fraud.

Ethics in managerial accounting

Competence, confidentiality, integrity, and credible communication of information.

Direct costs

Costs that can be cost‑effectively traced to a cost object.

Indirect costs

Costs that cannot be cost‑effectively traced to a cost object.

Manufacturing statement (COGM schedule)

Schedule showing DM used, DL, FOH, total manufacturing costs, WIP, and COGM used to compute cost of goods manufactured.

Beginning/Ending Finished Goods (COGS)**

COGS = Beginning Finished Goods + COGM − Ending Finished Goods (for manufacturers).