# Shared Flashcard Set

## Details

Acct 3270
Exam 1 concept flashcards
72
Accounting
02/26/2011

Term
 Define  Cost behavior
Definition
 the way that cost changes when some other level of activity changes
Term
 Define Variable cost
Definition
 total cost increase as the level of activity/volume increases; cost of unit remains unchanged as level of activity increases
Term
 Define Fixed cost
Definition
 total cost remains unchange as level of activity/volume increases; cost per unit decreases as level of activity increases
Term
 Mixed Cost
Definition
 Total cost increases as level of activity/volume increases; cost per unit decreases as level of activity increases
Term
 Define Linear cost
Definition
 Cost behavior that can be described using the equation of a line
Term
 Name 5 methods of determining cost Function
Definition
 Account Analysis method Conference method Industrial engineering method High-low Analysis Regression Analysis
Term
 Why do we want to estimate cost function?
Definition
 We can use cost function to estimate future cost To determine the usefulness of a possible cost driver
Term
 What 2 assumptions are used in estimating cost functions?
Definition
 Variations in a single activity (cost driver) explains the variations in costs within the relevant range of activity, cost behavoir is linear
Term
 How should the intercept of the cost function be interpreted?
Definition
 the intercept represents the fixed cost associated with operating in the relevant range
Term
 Discuss the advantages and disadvantages of the high-low and regression methods for estimating a cost function.
Definition
 both are quite simple high-low only requires 2 data points. Regression requires more than 2 data points. the more data points the more the regression works the quality of high-low estimates are limited because they only use 2 data points
Term
 In the high-low method, which data points should be used?
Definition
 the highest and lowest level of activity. these points define the relevant range of the cost function
Term
 What are some common non-linear cost functions?
Definition
 Step-Variable  Step-Fixed
Term
 What is the different between step-variable and step-fixed?
Definition
 step-fixed cost remain the same over a wide range of activity in the relevant range, in other word there are very step within the relevant range
Term
 What is an inventoriable cost?
Definition
 cost that are considered as assets on the balance sheet when they are incurred but are expensed as cost of goods sold when the product is sold
Term
 What are the three types of companies and which of their costs are inventoriable?
Definition
 Service- No inventoriable cost Merchandising- cost of purchasing inventory and having it delivered   Manufacturing- Direct labor, Direct material and Manufacturing overhead
Term
 Are all inventoriable cost manufacturing cost?
Definition
 No. Merchandinsing firms have inventoriable cost but no manufacturing costs
Term
 Are all manufacturing costs inventoriable under GAAP?
Definition
 Yes
Term
 When are manufacturing and inventoriable costs expensed?
Definition
 when products are sold
Term
 What do we call costs thatare not inventoriable?
Definition
 Period cost. Those cost are expensed as soon as incurred
Term
 Do service companies have any inventoriable costs?
Definition
 No
Term
 What are the three types of inventoriable manufacturing costs?
Definition
 Direct Material Direct Labor Manufacturing overhead
Term
 What is absorption costing?
Definition
 inventory costing method where all variable and fixe manufacturing cost are included as inventory- this is a requirement by GAAP
Term
 What does cost flow show us, in general?
Definition
 Cost flows show as how manufacturing cost moves through inventory accounts on the balance sheet
Term
 What is the total maufacturing costs?
Definition
 The cost of direct material, direct labor and manufacturing overhead that was incurred during the period of production
Term
 What does cost of goods manufactured represent?
Definition
 the cost associated with units that were completed in the period
Term
 What does cost of goods sold represent?
Definition
 the cost associated with units that were sold during the period
Term
 What is the most likely cost behavior for direct material?
Definition
 Variable
Term
 What is the most likely cost behavior for direct labor?
Definition
 the process that is used to determine direct labor forces it to be variable
Term
 What is the most likely cost behavior for manufacturing overhead?
Definition
 Most likely Mixed
Term
 What is idle time and how is the cost of idle time determined?
Definition
 idle time is the indirect cost that results when the circumstance prevent a worker from doing work. it is calculated as his normal wage multiplied by the number of idle hours
Term
 What is overtime premium and how is it determined?
Definition
 Overtime premium is an indirect labor cost that results when a worker works more than 40hrs. it is calculated by multiplying the hours more than 40 worked times the difference between the overtime wage and the normal wage
Term
 Why might absorption costing methods motivate mangers to over-produce inventory?
Definition
 absorption costing allows fixed manufacturing cost to be stored in inventory instead of being expensed. Overproduction means less fixed manufacturing cost are expensed which results in higher income. Managers rewarded based on income, then have an incentive to overproduce in order to increase income.
Term
 What are some ways to discourage overproduction of inventory?
Definition
 1. Careful budgeting and inventory planning to prevent managers the freedom to overproduce. 2. Counter earnings based incentives with penalties for excess inventory, spoilage or obsolescence  3. Move away from annual evaluation periods. 4. Include inventory related non-financial measures of performance in the evaluation process. 5. Evaluate managers using internal measures of income such as from variable costing or throughput costing instead of absorption costing.
Term
 Can variable costing be used for financial statement preparation.
Definition
 No
Term
 What is the only difference between absorption and variable costing?
Definition
 The treatment of fixed cost. In variable costing, fixed cost are treated like a period cost and are expensed in a lump sum. In absorption costing, fixed cost are only expensed when the units are sold.
Term
 Why is the contribution margin format of the income statement used in variable costing?
Definition
 To emphasize the lump sum treatment of fixed manufacturing costs.
Term
 What is another name for variable costing?
Definition
 Direct costing
Term
 What is throughput costing?
Definition
 Throughput costing is similar to direct costing except that the only inventoriable cost is direct materials. All overhead and labor is treated like a period cost and expensed in the period it is incurred.
Term
 How do differences in sales volume versus production volume affect income calculations from absorption and variable costing?
Definition
 1. If sales is greater than production then net income will be lower under absorption than under variable costing. 2. If  production is greater than sales then net income will be higher under absorption than under variable costing.
Term
 What is cost assignement?
Definition
 General term for assigning direct and indirect costs to a cost object. Direct cost assignment is called tracing. Indirect cost assignment is called allocation.
Term
 What is a cost object?
Definition
 anything for which a measurement of cost is desired. Common cost objects are units and departments.
Term
 What is a direct cost of a cost object
Definition
 Cost that can be traced specifically to the cost object.
Term
 What is an indirect cost of a cost object
Definition
 Cost that cannot be specifically traced to a cost object.   Indirect costs are allocated.
Term
 What are the four reasons we allocte costs
Definition
 1. Provide information for economic decisions  2. Motivate managers and other employees  3. Justify cost or compute reimbursement acts 4. Measure income and assets-
Term
 What criteria should be used in allocating cost?
Definition
 1. Cause and effect  2. Benefit received  3. Fairness and equity 4. Ability to bear cost
Term
 Is any criteria generally more important than the others?
Definition
 Yes, cause and effect is the best criteria if it is available.
Term
 What is a cost pool?
Definition
 costs associated with a grouping of indirect cost items.
Term
 What is an allocation base?
Definition
 A systematic way of linking indirect costs to a cost object.  For example, an activity that is expected to affect indirect costs and is measurable for all cost objects.
Term
 To allocate indirect cost to a cost object, what must we know?
Definition
 1. total cost pool 2. total allocation base 3. quantity of allocation base used by cost object
Term
 What do we get if we divide cost pool by the total allocation base?
Definition
 The allocation rate: we then multiply this rate base the quantity of allocation base used by the cost object to assign indirect cost to the cost object.
Term
 What do we get if we divide quantity of allocation used by a the cost object by the total allocation base?
Definition
 The percentage of the total allocation base used by the cost object. We then multiply this percentage by the cost pool.
Term
 When might a company use a job cost system?
Definition
 When the primary cost object is a unit or several units of a distinct product or service produced as a single job.
Term
 How do we trace direct costs in a job cost system?
Definition
 Direct material is generally traced with material requisition forms while direct labor is traced with time cards
Term
 What are examples of types of companies that migth use job cost system?
Definition
 Audit, tax, engineering, construction
Term
 Describe a normal costing system?
Definition
 traces direct costs to the cost object and allocates indirect costs based on budgeted costs and budgeted quantity of allocation base.
Term
 Describe an actual costing system?
Definition
 traces direct costs to the cost object and allocates indirect costs based on actual costs and actual quantity of allocation base.
Term
 What are the trade-offs between using a normal and actual costing system?
Definition
 Timing and accuracy
Term
 How do manufacturing costs flow to the income statement in a job cost system?
Definition
 manufacturing costs are are assigned to specific jobs and the cost of those jobs flow through the inventory accounts with the jobs. Total manufacturing costs equals the total direct labor, direct materials, and manufacturing overhead assigned to jobs during the period. The balance of the WIP account is equal to the sum of the costs assigned to jobs that are not yet complete. COGM for a period is equal to the sum of the cost of jobs that are  completed in the period. The balance of the finished goods account is equal to the sum of the costs assigned to jobs that are completed but not yet shipped.COGS for a period is equal to the sum of the cost of jobs that are sold shipped during the period.The balance in the COGS account equals the sum of the cost of the jobs that have been completed and shipped.
Term
 What non-manufacturing costs might be considered when determining product costs?
Definition
 Research  Design Distribution
Term
 Can product costs that include non-manufactruing costs be used in the financial statements?
Definition
 No!!!
Term
 Describe an over-costed product:
Definition
 An over-costed product is a product that has been assigned more cost than it should basedo n the relative resources that it required.
Term
 What problems can occur if products are over-costed?
Definition
 1. Products that are unknowingly over costed might in turn be over-priced resultign in lost sales.  2. managers may waste valuable resources trying to reduce costs unnecessarily.
Term
 Describe an under-costed product:
Definition
 An under-costed product is a product that has been assigned less cost than it should based on the relative resources that it required.
Term
 What problems can occur if products are under-costed?
Definition
 1. Products that are unknowingly under-costed might in turn be under-priced resulting in less profit.  2. Managers may not see a point in spending time trying to reduce costs.
Term
 What is product cross- subsidization?
Definition
 Cross-subsidization means that any time a product is under-costed, there is at least one other product over-costed.
Term
 What are three signs that a company might need a refined cost system?
Definition
 1. Increase in product diversity 2. Increase in indirect costs 3. Competition
Term
 What are three guidelines for refining a cost system?
Definition
 1. Direct cost tracing  2. More indirect cost pools that are homogenous – same cost driver 3. Allocate costs based on cost driver, if available then benefits received
Term
 Describe an activity based costing system.
Definition
 An activity based costing system is a refined costing system that identify cost pools whose  are categorerized as either unit level costs, batch-level costs, product-sustaining costs, or facilitating costs.
Term
 What is a unit-level cost?
Definition
 cost of activiites performed on each of product.  Example- Machine operation, distribution
Term
 What is a batch-level cost?
Definition
 cost of activiites related to a group of products Example: machine setups, order entry, invoicing,
Term
 What is a product-sustaining cost?
Definition
 Cost of activities to support an individual product regardless of units or batches produced. Examples - Design, research product specific testing
Term
 What is a facility-sustaining cost?
Definition
 Cost of activities that cannot be traced to products but serve the organization as a whole. Example - Administartive resources
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