TEST 1  CH 1, 2, 3, 5

CH1  Business environment

Decentralization: the delegation of decision making authority throughout an organization

Manufacturing cell: a clustering of 2 + machines at a single workstation

Ideally, how many units show be produced in a JIT manufacturing system?

 Actual customer demand for the current week

All of the following would be classified as product costs except:

 Property taxes on production equipment

 Insurance on factory machinery
 Salaries of the advertising staff
 Wages of machine operators

Line Staff

Directly related to achievement of the basic Supports line

objective of an organization
Emergency room manager in hospital HR manager in hospital
Both line/staff functions are on organization chart

FALSE Persons occupying staff function have authority over person occupying line

CFO

• Provides timely and relevant data to support planning and control activities
• Prepares financial statements for external users

Managerial Accounting Financial Accounting

More future oriented Focuses on historical past

Looser- doesn’t need to follow GAAP Follows GAAP
Used internally for mgmt: budgeting, Used for 3rd party users: shareholders,
controlling creditors, govt, banks, bonding companies
(CPA type stuff)
Emphasizes relevance, timeliness Emphasizes precision, objectivity, verifiability
Lean production: 5 step mgmt approach that uses resources around the blow of business
processes and pulls units through these processes in response to customer orders

Theory of constraint: key to success is effectively managing the constraint (weak link)

Six Sigma: method of improving business that relies on customer feedback/data gathering &
analysis

IMA Statement of Ethical Professional Practice

• Competence, Confidentiality, Integrity, Credibility

• When faced with ethical issue, discuss with immediate supervisor except when he/she is
involved. Present issue to next level if that’s the case.
• If immediate supervisor is CEO, then a group like audit committee, ecomm, board of
directors/trustees or owners can review the issue
• Management accountants must refrain from disclosing confidential information
acquired in the course of their work: except when authorized by mgmt, unless
legally obligated to do so
Sarbanes Oxley

• Protect the interests of those who invest in public companies

• CEO/CFO have to certify in writing that their financial statements are all true
• Audit committee is allowed to hire, compensate, terminate the public accounting firms
• Prohibits public accounting firms from providing non audit services
• Requires companies’ auditor to use opinion on company’s internal control over financial
reporting to accompany mgmt’s assessment  in annual report

CH 2 Cost concepts

Planning

• Establish strategy
• Select course of action
• Specify how action will be implemented
○ Budget: detailed financial plan for the future

Directing and Motivating

• Managing day to day activities

• Mobilizing people to carry out operations

Controlling

• Ensure plan is carried out and modified if circumstances change

• Performance reports are essential
○ Feedback: signals whether operations are on track

Period Costs include:

• Selling costs: costs necessary to secure the order/deliver product

• Administrative costs: executive, organizational and clerical costs
• Are expensed in the period they are incurred in

Product costs include:

• Direct labor, direct materials, MOH

○ MOH: indirect materials & indirect labor
• Not recorded into COGS until there’s a sale
• Appears on the balance sheet only if goods are partially completed or are
unsold at the end of a period

Prime costs: Direct Material & Direct Labor

Conversion Cost: Direct Labor & MOH (Indirect Labor/Indirect Materials/Factory utilities)

Wages for a timekeeper in a factory  conversion cost

Sunk cost: already incurred and cant be changed now or in future

COGM:

Direct Materials:

• Add: RM, inventory, beginning

• Add: Purchases of RM
○ RM available for use
• Deduct: RM, inventory, ending
Direct Labor
MOH
 Total Manufacturing Costs
Add: WIP inventory, beginning
Deduct, WIP inventory, ending
COGM
Fixed costs: as units , costs 
• Committed fixed cost for a retail sales corporation  lease payments made on
its store buildings
• Cost of running an annual leadership seminar for mgrs is NOT included as fixed cost
• Cost that remains constant in total throughout wide ranges of activity

Variable costs: cost that varies in direct proportion to

changes in the level of activity

• Constant per unit but varies in total with the

activity level

Cost A: variable  total costs increase when units

increase

# of units Unit Cost Total Cost

produced
1 ? $10
10 ? 100
100 ? 1,000

Cost B: fixed  total costs are the same

1 $5,000 ?
10 500 ?
100 50 ?

Income Statement:

Sales
-COGS:
• Add: FG, inventory, beginning
• Add: COGM
○ Goods available for use
• Deduct: FG, inventory, ending
○ Goods used in production
=Gross Margin
-Expenses
Net operating income
Ch 3 Job order costing

Process costing (1 process)

• Company produces many units of a single product

 • One unit of product is indistinguishable from the others  homogeneous
○ Assigned one same average cost
○ Coca Cola

Job order costing (many jobs)

• Many different products and services are produced each period to customer
specifications
• Products are manufactured to order
○ Aeropostale Jeans (many different washes, styles)
• Dollar amount transferred from WIP to FG is the sum of the costs charged to all
jobs: completed during the period

MOH is applied to jobs that are in process

Allocation base: direct labor hours, direct labor dollars, machine hours used to assign MOH to
individual jobs

PDOH: used to apply overhead to jobs before the period begins

• Makes it possible to estimate job costs sooner

• Total MOH costs/ allocation base
• Take PDOH * Actual activity to find Overhead applied

Underapplied or overapplied OH: different btwn the overhead cost applied to WIP and the
actual OH costs of a period

COGS:

FG, inventory, beginning

Add: COGM
Goods available for sale
Deduct: FG, inventory, ending
Unadjusted COGS
• Add: under applied overhead
Adjusted COGS

JOURNAL ENTRIES:

Apply MOH to jobs (WIP)

 Debit: WIP
○ Credit: MOH
Goods manufactured are transferred to finished goods warehouse
 Debit: FG
○ WIP
Cost to manufacture goods are recorded
 Debit: COGS
○ Credit: FG
Collections from customers during year are recorded
 Debit: Cash
○ Credit: Accounts Receivable
Payments to suppliers on account during the year; payments to employees for salaries and
wages
 Debit: Accounts Payable
 Debit: Salaries & Wages Payable
○ Credit: Cash
When Overhead is underapplied, the entry to close this balance to Cost of Goods Sold would
be:

Debit: Cost of Goods Sold

Credit: Manufacturing Overhead
 In the income statement, when calculating COGS, be sure to add the underapplied
amount to COGS!

When OH is overapplied, this is the entry:

Debit: MOH
Credit: COGS
 In the income statement, be sure to subtract the overapplied amount from COGS!

Ch 5 Cost behavior: Analysis & Use

Cost structure: relative proportion of each type of cost (variable, fixed, mixed) in an
organization

Variable costs: must be variable with respect to its activity base(cost driver)

• Measure of whatever causes the incurrence of variable cost

○ Direct labor hours, units produced, units sold
• Examples:
○ Merchandising companies : COGS
 COGS is variable w/ respect to volume sold
○ Manufacturing companies: DM, DL, variable OH
 DM @Ford b/c cost of DM is variable w/ respect
to Ford’s total volume of output
○ Merchandising & manufacturing: commissions,
shipping costs, clerical costs (invoicing)
○ Service companies: supplies, travel and clerical

DM: true or proportionately variable cost because the amount

used during a pd will vary in direct proportion to the level of
production activity

True variable costs: amount of true variable cost used during the pd varies in direct proportion
to the activity level (overage charge on a cell phone bill)

Step variable cost: cost of a resource that is obtained in large

chunks and that or only in response to fairly wide changes in
activity

○ Wages of skilled repair technician

○ Technician’s time can only be obtained in large
chunks- difficult to hire for part time work

Relevant range: range of activity within which the assumptions

made about cost behavior are reasonably valid
Relation between cost and activity is curvilinear

Committed fixed costs: investments in facilities, equipment and the basic organization
• Depreciation of buildings and equipment, real estate taxes , salaries of top mgmt,
insurance expense,
• If operations are interrupted or cut back, CFC remains largely unchanged in the short term
• Planning horizon is MANY years
Discretionary fixed costs: arise from annual decisions by mgmt to spend on certain fixed cost
items
• Advertising, research, PR, mgmt dvpmt programs, internships for students
• Planning horizon is ONE year
• Mgmt is not locked into its decisions regarding such costs
○ Costs can be adjusted year to year or even during the course of the year
 Recession: reduce number of internships available!
High low method: based on the rise/run formula for the slope of a straight line.
• If the relation btwn cost & activity is linear, then the slope of the straight line is = variable
cost per unit of activity
• Identify pd w/ lowest level of activity & pd w/ highest level of activity
BEP: contribution margin = fixed expenses

• BEP is NOT increased by:

○ Decrease in total fixed expenses
○ Increase in contribution margin ration
○ Decrease in the ratio of variable expenses to sales
• Contribution margin = sales revenue – variable expenses
○ This amount contributes towards covering fixed expenses and then towards profits
for the pd

Margin of safety = sales – (Fixed expenses/contribution margin ratio)

Which would decrease BEP?

• fixed expense,  contribution margin

•  fixed expense,  contribution margin
•  fixed expense,  contribution margin

High-low method is used with variable costs

Questions to memorize

TRUE There is a trend towards greater fixed costs relative to variable costs

TRUE traditionally, companies have maintained large amounts of raw materials, work in
process, and finished good inventories to act as buffers so that operations can proceed smoothly
even if there are unanticipated disruptions

TRUE When the PDOHR is based on the level of activity at capacity, the OH under applied may
be called the cost of unused capacity and treated as a period expense

TRUE The equivalent units in beginning WIP inventory plus the equivalent units for the work
done during the period equals the units transferred out plus the equivalent units in ending WIP
inventory

FALSE  Rent on a factory building used in the production process would be classified as a
period cost and as a fixed cost
FALSE 

FALSE  If the finished goods inventory increases between the beginning and end of a period,
then the COGM is < COGS

FALSE  ISO 9000 certification is relatively easy to achieve because the little documentation on
quality control procedures is needed

FALSE  Most companies use the contribution approach in preparing financial statements for
external reporting purposes

The following information relates to Spock manufacturing company:

○ Total estimated MOH at beginning of year………….….$620,000

○ Total MOH applied to production during the year.….$625,000
○ Total MOH incurred during the year……………………….$618,000

The company closes out the balance in the MOH to COGS at the end of the year. In the journal
entry to close out the balance, the company would:

 Credit COGS for $7,000

Baker corporation applies MOH on the basis of direct labor hours. At the beginning of the most
recent year, the company based its PDOHR on total estimated OH of $210,600 and 6,000
estimated direct labor hours. Actual MOH for the year amounted to $209,000 and actual direct
labor hours were 5,980.

To calculate PDOHR, take ESTIMATED OH/ ESTIMATED direct labor hours

○ $210,600/6000 = $35.10

To calculate the applied MOH for the year, take PDOHR and multiply by ACTUAL direct labor
hours

○ $35.10 * 5980 = 209,898

To calculate the OH for the year, compare applied OH to actual OH

○ Actual = $209,000
○ Applied= $209,898
○ Overapplied by $898

This is the journal entry to record application of MOH to WIP in a process costing system with 2
processing departments, A and B:

○ Debit: WIP-Dept A
○ Debit: WIP – Dept B
○ Credit: MOH