ACCT 3121 Exam 2 – Note Card Set

• DM = Direct Materials
• DL = Direct Labor
• MOH = Manufacturing Overhead
• VMOH = Variable Manufacturing Overhead
• FMOH = Fixed Manufacturing Overhead
• WIP = Work-in-Process Inventory
• FG = Finished Goods Inventory
• COGM = Cost of Goods Manufactured
• COGS = Cost of Goods Sold
• CC = Conversion Costs (DL + MOH)
• EU = Equivalent Units
• TI = Transferred-In costs
• ABC = Activity-Based Costing
• TDABC = Time-Driven ABC
• AP = Actual Price   SP = Standard Price
• AQ = Actual Qty (inputs)   SQ = Standard Qty (inputs)
• AO = Actual Output   TO = Targeted Output
• F = Favorable   U = Unfavorable
• BI/EI = Beginning/Ending Inventory
• S&C = Started & Completed
• JE = Journal Entry
• IC = Indirect Costs
• SG&A = Selling, General & Administrative

Job Costing = Costs tracked per distinct job/batch. Used for custom products (homes, audits, consulting).

Process Costing = Costs averaged over identical units. Used for mass production (gasoline, food).

Cost Object = What we're measuring cost of (product, service, customer)

Cost Driver = Activity causing cost (DL hrs, machine hrs, # units)

Direct Costs = DM + DL (traced to cost object)

Indirect Costs = MOH (allocated to cost object)

Normal Costing = Actual DM + Actual DL + Applied MOH

Actual Costing = Actual DM + Actual DL + Actual MOH

Product Costs = DM + DL + MOH → Inventory (B/S)

Period Costs = SG&A → Expensed immediately (I/S)

Sales commissions = PERIOD cost, NOT product cost!

• Bill of Materials – list of materials + required quantities to mfg product
• Materials Requisition Sheet – request to move items from RM to production (RM → WIP)
• Labor Timesheet – records workers on production run; job #, hours
• Job Cost Sheet – CONTROL document that compiles DM, DL, MOH for each specific job

Sub-Ledger Accounts:

• WIP Inventory = control account in GL
• Individual job cost sheets = sub-ledger
• Total of all job sheets = WIP control balance

Done BEFORE the year begins using estimates:

1. Estimate total MOH for the year
2. Choose application base (cost driver): DL hrs, MH, DL $
3. Estimate total base amount for the year
4. Calculate the predetermined rate

Applied uses BUDGETED rate × ACTUAL driver quantity!

Different departments may use different cost drivers.

Indirect-Cost Rate as % of DL Cost:

Bid Price / Special Order:

At year-end, Actual MOH ≠ Applied MOH (rate is estimated).

Method 1: Direct Write-Off (if immaterial)

Method 2: Proration (proportional to ending balances)

T-Account Flow:

RM Inv → WIP Inv → FG Inv → COGS

Purchases → DM used → Completed → Sold

MOH Control debits (actual) & credits (applied) flow through WIP

Traditional ("Peanut Butter") Costing:

• ONE plant-wide rate, ONE cost driver
• Spreads OH uniformly → product cross-subsidization
• High-volume products: OVERCOSTED
• Low-volume products: UNDERCOSTED
• GAAP approved for financial reporting

Activity-Based Costing:

• MULTIPLE cost pools, each with specific cost driver
• Cause-and-effect relationships
• More accurate product costs
• For MANAGEMENT decisions, NOT GAAP
• ABC for MOH only; some firms apply to SG&A too

Cross-Subsidization = broadly averaged costs assigned without recognizing actual resource usage differences

1. Unit-Level (Output)

• Per unit of output. Ex: DM, DL, energy, indirect materials
• Driver: # units, DL hrs, MH

2. Batch-Level

• Per batch/group. Ex: machine setup, procurement, cleaning
• Driver: # setups, # POs, # production runs

3. Product-Sustaining

• Supports product line. Ex: design costs, product advertising, R&D
• Driver: # product lines, engineering hours

4. Facility-Sustaining

• Entire facility. Ex: rent, security, exec salaries, admin, IT, HR
• Driver: sq ft, # employees
• MOST DIFFICULT to allocate — no clear cause-and-effect

1. Identify products (cost objects)
2. Identify direct costs (DM, DL)
3. Identify activity cost pools & cost drivers
4. Identify indirect costs per pool
5. Compute activity rate
6. Allocate to products
7. Compute total cost

When costs are per BATCH, divide by units per batch:

SG&A Allocation:

TDABC (Time-Driven ABC):

Capacity: Theoretical > Practical > Normal

Pros: Better pricing, product-mix, identifies non-value-added activities

Cons: Expensive, time-consuming, employee pushback, need 2 systems

Budget = Proposed plan of action for a period

Variance = Difference between actual and budgeted

Favorable (F) = Increases operating income vs. budget

• Revenue: Actual > Planned → F
• Expense: Actual < Planned → F

Unfavorable (U) = Decreases operating income vs. budget

• Revenue: Actual < Planned → U
• Expense: Actual > Planned → U

Management by Exception = Focus on significant deviations from budget

Criteria: Materiality (% difference) + Controllability (can manager control it?)

Standard Costs = Expected/predetermined cost per unit

Ideal Standards = No tolerance (breakdowns, breaks)

Practical Standards = Attainable, allows for normal inefficiency

Flexible Budget = adjusts to actual output at budgeted prices/costs

Static (Master) Budget = original budget at planned output

Price var at PURCHASE. Efficiency var at USE.

When DM Purchased: (recognize Price Var)

When DM Used: (recognize Efficiency Var)

Both variances recorded at same time (when labor is used).

WIP always at STANDARD. Wages Payable at ACTUAL. Variances make it balance.

Base = DL hours (same as DL). Set standard price first:

NO efficiency variance for FMOH! FMOH doesn't change with cost driver usage.

Volume Variance = capacity utilization indicator

• Favorable = Produced MORE than planned → FOH spread over more units → overallocated
• Unfavorable = Produced LESS than planned → idle capacity → underallocated

Variance accounts are temporary – closed at year-end.

F = CR = ↑ Op Income. U = DR = ↓ Op Income.

Process Costing = mass production of identical products. Costs averaged over ALL units.

Use for: gasoline, milk, candles, roasted peanuts, T-shirts, paint, gum

Job Order for: custom homes, consulting, wedding rings, baseball bats

Key Features:

• Multiple WIP accounts (one per department/process)
• Must calculate Equivalent Units (EU)
• Costs split: DM and CC (Conversion Costs = DL + MOH)
• DM typically added at BEGINNING of process
• CC added EVENLY THROUGHOUT process
• Two methods: FIFO and Weighted-Average

Operation Costing = hybrid. DM per job + CC per operation. Ex: furniture (different fabrics, same assembly)

TIP: Ask yourself — what dept? When are inputs added? Draw a timeline!

Started & Completed = Completed − Beg WIP units

FIFO = work done THIS PERIOD ONLY. Separates prior period work.

W-A = total work done TO DATE. Blends prior + current period.

W-A EU is ALWAYS ≥ FIFO EU (includes prior work)

Key Difference:

• FIFO: 3 groups (complete BI, S&C, EI)
• W-A: 2 groups (completed total, EI)

Step 3 is the SAME for both methods:

Step 4 differs:

FIFO cost/EU will differ from W-A because numerator AND denominator differ.

FIFO:

Weighted-Average:

Beg WIP 300 (100%DM, 30%CC, cost $298DM+$456CC=$754)

Started 22,000 | Completed 21,300 | End WIP 1,000 (100%DM, 60%CC)

Current costs: DM $5,500, CC $4,362

Transferred-In (TI) = costs from prior department

• Treated like DM — added at BEGINNING, 100% complete on entry
• Separate column in production report
• Dept 2 has 3 cost categories: TI + DM + CC
• Product transferred between depts is still WIP (NOT FG!)
• TI costs may vary between batches

If DM added at END: only completed units get DM EU. EI gets 0 DM EU unless past the addition point.

Gross Margin:

FIFO is more accurate — separates periods

W-A is simpler — blends periods together

If costs fluctuate significantly → FIFO captures it

If costs stable → W-A gives similar results with less effort

Both methods produce same Step 3 total costs. They differ in Steps 2, 4, 5.

• DM price var uses AQ PURCHASED, not used
• DM eff var uses AQ USED, not purchased
• FMOH has NO efficiency variance
• FMOH Flex budget = Static budget (fixed costs don't flex!)
• Over-applied MOH → CR COGS → ↑ income
• Under-applied MOH → DR COGS → ↓ income
• Applied MOH = Budgeted rate × ACTUAL driver qty
• WIP always recorded at STANDARD cost
• Wages Payable always at ACTUAL cost
• Sales commissions = period cost (never in COGM)
• Product transferred between depts = still WIP
• W-A EU ≥ FIFO EU always
• DM at beginning → 100% for all units in process
• DM at end → only completed units get DM EU
• Facility-level = hardest to allocate in ABC
• ABC is for management, NOT GAAP
• Volume var U = produced LESS = idle capacity
• Favorable ≠ always good (cheap DM may hurt quality)