Cost Accounting Exam 2 Multiple Choice Review Chapter 6 Process Costing Normal Spoilage o The cost is charged to units transferred to the next processing department or FG Inventory o Can also be charged directly to COGS Abnormal Spoilage o Result of unusual operating problems o Recorded as a loss expense of the period abnormal spoilage expense Chapter 7 Cost Allocation Joint Products o Products resulting from the same production process with common inputs Intermediate Products o Requires further processing before sale o Ready for sale without further processing Final Product By Product products Split off Point o Incidental products with relatively low value or quantity when compared to major joint o The first point in a joint production process at which individual products can be identified and separated Joint Cost Costs of processing joint products prior to the split off point Joint Allocation Methods o Physical Measure Method Joint costs are allocated based on a proportional measure weight volume etc of the joint products at the split off point This method may be used when product prices are highly volatile or market prices are highly volatile or market prices are unavailable for joint products E g Cost plus contracts o Sales Value at Split Off Method Joint costs are allocated based on the relative sales values of the products at the split off point This method can be used only when joint products can be sold at the split off point without further processing o Net Realizable Value NRV Method Joint costs are allocated based on the estimated sales values or NRV values of the products at the split off point This method can be used when joint products cannot be sold at the split off point and need further processing By product NRV is deducted from joint production costs By product NRV is treated as other revenue For each method the NRV of the by products could be assigned at time of production as inventory asset recognition approach or at time of sale revenue approach Accounting for By Products o Two methods Chapter 8 Cost Estimation Cost Estimation o Development of the functional relationship between an activity cost and its cost driver s for the purpose of predicting the cost o Uses algebra to determine a unique estimation line between representative high and High Low Method low points in the data Regression Analysis o Statistical method for obtaining the unique cost estimating equation that best fits a set of data points o R Squared o T Value Measure of the goodness of fit provides the amount of variation of the dependent variable that is explained by the independent variable Measures whether each cost driver X has a valid stable relationship with the cost Y Less than 2 indicates negative correlation Between 2 2 indicates no correlation Greater than positive 2 indicates positive correlation o Standard Error Measures the accuracy of the predicted values of cost Y Chapter 9 Cost Volume Profit Analysis CVP analysis o Used to analyze how operating decisions and marketing decision affect profit o Relies on an understanding of the relationship between variable costs fixed costs unit selling price and output level volume Assumptions of CVP o Linear revenue and cost functions over a relevant range o Total costs can be reliably classified into fixed and variable components o Selling price per unit variable cost per unit and total fixed cost can be identified and remain constant over the relevant range o Units produced purchased units sold o For multiple product analysis sales mix proportion sold of each product is constant Margin of Safety o The amount by which sales can drop before losses begin to incur o The lower the MOS the higher the risk of not breaking even when the sales drop o MOS in Total sales in units BEP in sales o MOS in units Total sales in units BEP in units o MOS Margin of safety in dollars units Total sales dollars units sold Operating Leverage o OL contribution margin operating income o A measure of how sensitive operating income is to a change in sales operating risk o A measure of the relative mix of fixed costs and variable costs o High low OL is indicative of high low of fixed costs suggesting high low operating risk o For firms with high OL a relatively small change in sales can lead to a loss o Budgets are financial or nonfinancial expressions of a plan of action for a specified Chapter 10 Strategy and the Master Budget o Role of Budgets period financial year Defining goals and objectives Means for allocating resources Motivating employees to attain goals Evaluating performance Coordinating activities Communicating plans o Budgeting Approaches o Zero Base Budgeting Requires managers to prepare budgets from a zero base It allows no activities or functions to be included in the budget unless managers can justify their needs o Base Budgeting or Incremental Budgeting Starts with the current budget and assumes that most current activities and functions will continue into that budget period Any increases above the initial budget would need to be justified o Authoritative Top Down Budgeting o Participative Bottom Up Budgeting Allows top management to prepare budgets for the entire organization Involves the employees throughout the organization in the budget preparation process o Behavioral Issues in Budgeting o Goal Congruence Refers to the degree of consistency between goals of the firm its subunits and its employees Three factors affect the level of goal congruence Employee participation in the budgeting process Difficulty level of the budget target easy vs difficult vs challenging but attainable The link of compensation and performance o Budgetary Slack Padding the Budget practice of managers knowingly underestimating or overestimating targets to enhance performance increasing budgeted expenses expenditures or decreasing budgeted revenue Practice of using all resources received to avoid reduction in future budgets o Spending the Budget o Master Budget o Comprehensive budget for a specific period grand plan of action o Comprises a set of operating and financial budgets Operating budgets are plans that identify resources needed to carry out the budgeted activities sales and production Include budgets for production purchase personnel and marketing and budgeted income statement Financial budgets identify sources and uses of funds for the budgeted operations Include cash budget budgeted statement of cash flows budgeted balance sheet and capital expenditure budget