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ACCT 2102: Test 2
Unit Level Activity
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Activities that affect each individual unit produced
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Batch Level Activity
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Activities that affect groups of units
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Product Level Activities
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Affect a specific product line
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Facility Level Activities
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Include all activities that do not fall into another category
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The allocation base is also called the ___ _____
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Cost driver
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Unit level and Facility level activities use _____ based cost drivers
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volume
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Batch and Product level activities use ______ based cost drivers
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transaction
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Activity Based Costing is easier to implement when:
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a company has the necessary accounting and information technology expertise to develop the system and the information technology in place to track the chosen allocation bases.
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Cost Distortion
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The difference between the amount of MOH allocated to the cost object under traditional costing and the amount of MOH allocated to the cost object under a refined costing system
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Main goal of refined costing systems
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To more accurately assign manufacturing costs to the cost objects.
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Each processing department has its own ____ account
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WIP
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Conversion consists of ____ and _____
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DL and MOH
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Equivalency Units (EU's) are calculated by multiplying _____ against a ______
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Physical units x Percentage of Completion
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Equivalency Units
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Represent the total amount of units that could have been completed given the product costs for the period
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If product costs vary drastically from period to period, the _____ method is used. If not, ______ _______ is used.
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FIFO, Weighted Avg.
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Five Production Cost Steps for Weighted Avg.
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1. Physical Units
2. Calculation of total EU's
3. Summary of costs to account for
4. Calculation of cost per EU
5. Assignment of Costs to units completed (C&TO) and units in ending inventory (EI)
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Variable Costs
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Total variable costs are directly proportional to changes in activity level. As the activity level increases, so do the total variable costs. As the activity level decreases, so do the total variable costs. Variable costs do not change on a per unit basis.
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Fixed Costs
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Unit fixed costs are indirectly proportional to changes in activity level. As the activity level increases, the unit fixed cost decreases. As the activity level decreases, the unit fixed cost increases. Fixed costs do not change in total.
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Mixed Costs
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Mixed costs contain both variable and fixed components. Mixed costs are neither directly nor inversely proportional to changes in activity level. As the activity level increases, the total mixed costs increase and per unit mixed cost decreases. As the activity level decreases, the total mixed costs decrease and per unit mixed cost increases.
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Relevant Range
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The relevant range is the range over which the identified cost behaviors are valid. Managers can predict costs accurately only if they use cost information for the appropriate relevant range.
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Account Analysis
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Account analysis requires managers to use their judgment to determine cost behavior and develop a cost behavior formula. Only managers who have in depth knowledge of a company’s operations should be allowed to use account analysis. This method is the most subjective of the four methods we will discuss.
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Scatterplot
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A scatterplot is a graphical representation of all data points for a given cost=
If the data points fall in a pattern that closely resembles a line, there is a strong correlation between the costs and the cost driver. However, if the data points fall in a pattern that does not closely resemble a line, there is a weak correlation between the costs and the cost driver.
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High-Low
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The high-low method identifies the highest and lowest cost driver activity levels (independent variable, x) and pairs the activity levels with their related costs (dependent variable, y). Using these two data points, the unit variable cost and fixed costs are calculated and a cost behavior formula is created.
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Regression Analysis
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Regression analysis is a statistical procedure used to determine the cost behavior formula. It is the most accurate and objective method available to predict cost behavior. Regression is simple to complete using available spreadsheet technology. Regression output can be difficult to interpret. However, for our purposes, we will only use three pieces of information found in the output: Intercept coefficient, X Variable 1 coefficient, and R-squared value.
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If r^2 is close to zero, then
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The cost driver is a poor fit
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