(Shared) ACC 350 Exam 1 Study Material

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ACC 350, Spring 2018

Exam 1 Study Material

OVERVIEW

● Chs. 1 & 2 :​ I​ ntroduction to Cost Accounting​ ….. P. 2
○ Terminology Definitions (terms list in study guide) ….. P. 2
○ Other Terminology Definitions (terms not listed in study guide, but worth noting) ….. P. 5
○ Complete List of Terms (from end of chs, in textbook, with corresponding page #s) ..... P. 6
○ Blackboard Problems ….. P. 7​ ​→​ C​ LICK HERE:​ l​ ink to pp. 7-1 through 7-19
■ Review Problems (followed by solutions) ….. P. 7-1
■ Exam 1 Practice Problems (followed by solutions)….. P. 7 -6
■ In-class Problem (followed by solutions) ….. P. 7-14

● Ch. 5 : ABC (Activity Based Costing)​ …..P. 8
○ Complete List of Terms (from end of chs, in textbook, with corresponding page #s) ….. P. 8
○ Terminology Definitions ….. P. 8
○ Traditional Costing Effects: Under- and Over-Costing ….. P. 11
○ Determining the Cost of Activities ….. P. 12
○ Calculating Cost Driver Rates ….. P. 12
○ Assigning Activity Costs to Goods & Services ….. P. 13
○ Calculating Product Cost Using the Traditional Approach ….. P. 13
○ Calculating Product Cost Using ABC ….. P. 14
○ Determining the Profitability of Products ….. P. 15
○ Determining the Profitability of Customers ….. P. 17
○ Blackboard Problems ….. P. 18 → ​ C​ LICK HERE:​ link to pp. 18-1 through 18-23
■ Practice Problem (followed by solutions) ….. P. 18-1
■ In-class Problem (followed by solutions)….. P. 18-3
■ Milwaukee Problem (followed by solutions)….. P. 18-15
■ Brrrr Problem (followed by solutions)….. P. 18-19

● Ch. 15 : Allocation of Support Dept. Costs, Common Costs, and Revenues​ ….. P. 19
○ Complete List of Terms (from end of chs, in textbook, with corresponding page #s) ….. P.
○ Terminology Definitions ….. P.
○ Direct Method ….. P.
○ Sequential (Step) Method ….. P.
○ Calculating OH Rates from Operating Departments ….. P.
○ Assigning OH Costs to Products, Jobs and Services ….. P.
○ Blackboard Problems ….. P.
■ In-Class problem (followed by solutions) ….. P.
■ Case Problem (followed by solutions)….. P.
■ Haliburton Problem (followed by solutions)….. P.
■ Service Department Problem (followed by solutions)….. P.

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Exam 1 Study Material

● TDABC Article
○ Summary
○ How-To: TDABC

Chs. 1 & 2 - Intro. To Cost Accounting:

Terminology Definitions​ (Terms listed in study guide)

1. Product/Service cost

a. The sum of the costs assigned to a product
b. Can be different amounts for the same cost object, depending on the purpose of

measurement
c. Image illustrating some different product costs for different purposes and the value chain

activities they include in their calculations (below):

2. Period cost

a. Also known as “SG&A” costs
b. All costs in the income statement other than COGS
c. Examples:

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Exam 1 Study Material

i. Design
ii. Marketing
iii. Distribution
iv. Customer Service
v. R&D
d. For manufacturing firms:
i. All non-manufacturing costs in the income statement
e. For retail firms:
i. All costs not related to the cost of goods purchased for resale
f. Treated like expenses in the periods in which they occur

3. Direct labor

a. DL or DML (Direct manufacturing labor)
b. Compensation for manufacturing labor
c. Assignment method: tracing/traced
d. Examples:

i. Wages paid to workers who convert RM to FG
ii. Benefits paid to workers who convert RM to FG

4. Direct material

a. DM
b. Acquisition costs of all materials that eventually become part of the cost object as WIP

or FG
c. Assignment methods: Tracing/Traced

5. Overhead cost

a. MOH (manufacturing overhead), OH (overhead), Indirect manufacturing costs, factory
OH

b. Manufacturing costs related to the cost object that CANNOT be traced in an
economically feasible way

c. Assignment method: Allocation/Allocated

6. Relevant range

a. is the band or range of normal activity level or volume in which there is a specific
relationship between the level of activity or volume and the cost in question.

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b. Example
i. a fixed cost is fixed only in relation to a given wide range of total activity or
volume (at which the company is expected to operate) and only for a given time
span (usually a particular budget period).

7. Opportunity Costs

a. the loss of potential gain from other alternatives when one alternative is chosen.

8. Cost Driver

a. a variable that causally affects costs over a given time span
b. The cause in a cause-and-effect relationship with costs being the effect
c. Examples:

i. Level of activity
ii. Volume of production
d. Note that:
i. Fixed costs​ have n​ o​ cost driver in the short run​ but may have a cost driver in the

long run.

9. Fixed costs ​(within a relevant range)

a. Total​ fixed costs:
i. Are​ constant
1. Unchanged, despite significant changes in levels of total activity or volume.
when considering fixed costs, always focus on total costs.

b. Per unit​ fixed costs
i. Are​ inversely proportional
1. Decrease as the activity level or volume increases

c. Cannot be easily changed in the short run, rather are changed
in the long run by managerial decision making

d. Examples:
i. Salaries to plant supervisors
ii. Labor union agreements to set workers
hours/compensation

10. Variable costs

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a. Total​ variable costs​:
i. Are p​ roportional​ within a relevant range
1. Total variable cost changes in proportion to changes in the related level of
total activity or volume of output produced.
ii. graphed as a diagonal, upward sloping line

b. Per unit​ of activity:
i. Is ​constant ​within a relevant range
ii. Is graphed as a horizontal line

c. Examples:
i. Hourly wages

Other Terminology Definitions ​(Terms not listed in study guide)

11. Cost Classifications

a. Costs can be classified b​ ased on:​
i. Function/department:
1. R&D
2. Design
3. Production
4. Marketing
5. Distribution
6. Customer Service
ii. Assignment method:
1. Direct = tracing
2. Indirect = allocation

iii. Behavior:
1. Variable
2. Fixed

iv. Number of units (of the cost object):
1. Total
2. Unit

v. Financial statement-treatment:
1. Inventoriable

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a. Manufacturing/Production costs (WIP & FG)

i. DM - direct materials
ii. DL - direct labor
iii. MOH - manufacturing overhead
2. Period (“SG&A”)
a. Expensed in the period incurred
b. Image summarizing cost classifications other than product/service costs (below):

12. Semi-variable costs

a. Have both fixed and variable components
b. Examples:

i. Phone bill that has a monthly fixed cost plus a per-minute used, variable cost

Complete List of Terms ​(From end of chapters)

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Blackboard Problems

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Ch. 5 - ABC:

Complete List of Terms​ (From end of chapter)

Terminology Definitions ​(selected terms)

13. Activity-based costing (ABC)

a. A tool for refining a cost system
b. Identifies individual activities as cost objects
c. For strategic (pricing & product mix) decisions

i. Identify all activities in the value chain
ii. Calculate all costs of individual activities
iii. Assign costs to cost objects on the basis of mix of activities needed
d. Illustration of ABC process:

14. Cost hierarchy

a. Categorizes various activity pools

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i. Basis:
1. Cost-drivers
2. Cost-allocation bases
3. Degrees of difficulty in determining cause-and-effect or benefits received
relationships

ii. Levels:
1. Output-unit
2. Batch
3. Product/Service-Sustaining
4. Facility-sustaining

15. Traditional Costing

a. “S​ imple costing system”​ or “Peanut-Butter Costing”
b. Uses a single indirect cost pool
c. Broadly averages cost of resources to cost objects
d. Often leads to under/over-costing
e. Works best for:

i. Limited variety of products
ii. Few OH resources used

16. Under-costing

a. A product/service is reported as having a lower cost per unit than the level of resources it
actually consumes

b. Strategic consequences:
i. under-pricing
ii. Losses on profits

17. Over-costing

a. A product/service is reported as having a higher cost per unit than the level of resources
it actually consumes

b. Strategic consequence:
i. Over-pricing
ii. Low market share as competition with lower prices gains consumers

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18. Product-cost cross-subsidization

a. Common in a traditional/simple costing system
b. Undercosting one item and overcosting one or more of its other products

19. Activity

a. Verb
b. Event, task, or unit of work with a specified purpose
c. Examples

i. Designing products/processes
ii. Setting up machines
iii. Operations of machines
iv. Setting up shipments
v. Distributing
d. Are sources of indirect costs
e. Are used to refine total indirect costs into pools
f. To achieve an effective balance, f​ ocus on activities that account for a sizable fraction of
indirect costs
g. Individual ​tasks can be combined into single activities if they all have the same cost
driver
i. Example:

1. A firm decides to combine maintenance of molding machines,
operations of molding machines, and process control into a single
activity—molding machine operations—because all these
activities have the same cost driver: molding machine-hours.

20. Indirect-cost pools

a. A grouping of indirect costs caused by activities
b. In ABC:

i. should be ​homogenous
1. Have the same or similar cause-and-effect/benefits-received relationship
with a s​ ingle cost-driver

c. Examples:
i. Distribution costs pool
1. Includes:

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a. all costs associated with distribution
ii. Set-up costs pool

1. Includes:
a. all costs associated with setting up a machine

21. Cost-allocation base

a. The c​ ost-driver​ that proportionally causes an indirect cost-pool to increase
b. Examples:

i. Cubic feet of packages
1. Cost pool associated: distribution costs

ii. Setup hours
1. Cost pool associated: set-up costs

22. Activity Based Management (ABM)

a. Uses ABC to improve customer satisfaction and profitability
b. Critical decisions:

i. Pricing & product mix
ii. Cost reduction
iii. Process improvement
iv. Product & process design

Traditional Costing Effects: Under- and Over-Costing

Summary:

Traditional costing, also known as “simple costing” or “peanut-butter costing,” often
leads to under/over-costing​ of products/services when applied to modern businesses.
Historically used ​when companies produced l​ ow variety​ products with m​ inimal overhead costs.
The ​strategic consequences​ of traditional costing include mis-pricing of products/services
along with the effects mis-pricing can lead to [under-pricing → lost profits & Over-pricing →
low market share]

Determining the cost of activities

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Summary:

Activities are the prime sources of total indirect cost accumulation. In normal ABC, the cost of
activities is measured using ​surveys and interviews.​ Budgeted quantities of indirect costs per cost
pool are then identified.

Calculating cost driver rates

Summary:

A b​ udgeted indirect cost rate​ is determined for each activity, by dividing its associated,
homogeneous cost pool by the total budgeted quantity of cost-allocation base related to the activity.

● Example calculation:

23. Steps:

a. Determine the total budgeted indirect costs for an activity/indirect cost-pool

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b. Determine the total budgeted quantity of the activity’s cost-allocation base
c. Divide​ step (a) by step (c):

i. ​ total budgeted indirect costs for an activity/indirect cost-pool
total budgeted quantity of the activity’s cost-allocation base

Assigning activity costs to goods & services

Summary:

Take the cost-driver rate (budgeted indirect cost rate) and multiply it by the quantity of cost-
allocation base that the individual product or service consumes.

24. Steps:

Calculating product cost using the traditional
approach

Summary:

Refer to (#15) “Traditional costing” definition. Simply divide total indirect costs (a single pool)
by one single budgeted cost-allocation base. Use this rate to determine product costs by multiplying
the rate by the amount of cost-allocation base consumed by the particular product.

Calculating product cost using ABC

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Summary:

Refer to (#13) “Activity Based Costing” definition. ABC groups indirect costs into
homogenous activity-cost pools, each having a cost-allocation base. The cost-allocation base is the
driver of costs in the activity-cost pool. It is used to determine indirect cost-rates for individual
activities. Those rates are used to compute product costs based on the product’s cost-allocation base
consumption per unit.

25. Steps:

a. Identify ​cost objects
i. cost pools
ii. products/services

b. Identify d​ irect costs​ of the product
i. DM
ii. DL

c. Select the a​ ctivities and/or cost allocation bases​ for indirect costs
d. Identify the i​ ndirect costs​ associated with each cost-allocation base
e. Compute the r​ ate per unit​ of each cost allocation base
f. Compute a​ llocation amounts​ to assign to each product
g. Compute the t​ otal assigned costs​ of a product

i. Sum:
1. All direct costs traced
2. All indirect costs allocated

h. Illustration of steps (below):

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Determining the profitability of products

Summary:

The profitability of a product is the n​ et gain​ a company receives for providing it. This is
often represented a percentage called the “operating profit margin.”
● Operating profit margin

○ Also known as:
■ Operating income margin
■ Operating margin
■ Return on Sales (ROS)

○ Is a percentage

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○ = operating income / revenues

26. Steps:

a. Determine t​ otal product​ revenues​ a​ ttributable to the particular product
i. = “net sales”
ii. = price * qty sold - returns and sales allowances

b. Determine the t​ otal p​ roduct-cost
i. = Cost of all value chain activities associated with providing the product
ii. = COGS + indirect/period/SG&A costs allocated to the product

iii. = COGS + operating costs ---- (on income statement)
c. Using (a) and (b), Determine ​the product’s ​operating income:​

i. Subtract total product-cost from total product-revenues to get the product’s
operating income

ii. = (product-operating income) = (total product-revenue) - (total product-cost)
d. Divide total revenues (step a) by operating income (step b)

i. = (Total product-revenue) ​/​ (product-operating income)
e. Multiply by 100 to g​ et a %​ → this is your​ operating profit margin

Example Problem from textbook:

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Solution on p. 178 of textbook

Determining the profitability of customers

Summary:
INSERT
Steps:

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INSERT

Blackboard Problems:

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Ch. 15 - Allocation of Support Dept. Costs,
Common Costs, and Revenues

Complete List of Terms​ (From end of chapter)

Terminology Definitions

27. Allowable cost

Direct Method

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Summary:
28. Steps:

Sequential (Step) Method

Summary:
29. Steps:

Calculating OH rates from operating departments

Summary:
30. Steps:

Assigning OH costs to products, jobs and services

Summary:
31. Steps:

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TDABC Costing Article

Summary of Article

Summary
32. The Problem
33. Solution

How-to: TDABC

34. Steps