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FMA
Financial and Managerial Accounting Unit 6
| Question | Answer |
|---|---|
| What is the primary purpose of understanding product costs in managerial accounting? | To support internal decision-making in areas like pricing, production control, and evaluating product continuation. |
| What are the three key costing methodologies introduced in this unit? | Job Order Costing, Activity-Based Costing (ABC), and Process Costing. |
| When is Job Order Costing used? | When products or services are customized or produced in small batches. |
| How are costs treated in Job Order Costing? | Each job is treated as a unique project, and costs are traced directly to that specific job. |
| What industries commonly use Job Order Costing? | Construction, consulting, and custom manufacturing. |
| What is the purpose of Activity-Based Costing (ABC)? | To allocate overhead costs more accurately based on cost drivers. |
| Why is ABC useful for overhead costs? | Because overhead is often complex and less directly traceable than direct materials and labor. |
| What are cost drivers in ABC? | Factors like machine hours or inspections that are used to assign overhead costs. |
| What is the main benefit of ABC? | It provides better insight into the true cost of products or services. |
| When is Process Costing used? | For mass production of similar or identical items. |
| How are costs handled in Process Costing? | Costs are accumulated over time and averaged across all units produced. |
| What industries commonly use Process Costing? | Paint manufacturing, food processing, and furniture production. |
| What is the proficiency statement for the Costing Methodologies module? | Given a business scenario, the student explains how various costing methodologies affect decision-making. |
| Why are design revisions considered overhead, not direct costs? | Because they support production but aren't tied to a specific unit of output. |
| What is a cost driver in the context of ABC? | A factor that causes overhead to increase, such as time spent on design revisions. |
| How do cost drivers help in allocating overhead? | They help assign overhead costs fairly and profitably to individual projects. |
| How does ABC differ from traditional costing methods? | ABC allocates overhead based on specific cost drivers, offering more precise cost assignment. |
| When is understanding costing methodology especially important? | When products are customized, overhead costs are significant, and pricing accuracy affects profitability. |
| What are the three main costing methodologies? | Job-order costing, process costing, and activity-based costing (ABC). |
| What is job-order costing used for? | Distinct or customized products, with costs assigned to specific jobs or batches. |
| What industries typically use job-order costing? | Construction, custom furniture, specialized consulting. |
| When is process costing applied? | When products are uniform and produced in continuous flow. |
| What are examples of products that use process costing? | Paint, bottled water, cement. |
| What is the primary focus of activity-based costing (ABC)? | Allocating overhead by identifying cost drivers. |
| Is ABC a replacement for job-order or process costing? | No, it enhances these methods by improving overhead allocation. |
| What is job order costing? | A costing method that tracks costs for individual, custom products or services (called "jobs"). |
| When is job order costing used? | When each job is unique and can be costed separately—e.g., custom homes, legal cases, or consulting projects. |
| Why is accurate costing important? | For pricing, measuring gross margin, valuing assets, and supporting management decisions. |
| What are the three elements of product cost in job order costing? | Direct materials, direct labor, and manufacturing overhead. |
| What is direct material? | Raw materials specifically used in a product or job. |
| What is direct labor? | Wages paid to workers directly making the product. |
| What is manufacturing overhead? | Indirect factory costs like utilities, maintenance, and supervisor wages. |
| How is overhead applied in job order costing? | Using a predetermined rate based on estimated cost drivers. |
| What are the inventory stages in job order costing? | Raw materials → Work-in-process → Finished goods → Cost of goods sold (COGS). |
| What is an example of a company using job order costing? | Boeing tracks the cost of each airplane from production through delivery. |
| When should you use job order costing? | When jobs are custom-made and can be separately tracked. |
| When should you not use job order costing? | When products are mass-produced and identical—use process costing instead. |
| What’s the cost vs. benefit trade-off with job order costing? | It provides detailed info but may not be worth it for identical or simple products. |
| Give an example of job order costing in home renovations. | Builders track specific materials, labor, and subcontractor work per project. |
| How is job order costing used in auto repair? | Costs are tracked per service (e.g., oil change vs. engine repair). |
| How is job order costing applied in Christmas light installation? | Each home's cost differs by time, materials, and travel—tracked individually. |
| What are product costs? | Costs inside the factory; capitalized as inventory and expensed when sold. |
| What are period costs? | Costs outside the factory; expensed in the period incurred. |
| Give examples of product costs. | Raw materials, factory labor, factory rent, factory utilities. |
| Give examples of period costs. | Admin salaries, advertising, office utilities. |
| How do you classify property taxes on a factory vs. an office? | Factory = Product cost; Office = Period cost. |
| What is gross margin and how is it calculated? | Gross margin = Sales price − Cost of Goods Sold (COGS); indicates profitability. |
| Which phrase below describes job order costing? | A system in which manufacturing costs are accumulated by separate product orders or batches |
| In a job order costing system, how are factory supervisor wages classified? | Manufacturing overhead |
| What is a period cost? | A cost associated with activities occurring outside the factory |
| What is Activity-Based Costing (ABC)? | ABC assigns overhead using multiple cost drivers that reflect actual activity usage, leading to more accurate product costing. |
| How does traditional costing assign overhead? | Using one activity base, such as labor hours or machine hours. |
| Why does ABC lead to more accurate product costing? | Because it accounts for how different products consume overhead activities differently. |
| Why does ABC matter? | It helps companies understand the true cost of products/services and supports smarter pricing and decision-making. |
| When is ABC more accurate than traditional methods? | When products require different levels of support or when overhead varies significantly. |
| Compare traditional costing and ABC by how they assign overhead. | Traditional: One base (e.g., labor hours) ABC: Multiple cost drivers |
| Compare traditional costing and ABC by effort required. | Traditional: Easier to apply ABC: More data-intensive |
| When should ABC be used? | When overhead is large, products use overhead differently, and detailed tracking is possible. |
| When should ABC be avoided? | When overhead is small, production is simple, and data tracking is limited. |
| What are unit-level activities? | Activities performed for each product unit (e.g., drilling). |
| What are batch-level activities? | Activities performed for each batch (e.g., machine setup). |
| What are product-line activities? | Activities that support an entire product line (e.g., R&D). |
| Define a cost pool. | A total overhead cost linked to one activity. |
| Define a cost driver. | A measurable activity that causes or increases cost (e.g., machine hours). |
| What is the formula for activity rate? | Activity Rate = Cost Pool ÷ Estimated Cost Driver Units |
| What are the benefits of ABC? | More accurate overhead allocation Better pricing decisions Identifies cost-saving opportunities Improves budgeting and profitability |
| What is the bottom line about ABC? | Though more complex, ABC leads to fairer pricing, better decision-making, and stronger competitiveness. |
| Which statement is correct with respect to activity-based costing (ABC) overhead allocation? | Overhead is allocated based on several different measures of activity. |
| One important result of using an ABC system is more accurate product costing. What is another important result of using an ABC system? | Better decisions made |
| An ABC overhead allocation system is not always substantially better than a traditional system. When does a traditional overhead allocation system work well? | When the production process for each different product or project or process is basically the same |
| What is process costing? | A system where costs are accumulated by process or department over a period and averaged across all units produced. |
| When is process costing most appropriate? | When a company produces large volumes of standardized, identical products. |
| How are unit costs assigned in process costing? | All units in the period are assigned the same cost per unit. |
| Name some companies that use process costing. | Chevron, Wrigley, PPG Paints, Hershey, Heinz. |
| What are key features of process costing? | Costs are tracked by process, not individual product Products move through multiple stages Each stage adds labor, materials, and overhead |
| What conditions must be met to use process costing? | All units go through the same steps Units are identical or nearly identical |
| Example of cost flow in paint manufacturing? | Raw Materials → Process 1 → Process 2 → Process 3 → Finished Goods Inventory → COGS |
| How do you calculate unit cost if there’s no inventory? | Total cost ÷ Units transferred out = Unit cost |
| How does process costing compare to job order costing? | Feature Process Costing Job Order Costing Product Type Mass-produced Custom Cost Assignment Averaged Traced to jobs Used by Paint, food, etc. Construction, custom work |
| What does ABC focus on in comparison to job order or process costing? | ABC focuses only on overhead, while job order and process costing assign all costs (materials, labor, overhead). |
| Key takeaway about ABC vs. Job Order vs. Process Costing? | ABC = Overhead accuracy Job Order & Process Costing = Total unit cost determination |
| Real-world example of process costing? | Costco rotisserie chicken – costs are averaged over 90+ million identical chickens produced per year. |
| Why is process costing suitable for Costco's rotisserie chicken? | Chickens are mass-produced using the same process and tracked as one product type. |
| When should you use process costing? | Products are mass-produced and identical Tracking each unit is impractical Costs can be averaged |
| What are the stages of production in process costing? | Production Packaging Finishing |
| How do costs flow in process costing? | Accumulate by process Calculate average per unit Transfer costs to next stage Move to Finished Goods → COGS when sold |
| Example of cost flow through processes: | Process Cost Components Action 1 Materials + Labor + Overhead Average cost → Process 2 2 Additional M/L/O New avg cost → Process 3 3 Additional M/L/O Final avg cost → Finished Goods Sold — Cost/unit → COGS |
| What is process costing? | A method of product costing in which costs are accumulated by process and averaged over all products made during a period |
| For some production processes, job order costing is the correct production costing system to use. With other production processes, process costing is more appropriate. For which product is process more appropriate? | Manufacturing identical residential refrigerators |
| Four tax consulting companies serve very different sets of customers. Which of these four tax consulting companies is most likely to use a process system in determining the cost of each customer engagement? | A company that serves tax customers who are middle-income individuals who all have basically the same tax issues |
| What are the three categories of manufacturing costs? | Direct materials, direct labor, and manufacturing overhead |
| Smartistry produces custom photo albums, calendars, and stationery for customers. Which overhead allocation system should the company use? | Job order costing |
| In a job order costing system, some actual production costs are directly associated with a job or product or project. Which production cost is allocated rather than being directly associated with a job, product, or project? | Overhead |
| What is direct labor? | Wages of factory employees who work directly on the products manufactured |
| In an ABC system, what is a cost pool? | The collection of overhead costs associated with a specific overhead cost activity |
| Sara is frustrated with her company’s costing system. She suspects that too much overhead cost is being allocated to generic, simple products, and too little overhead cost is being allocated to custom-designed, complex products. The existing overhead allo | Activity-based costing |
| There are three general types of overhead cost activities in an ABC system. What are those three general types of activities? | Unit-level, batch-level, and product-line |
| How is an activity rate computed in an ABC system? | Cost pool divided by number of cost driver events |
| For some production processes, job order costing is the correct production costing system to use. With other production processes, process costing is more appropriate. For which process is process costing more appropriate? | Producing identical cans of paint |
| For which company below is job order costing the appropriate costing methodology? | A manufacturer of custom-designed furniture |
| A manufacturing company that produces custom snowmobiles must determine a systematic and rational way to allocate overhead costs. How should the company allocate overhead costs? | Allocate costs with a predetermined overhead rate based on budgeted overhead costs. |
Created by:
heavenlypure
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