Line Staff
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
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
CH 2 Cost concepts
Planning
• Establish strategy
• Select course of action
• Specify how action will be implemented
○ Budget: detailed financial plan for the future
Controlling
Conversion Cost: Direct Labor & MOH (Indirect Labor/Indirect Materials/Factory utilities)
COGM:
Direct Materials:
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
• 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
Allocation base: direct labor hours, direct labor dollars, machine hours used to assign MOH to
individual jobs
Underapplied or overapplied OH: different btwn the overhead cost applied to WIP and the
actual OH costs of a period
COGS:
JOURNAL ENTRIES:
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)
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)
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
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 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:
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.
○ $210,600/6000 = $35.10
To calculate the applied MOH for the year, take PDOHR and multiply by ACTUAL direct labor
hours
○ 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