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Acct Test 2

CHP 4
CHP 4
When do you use a Job order costing system?
Use if customize or have highly differentiated products
JOC: Assign DM used, DL, and OH applied to:
WIP Inventory (assigned to each job)
When do you use a Process Cost System?
Use if mass produce homogenous products in a continuous production process
PCS: Assign DM used, DL, and OH applied to:
WIP Inventory (assigned by department)
Which costing system is more COSTLY to use?
Job order costing
Operation Costing System
-a *hybrid* system that employs elements from both job order and process costing
-use if produce products that have some common characteristics and some unique characteristics
-often assign DM to each batch and DL and OH by department
How are Job order costing and process cost system similar?
-similar in the way that production costs are recorded
-accumulation of materials, labor, and OH costs to inventory is the same
How are Job order costing and process cost system different?
-the methods of assigning the cost to individual units of inventory differ
-in a process costing environment, materials, labor, and manu OH are added in multiple departments.
Cont…Process Costing elaboration
-must be recorded as WIP inventory in EACH manufacturing department
-cost flow in sequence from one department to another
-cost accumulate as inventory moves through the departments.
THEREFORE, must have WIP account for each manu department.
Costing Inventory in a Process Costing Environment
Costing Inventory in a Process Costing Environment
Why compute cost/unit
for management decisions and inventory valuation, costs must be allocated between:
1. cost of completed units
2. cost of ending WIP
Cost per unit equation
DM Used + DL + OH Applied / Units produced
What is the problem with computing cost/unit?
partially completed inventory
what is the accounting solution?
-partially completed units are translated into the finished units
-then compute a cost/equivalent unit to value inventories
Equivalent Units
a measure of the work done during the period, expressed in fully completed units; this allows accountants to calculate cost per unit when some units are partially completed.
How many columns might be needed in your calculation?
1, 2 , or 3 (DM, DL, OH)
Cost of Production Report
-an internal document for management
-shows production quantity and cost data for department
-provides basis for evaluating productivity and cost control of each department, setting prices, etc.
CALCULATING COST/EU
CALCULATING COST/EU
Weighted average method
-calculate average cost/eu —- average all costs (beginning and current) over all EU
– *Most widely used method*
First in First Out method
-transfer between finished goods into 2 layers
1. beginning layer
2. current layer–calculate current cost / EU
Transferred In costs
costs that were incurred in a previous process and brought into a later process as part of the product costs –> requires a separate cost per equivalent unit in calculation
6 steps to preparing a production cost report (using weighted avg method)
1. Account for physical flow of units
2. Accumulate Costs
3. Calculate Equivalent Units
4. Calculate Cost per Equivalent Unit
5. Value Inventories
6. Cost Reconciliation
Step 1: account for physical flow of units
-show the number of units to be accumulated for during a period, regardless of % of work performed.
Beg WIP + Units Started = Ending WIP + Units completed
Step 6: Cost Reconciliation
-Flow of Costs is similar to the flow of products
Beg Costs + Current Costs = Cost of End WIP + Cost of Units Completed
CHP 5
CHP 5
What does the Contribution Margin income statement classify?
-classifies costs as variable or fixed and computes a contribution margin
Sales – VC = CM
What is contribution margin?
the amount of sales remaining after variable expenses have been deducted; the amount that remains to cover fixed costs and generates a profit
Can CM also be stated as a total amount, a per unit amount, or a ratio?
Yes!
but how?
Total Contribution Margin
Total Sales-Total Variable Costs
Contribution Margin per unit
Unit Selling Price – Unit Variable Costs
Contribution Margin Ratio
Contribution Margin/unit (divided by) Sales Price/unit
OR
Total Contribution Margin / Total Sales $
Variable Cost Ratio
Total Variable Cost / Total Sales $
Variable Cost/unit (divided by) Sales Price/unit
Cost Volume Profit
is the study of effects of changes in costs and volume on a company’s profits
-important profit planning tool
-useful in setting selling prices, determining product mix, and maximizing use of production facilities
CVP Analysis considers the inherent interrelationships among:
a. Volume or level of activity
b. Unit selling prices
c. Variable cost per unit
d. Total Fixed Costs
e. Sales mix
Assumptions underlying CVP analysis
-cost and revenues are linear throughout the relevant range (sales price & VC per unit are constant; total FC is constant)
-costs can be classified as either variable or fixed with reasonable accuracy
-all units produced are sold
-sales mix will remain constant (relative proportion of sales for each product line)
Breakeven Point
the level of sales where the company will realize no income and will suffer no loss; (where revenues = expenses, and profit = 0)
Target Net Income
the profit objective for the company or an individual segment
Margin of safety
the difference between actual (past) or expected (future) sales and breakeven sales.
Margin of safety (in sales $)
Expected Sales – Breakeven Sales
Margin of Safety %
margin of safety / expected sales
Sensitivity Analysis
the analysis of the effect of a change in a variable on profit (“what-if analysis”)
Equation Method of CVP
Revenues – VC – FC = Desired Profit
Let SP = Sales Price and X = Sales Volume
SP (X) – (VC/unit)(X) – FC = desired profit
Contribution Margin (Formula) Method
X= Total FC + Desired Income Before Tax / Contribution Margin per unit
-gives sales in UNITS
Contribution Margin Ratio Approach (Desired Profit)
Sales $= Total FC + Desired Income Before Tax / CM Ratio
-provides answer in sales $
-use if sales price and/or VC per unit is not available
Cost-Volume-Profit Graph
the graph allows management to see what profit will be at various levels of sales.
Sales Mix
the relative proportion in which each product is sold (when a company sells more than one product)
Why is sales mix important to managers?
some products are more profitable than others
What two formulas do you use for sales mix?
-Breakeven in sales:
Total Fixed Costs + Desired Profit / Overall CM Ratio = Sales $
-Required Sales for each product:
overall BE * sales mix
Cost Structure
the relative proportion of fixed vs variable costs that a company incurs– can have a significant effect on company profitability
Operating leverage
the degree to which a company net income reacts to a change in sales; provides a measure of the company’s earnings volatility
Degree of Operating Leverage
Total Contribution Margin / Net Income
Percentage Change in net operating income
% change in sales * degree of operating leverage
When a company’s sales revenue is increasing, high operating leverage is good because it means that profits will ___________________.
increase rapidly
When sales are declining, too much operating leverage will cause profits to ___________________.
decrease rapidly
BEG CHP 6
BEG CHP 6
Absorption (Full) Costing
Accumulate all product costs with inventory
What costs are assigned to inventory in absorption costing?
DM Used, DL, Variable OH, Fixed OH
What type of income statement does absorption costing use?
sales
-COGS
=GM
-Op Exp
=Net Income
(PRODUCT VS PERIOD format)
Absorption costing is used for _____________ reporting
external
-does not facilitate CVP Analysis and other mgmt decisions
Variable Costing
Accumulate only variable product costs with inventory
what costs are assigned to inventory in variable costing?
DM Used, DL, Variable OH
Fixed OH is _______________
expensed in full in the period incurred (treat as period cost)
What type of income statement does variable costing use?
Contribution Margin (variable/fixed format)
sales
-variable cost
=CM
-Fixed cost
=income
Variable costing is used for _____________ reporting
internal
-facilitates planning (CVP analysis), evaluation of segments, etc.
What causes the difference in operating income?
-treatment of fixed OH
*not always greater in absorption costing
IF production=sales volume
Net income will be equal under the two costing approaches
IF production > sales volume
income will be higher under absorption costing
IF production < sales volume
income will be higher under variable costing
Period cost
NEVER assign to inventory
-SO, the amount of selling and administrative costs expensed is always the amount incurred
what are the potential advantages of variable costing?
1. Variable costing is consistent with cost-volume-profit analysis and supports decision making
2. Net income computed under variable costing is unaffected by changes in production levels.
-management may be tempted to overproduce in a given period in order to increase net income under absorption costing
Segmented Income Statements
managers need more than a single, companywide income statement that focus on the various segments of a company.
Definition of a segment:
is any part or activity of an organization about which a manager seeks cost, revenue or profit data
What are segments used for?
-to facilitate performance evaluation and decision-making, segmented income statements can be prepared at various levels
-sales and variable costs are generally traceable to a given segment but fixed costs may or may not be
examples of segments:
geographic regions, product line, department
Direct and Indirect (common) fixed costs
A cost is either traceable or common with respect to a particular segment
Direct Fixed cost
exist because the segment exists (traceable)
-ex: salary of a manager of cstat store to the cstat store
Common fixed cost
exists because of multiple departments; must be allocated, but the allocations are not useful for evaluating segments
-ex: salary of a manager of stat store to each of the 5 product lines
Segmented income statements
Sales
-Variable costs
=CM
-Direct Fixed Costs
=Segment margin (most useful for performance evaluation)
-Common Fixed Costs
=Division income
common mistakes of preparing segmented income statements
1. omission of costs that are traceable
2. inappropriate allocation base used/arbitrarily dividing common costs among segments

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