Principles II: Final Set Prep

What is the primary use of a process cost system?

To apply costs to similar products that are mass-produced in a continuous fashion.

What is a key characteristic of a process cost system?

Once production begins, it continues until the finished product emerges.

What type of companies benefit from using a job order cost system?

Service companies that provide individualized, nonroutine services.

What is the objective of assigning manufacturing overhead in a process cost system?

To allocate overhead to production departments on an objective and equitable basis.

What happens when the Assembly Department completes units in a process cost system?

The completed units are transferred to the finished goods warehouse.

What is the significance of equivalent units of production in process costing?

They are used to measure the work done during a period, expressed in fully completed units.

What type of costs are tracked in both job order and process cost systems?

Direct materials, direct labor, and manufacturing overhead.

Why might a manufacturer of paintballs use process costing?

Because paintballs are produced in a continuous, uniform manner.

What is the significance of the journal entry for direct materials used in a process cost system?

It records the addition of materials to the production process.

What happens to the costs of completed units in a process cost system?

They are transferred to finished goods and recorded as cost of goods sold.

What does the term 'homogeneous products' refer to in the context of process costing?

Products that are identical or very similar in nature, produced in large volumes.

In process costing, what happens to raw materials costs?

They often increase two or more work in process accounts.

What is the definition of equivalent units?

Units that have been partially completed and are expressed in terms of fully completed units.

What is the most widely used method for computing equivalent units?

Weighted-Average Method.

What does the Weighted-Average Method consider?

Degree of completion (weighting) of units completed and transferred out and units in ending work in process.

What is the equivalent units of production for 20,000 units completed and 5,000 units in ending work in process 60% complete?

23,000 equivalent units.

What is the significance of beginning work in process in the Weighted-Average Method?

It is not part of the computation of equivalent units.

What is included in conversion costs?

The sum of direct labor costs and manufacturing overhead costs.

What is the purpose of a production cost report?

To understand activities and show production quantity and cost data.

What is the cost of instruction per full-time equivalent student?

It is calculated based on the total costs divided by the number of full-time equivalent students.

What is the equivalent units of production for conversion costs?

It is calculated similarly to materials, considering the degree of completion.

What are physical units in production?

Actual units to be accounted for during a period, regardless of their state of completion.

What is included in total units accounted for?

Units transferred out during the period plus units in process at the end of the period.

What is the significance of equivalent units of production?

They represent the amount of work done on partially completed units, allowing for accurate cost allocation.

How are unit production costs expressed?

In terms of equivalent units of production.

How do you compute total manufacturing cost per unit?

By dividing the total manufacturing costs by the number of units produced.

What is the FIFO method in production costing?

A method that computes equivalent units based on the assumption that the oldest costs are used first.

How do you assign costs to units completed and transferred out?

By calculating the costs incurred during production and allocating them based on the completion percentage of the units.

What does the term 'conversion costs' refer to?

Costs incurred to convert raw materials into finished goods, including labor and overhead.

How are ending work in process units evaluated?

By determining their completion percentage for both materials and conversion costs.

What is the role of equivalent units in cost accounting?

To facilitate the allocation of costs to partially completed units.

What is the significance of the 40% completion rate in ending work in process?

It indicates the extent to which conversion costs have been incurred on those units.

What is the primary focus of the Production Cost Report?

To provide an internal document for management that shows production quantity and cost data.

What is the impact of using the FIFO method on unit cost calculations?

Unit costs are based entirely on the production costs incurred during the month.

What is the purpose of computing unit costs in the Mixing Department?

To assess the efficiency and cost-effectiveness of the production process.

What is the focus of cost accounting?

Measuring, recording, and reporting product costs.

What are the two basic types of cost accounting systems?

Process cost system and job order cost system.

When is a process cost system used?

When a large volume of similar products are manufactured.

What is a job order cost system?

A system where costs are assigned to each job or batch of goods.

How does cost flow in a job order cost system?

Costs are assigned to Work in Process Inventory, then to Finished Goods Inventory, and finally to Cost of Goods Sold.

What types of costs are included in factory labor costs?

Gross earnings of factory workers, employer payroll taxes, and fringe benefits.

What is the purpose of a job cost sheet?

To record costs chargeable to a specific job.

What is a materials requisition slip?

A written authorization for issuing raw materials.

How are direct and indirect materials recorded?

Direct materials are charged to Work in Process Inventory; indirect materials are charged to Manufacturing Overhead.

What happens to the cost of completed jobs in a job order cost system?

It is transferred to the Finished Goods Inventory account.

What is the entry for recording raw material purchases?

Debits to Raw Materials Inventory and credits to Accounts Payable.

What is the significance of the Work in Process Inventory account?

It accumulates costs for jobs that are still in production.

What does the term 'overapplied manufacturing overhead' mean?

When the overhead applied to jobs exceeds the actual overhead incurred.

What does 'underapplied manufacturing overhead' refer to?

When the actual overhead incurred exceeds the overhead applied to jobs.

What is the purpose of accumulating manufacturing costs?

To track and manage costs associated with production.

What is the journal entry for factory labor costs?

Debits to Work in Process Inventory and credits to Factory Labor.

What is the significance of the cost flow in manufacturing?

It parallels the physical flow of materials as they are converted into finished goods.

What information is included in a time ticket?

Employee name, hours worked, account and job to be charged, and total labor cost.

How are costs assigned to jobs in a job order cost system?

By tracking direct materials, direct labor, and applied overhead specific to each job.

What is the purpose of preparing journal entries for manufacturing costs?

To accurately record the costs incurred during the production process.

What is the impact of expired prepaid factory insurance on costs?

It is recognized as an expense and reduces net income.

What does the term 'finished goods inventory' represent?

The account that holds the cost of completed products ready for sale.

What is a predetermined overhead rate?

A rate established at the beginning of the year to allocate overhead costs to jobs.

What factors can be used as an activity base for applying overhead costs?

Direct labor costs, direct labor hours, machine hours, or any equitable measure.

How do small companies typically determine their predetermined overhead rate?

They often use a single, company-wide predetermined rate.

How do large companies determine their predetermined overhead rates?

They often use rates that vary from department to department.

What is the equation for calculating the predetermined overhead rate?

Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Activity Base.

How is overhead applied to Work in Process?

Overhead costs are assigned during the period to provide timely information about job costs.

What happens to the balance in Manufacturing Overhead when overhead is applied?

The balance is reduced, and Work in Process Inventory is increased.

What should the balance in Work in Process Inventory equal at the end of each month?

It should equal the sum of costs shown on job cost sheets of unfinished jobs.

What is the process for assigning costs to Finished Goods?

When a job is completed, its total cost is transferred to Finished Goods Inventory.

What journal entry is made when goods are sold?

The entry records the sale and the cost of goods sold for the job.

What is the flow of costs in a job order cost system?

Costs flow from Work in Process to Finished Goods and then to Cost of Goods Sold.

How do service companies use job order costing?

They track costs for specific jobs to evaluate profitability, even without inventory.

What is a cost-plus contract?

A contract where the customer's bill is the sum of costs incurred plus a profit percentage.

What is an advantage of job order costing?

It provides a more precise assignment of costs to projects than process costing.

What is a disadvantage of job order costing?

It requires a significant amount of data entry.

How is year-end balance in manufacturing overhead adjusted?

Underapplied overhead is debited to Cost of Goods Sold; overapplied overhead is credited to COGS.

How are unusual items reported in sustainable income?

Unusual items are reported net of income taxes.

What is an unrealized loss?

A loss that occurs when an asset has experienced a change in value but has not been sold.

How are unrealized gains and losses reported for trading securities?

Unrealized gains and losses are reported in the 'Other expenses and losses' section of the income statement.

How are unrealized gains and losses reported for available-for-sale securities?

Unrealized gains and losses are reported as 'Other comprehensive income' in stockholders' equity.

What are the three types of comparisons in financial analysis?

Intracompany basis, intercompany basis, and industry averages.

What does a high quality of earnings indicate?

It indicates that the financial information is reliable and not misleading, allowing for better decision-making by users.

What is improper recognition of revenue?

The abuse of recognizing revenue inappropriately, such as through channel stuffing or failure to report liabilities.

What is the formula for calculating changes in horizontal analysis?

Changes are computed as the difference between current and base period amounts, expressed as either an amount or a percentage.

What does a comparative balance sheet show?

It displays changes in assets, liabilities, and stockholders' equity over time.

What is the role of management in changing accounting principles?

Management must demonstrate that the new principle is preferable for it to be accepted.

What is the effect of a decrease in income tax expense on net income?

It can contribute to an increase in net income, even if sales do not increase significantly.

What is the relationship between net sales and cost of goods sold in horizontal analysis?

Changes in net sales and cost of goods sold are analyzed to assess profitability and operational efficiency.

How is the income from discontinued operations reported?

It is reported in two parts: income (loss) from operations and gain (loss) on disposal, both net of tax.

What is the importance of disclosures for unusual items?

Disclosures help users understand the impact of unusual items on a company's financial performance.

How is vertical analysis applied to a balance sheet?

Current assets might be expressed as a percentage of total assets.

What does ratio analysis express?

The relationship among selected items of financial statement data.

What are liquidity ratios used to measure?

The short-term ability of a company to pay its maturing obligations.

What does the current ratio indicate?

The amount of current assets available to cover current liabilities.

What does a higher accounts receivable turnover suggest?

Better liquidity due to quicker collection of receivables.

What does inventory turnover measure?

How quickly a company sells its inventory.

What are solvency ratios used to measure?

A company's ability to survive over a long period of time.

What is the formula for calculating the current ratio?

Current Assets / Current Liabilities.

What does a decrease in cost of goods sold as a percentage of net sales indicate?

Improved profitability.

What is the purpose of intercompany comparisons in ratio analysis?

To evaluate a company's performance against its competitors.

What is the significance of profitability ratios?

They measure a company's ability to generate profit relative to sales, assets, or equity.

What does the gross profit rate indicate?

The percentage of revenue that exceeds the cost of goods sold.

What is the price-earnings ratio?

A valuation ratio calculated by dividing the market price per share by earnings per share.