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SU 19
Costing Techniques
36
Accounting
Undergraduate 4
05/16/2015

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Term
absorption costing
Definition
used for GAAP for external reporting and IRS for tax purposes
Fixed MO is included in the cost of each product b/c product cost includes all fixed and variable mfg. costs.
Sales – absorption-based CoGS = gross margin – S&A (fixed and variable) = OI
Term
variable costing
Definition
Product cost only includes var. mfg. costs.
Preferable for internal reporting; better satisfies mgmt.'s needs for operational planning and control information b/c it excludes arbitrary allocations of fixed costs.
Term
net income under var. costing
Definition
VC NI varies directly w/sales and is not affected by changes in inventory levels.
Term
contribution margin (CM)
Definition
Sales – variable CoGS and variable S&A = CM.
CM is the amount available for covering fixed MO and fixed S&A.
Term
difference between OI in absorption and variable costing
Definition
Difference in operating income between absorption and variable costing is the difference between ending inventory amounts of the two methods.
Term
When production and sales are equal...
When production > sales...
When production < sales...
Definition
P = S: AC and VC report the same OI.
P > S: ending inventory expands. Under absorption costing, some fixed mfg. costs are in end. inv., while all fixed costs are expensed under var. costing. Therefore, OI is higher under absorption costing.
P < S: ending inventory contracts. Under absorption costing, some fixed mfg. costs in end. inv. get expensed, while only the current period's fixed costs are expensed under var. costing. Therefore, OI is higher under variable costing.
Term
joint products
Definition
separate products resulting from a common mfg. process and common inputs. Joint (common) costs are incurred up to the split-off point where the products become separately identifiable.
Term
joint costs
Definition
DM, DL and MO that are not separately identifiable, so they must be allocated to the individual joint products.
Term
separable costs
Definition
costs incurred after split-off; can be identified w/a particular joint product and allocated to a specific unit of output
Term
The decision to sell or process further (for both joint products and by-products) is based on...
Definition
whether the incremental revenue to be gained by further processing exceeds the incremental cost.
The joint cost of the product is irrelevant b/c it is a sunk cost.
Term
by-product
Definition
one or more products of relatively small total value that are produced simultaneously from a common mfg. process w/products of greater value and quantity.
Term
net realizable value (NRV)
Definition
Selling price – additional processing costs – selling costs = Net realizable value (NRV).
Term
If NRV = 0, or NRV is negative...
Definition
If NRV = 0 or is negative, the by-products should be sold at the split-off point or discarded as scrap if they cannot be sold.
Term
The value of a by-product may be initially recognized either...
Definition
at the time production is completed (for the expected sales value or expected NRV if further processing is needed), or at the time the by-product is actually sold.
Term
proceeds from by-product sales are recognized either...
Definition
As a reduction of the joint cost or as miscellaneous revenue.
Term
Do by-products receive an allocation of joint costs?
Definition
No. The cost of this accounting treatment ordinarily exceeds the benefit.
Term
physical-quantity method
Definition
uses a physical measure such as volume, weight, or length
Joint production costs are allocated to each product based on its relative proportion of the measure selected.
The physical-quantity method's simplicity makes it appealing, but it does not match costs with the individual products' revenues.
Term
market-based approach
Definition
assigns a proportionate amount of the total cost to each product on a quantitative basis.
These allocations are performed using the entire production run for an accounting period, not units sold. This is b/c the joint costs were incurred for all units produced, not just those sold.
Term
sales-value and split-off method
Definition
based on the relative sales values of the separate products at split-off
Term
estimated NRV method
Definition
allocates joint costs based on the relevant market values of the product after an additional process to make the products salable is performed.
Term
NRV vs. estimated NRV
Definition
NRV at split-off is equal to the sale price at the point of sale – cost to complete after split-off (separable costs).
The difference is that, under the estimate NRV method, all separable costs necessary to make the product salable are subtracted before the allocation is made.
Term
job-order costing
Definition
used when each end product is unique; because the end products are so few, tracking their costs in relatively straightforward
Term
accumulation of direct costs in a job-order system
Definition
A sales order is received from a customer. B/c products are customer-driven, no inventory is held. Production cannot begin until an order is placed. Once the sales order is approved, a production order is issued.
Physical inputs required for the production process are obtained from suppliers.
A subsidiary account is created within the work-in-process ledger account to track the costs for each job. The accumulation of direct costs (DM and DL) is straightforward.
Materials requisition forms request DM to be sent from the warehouse to the production line.
Time tickets track the DL by workers on various jobs.
Direct costs are entered into the G/L at their actual amounts. In job-order costing, tracing the direct costs incurred in a given job is simple.
Term
accumulation of indirect costs in a job-order system
Definition
When a single indirect cost pool is used, it is commonly called MO control. Though often there will be two cost pools- one for VMO and one for FMO.
Accounting for overhead costs is more difficult b/c they are indirect.
Term
MO contains three types of costs
Definition
IM, IL, and fixed factory operating costs

Indirect materials are tangible inputs to the mfg. process that cannot be feasibly traced to the product.
Indirect labor is the cost of human labor connected w/the mfg. process that cannot feasibility be traced to the product.
Factory operating costs include such items as utilities, real estate taxes, insurance, and depr. on factory equipment.
Term
overhead control account
Definition
When an overhead control account is used, actual overhead costs do not affect WIP when they are incurred. The total actual overhead incurred is the debit balance in the control account.
Term
indirect costs
Definition
allocated to production using an overhead allocation rate. The first step is to estimate the total indirect costs for the coming period.
If more than one indirect cost pool is used, a different rate is computed for each pool.
Term
overhead application rate (OAR)
Definition
estimated total overhead costs for year / estimated total units of allocation base
Term
OAR numerator and denominator
Definition
The numerator is estimated from budget data for the year.
The denominator (allocation base) must be a cost driver that has a direct cause-and-effect relationship with the level of overhead costs. When overhead costs rise or fall, the units of the allocation base also should rise or fall. Among the most common for use with a single indirect cost pool are DL-hours and machine hours.
Term
overhead applied
Definition
units of overhead driver * application base
Term
How is OAR tracked? How is overhead applied tracked?
Definition
This amount is ordinarily not credited to the control account, but to MO applied (a contra-account). The two accounts track actual and applied costs separately.

Separate tracking retains actual overhead amounts in the debit balance of the control account (MO). It also permits comparison of actual and applied costs. The closer they are, the better the estimate.
Term
completion of job & sale of output
Definition
When a job order is completed, all costs are transferred to FG.
When the output is sold, the sale is recorded and the appropriate portion of the cost is transferred to CoGS.
Term
over- and underapplied overhead
Definition
MO control account < overhead applied, overhead is overapplied.
MO control account > overhead applied, overhead is underapplied.
Term
How do you deal with over- or underapplied overhead?
Definition
If the variance is immaterial, it may be closed directly to CoGS.
If overhead is overapplied, the entry to CoGS is credited. If overhead is underapplied, CoGS is debited.
If the variance is material, it should be allocated based on the relative values of WIP, FG, and CoGS.
Again, if overhead is underapplied, the entries to the inventory accounts would have been debits.
Term
What happens to actual overhead costs?
Definition
They become part of product costs.
Term
variance
Definition
results from factors that affect the numerator or the denominator of the application rate.
Factors affecting the numerator cause higher or lower costs than estimated.
Factors affecting the denominator cause the activity level to vary from the estimate.
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