Accounting Exam 1

Q: What are direct costs?

A: Costs that can be easily traced to a specific product or project (e.g., raw materials, labor costs, shipping costs).

Q: What are indirect costs?

A: Costs that support multiple products and cannot be easily traced to one product (e.g., factory supervisor salaries, utilities, rent).

Q: What is a cost object?

A: Anything for which cost data is desired, such as products, departments, or office locations.

Manufacturing Costs

Q: What are the three categories of manufacturing (product) costs?

A: Direct materials, direct labor, and manufacturing overhead.

Q: What is direct labor?

A: Labor costs that are easily traceable to finished products (e.g., assembly line workers).

Q: What is manufacturing overhead?

A: Indirect manufacturing costs, including factory utilities, depreciation, and indirect labor.

Q: What is the difference between indirect materials and indirect labor?

A:

• Indirect materials: Raw materials that cannot be easily traced to a product (e.g., glue used in furniture).

• Indirect labor: Employees who support production but do not directly work on the product (e.g., janitors, supervisors).

Nonmanufacturing Costs (Period Costs)

Q: What are the two types of nonmanufacturing costs?

A: Selling costs and administrative costs.

Q: Give examples of selling costs.

A: Advertising, sales commissions, and shipping.

Q: Give examples of administrative costs.

A: Legal counsel, accounting, executive salaries.

Cost Behavior

Q: What are the three types of cost behavior?

A: Variable, fixed, and mixed costs.

Q: How do variable costs behave?

A: They change in direct proportion to activity levels (e.g., raw materials, commissions, shipping costs).

Q: How do fixed costs behave?

A: They remain constant regardless of activity level (e.g., rent, property taxes, administrative salaries).

Q: What is a mixed cost?

A: A cost that has both variable and fixed elements (e.g., utility bills with a base fee plus usage charges).

Q: What is a step-variable cost?

A: A cost that remains fixed over small activity ranges but increases once a threshold is reached (e.g., supervisor salaries when hiring extra staff).

Cost Classifications for Decision Making

Q: What is a relevant cost?

A: A cost that differs between alternatives and should be considered when making decisions.

Q: What is an irrelevant cost?

A: A cost that does not change between alternatives and should be ignored.

Q: What is an opportunity cost?

A: The potential benefit lost when choosing one alternative over another.

Q: What is a sunk cost?

A: A cost that has already been incurred and cannot be changed, so it should be ignored in decision-making.

Cost Formulas & Calculations

Q: What is the formula for product costs?

A: Direct Materials + Direct Labor + Manufacturing Overhead

Q: What is the formula for period costs?

A: Selling Expenses + Administrative Expenses

Q: What is the formula for conversion costs?

A: Direct Labor + Manufacturing Overhead

Q: What is the formula for prime costs?

A: Direct Materials + Direct Labor

Q: What is the formula for variable manufacturing costs?

A: Direct Materials + Direct Labor + Variable Manufacturing Overhead

Q: What is the formula for total fixed costs?

A: Fixed Manufacturing Overhead + Fixed Selling Expense + Fixed Administrative Expense

Income Statements & Cost Accounting

Q: What is the difference between a traditional income statement and a contribution format income statement?

A:

• Traditional: Used for external reporting, focuses on product vs. period costs, calculates gross margin.

• Contribution: Used for internal decision-making, focuses on variable vs. fixed costs, calculates contribution margin.

Q: What is the formula for gross margin?

A: Sales - Cost of Goods Sold (COGS)

Q: What is the formula for contribution margin?

A: Sales - Variable Expenses

Job-Order Costing

Q: What is job-order costing used for?

A: Tracking costs for individual jobs in manufacturing and service industries (e.g., Boeing, custom machining).

Q: What are the three direct costs tracked in job-order costing?

A: Direct materials, direct labor, and applied manufacturing overhead.

Q: How is manufacturing overhead applied in job-order costing?

A: Using a predetermined overhead rate based on estimated overhead and estimated labor-hours.

Q: What is the formula for predetermined overhead rate?

A: Estimated Overhead Costs ÷ Estimated Direct Labor-Hours

Q: What happens when overhead is underapplied?

A: Applied overhead < Actual overhead → Increases COGS, decreases net income.

Q: What happens when overhead is overapplied?

A: Applied overhead > Actual overhead → Decreases COGS, increases net income.

Here are your flashcards for Job Order Costing - The Flow of Costs:

Flashcard 1: Job Order Costing - Flow of Costs

• Product costs flow through three inventory accounts:

  1. Raw Materials

  2. Work in Process (WIP)

  3. Finished Goods

• Costs transfer to Cost of Goods Sold (COGS) when products are sold.

Flashcard 2: Raw Materials Inventory

• Includes: Any materials used in production.

• Direct materials: Transferred to WIP when used in production.

• Indirect materials: Charged to Manufacturing Overhead (MOH).

Flashcard 3: Work in Process (WIP)

• Includes: Partially completed products.

• Costs Added:

  1. Direct materials (from Raw Materials Inventory)

  2. Direct labor

  3. Manufacturing overhead (applied using a predetermined rate)

• Transfers to: Finished Goods Inventory when complete.

Flashcard 4: Finished Goods Inventory

• Includes: Completed products not yet sold.

• Transfers to: COGS when the product is sold.

Flashcard 5: Cost of Goods Manufactured (COGM)

• Definition: Total cost of products finished during a period.

• Formula: COGM=Direct Materials+Direct Labor+Applied Overhead+Beginning WIP Inventory−Ending WIP InventoryCOGM = \text{Direct Materials} + \text{Direct Labor} + \text{Applied Overhead} + \text{Beginning WIP Inventory} - \text{Ending WIP Inventory}

• Transfers from: WIP to Finished Goods.

Flashcard 6: Cost of Goods Sold (COGS)

• Definition: Cost of products that were sold during the period.

• Formula: COGS=COGM+Beginning Finished Goods Inventory−Ending Finished Goods InventoryCOGS = \text{COGM} + \text{Beginning Finished Goods Inventory} - \text{Ending Finished Goods Inventory}

• Transfers from: Finished Goods Inventory.

Flashcard 7: Manufacturing Overhead (MOH)

• Includes: Indirect costs like factory utilities, indirect materials, and depreciation.

• Applied to WIP using a predetermined rate: POHR=Estimated Total MOH CostsEstimated Total Allocation Base\text{POHR} = \frac{\text{Estimated Total MOH Costs}}{\text{Estimated Total Allocation Base}}

• Actual vs. Applied Overhead:

  • Underapplied OH: Actual > Applied → Increase COGS.

  • Overapplied OH: Actual < Applied → Decrease COGS.

Flashcard 8: The MOH Clearing Account

• Debits: Actual overhead costs incurred.

• Credits: Overhead applied to WIP.

• Final balance:

  • Debit balance: Underapplied OH.

  • Credit balance: Overapplied OH.

• Adjustment Methods:

  1. Close to COGS (simple method).

  2. Allocate proportionally to WIP, Finished Goods, and COGS (more accurate).

Flashcard 9: Nonmanufacturing Costs

• Examples: Selling & administrative expenses.

• Treatment: Recorded as period costs directly on the income statement.

• NOT included in MOH.

Flashcard 10: Job Order vs. Process Costing

Flashcard 11: Entries for Job Order Costing

1. Purchase Raw Materials: Debit Raw Materials Inventory.

2. Use Materials in Production: Debit WIP (direct), Debit MOH (indirect).

3. Labor Costs Incurred: Debit WIP (direct), Debit MOH (indirect).

4. Apply Overhead to WIP: Debit WIP, Credit MOH.

5. Complete Jobs: Debit Finished Goods, Credit WIP.

6. Sell Jobs: Debit COGS, Credit Finished Goods; Debit Accounts Receivable, Credit Sales Revenue.

These flashcards cover the key concepts of job order costing and cost flow in an easy-to-review format. Let me know if you need modifications! 😊