📋 Master Study Guide
40 multiple-choice questions — 10 per chapter (Ch 8, 9, 10, 11). Mix of conceptual and computation. Bring a Scantron and non-programmable calculator. Arrive early.
1. Job Costing (Ch 8)
Normal costing · MOH application · Over/under-applied · Journal entries · Job vs. Process
2. Activity-Based Costing (Ch 9)
ABC vs. Traditional · Cross-subsidization · 4-level hierarchy · ABC rate calculations
3. Variance Analysis (Ch 10)
Static vs. Flexible budgets · Variance diagram · DM/DL/MOH variances · Standard costing journal entries
4. Process Costing (Ch 11)
5-step template · Equivalent units · FIFO vs. Weighted-Average · Operation costing · COGM
⚡ Quick-Reference Flash Facts
1. Unit-level (per unit produced)
2. Batch-level (per batch/run)
3. Product-sustaining (per product line)
4. Facility-sustaining (whole facility)
Conversion Costs = DL + MOH
FIFO = current period work only
Wtd-Avg = blends all costs
• Ch 10: "The variance diagram is really good — put it on your cheat sheet and use it to answer any questions."
• Ch 11: Expect one FIFO equivalent units question and one COGM calculation (use a T-account).
• Ch 8: Know how to compute overhead applied to a job and determine over/underapplied.
• Ch 9: Be able to classify costs into the 4-level hierarchy and determine if a product is over or undercosted.
• Adaptive Practice on WileyPlus has questions similar to the test.
Chapter 8: Job Costing
| Term | Definition |
|---|---|
| Cost Object | Anything for which costs are measured (product, service, department, job) |
| Cost Driver | A factor that causes a cost; also called allocation base |
| Cost Tracing | Assigning direct costs to a cost object |
| Cost Allocation | Assigning indirect costs using an allocation base |
| Cost Pool | A grouping of costs allocated using a single cost driver |
| Job Cost Sheet | Document that records DM, DL, and MOH for a specific job |
| Normal Costing | Actual DM + Actual DL + Applied MOH (budgeted rate) |
| Actual Costing | Actual DM + Actual DL + Actual MOH |
Manufacturing Costs = DM + DL + MOH
1. Estimate MOH for the year (rent, depreciation, electricity, indirect labor…)
2. Choose an application base / cost driver (DLH, MH, DL cost)
3. Estimate the amount of the base for the year
4. Calculate the rate:
Example: Synergy budgets $400,000 MOH and 100,000 DLH → Rate = $400,000 ÷ 100,000 = $4.00/DLH
At year-end, compare actual vs. applied:
Applied > Actual → Credit balance → Decreases COGS
Actual > Applied → Debit balance → Increases COGS
Two disposal methods:
- Direct Write-Off: Close entire balance to COGS
- Prorated: Distribute among WIP, FG, and COGS based on ending balances
Example (Filex): Actual MOH = $13,000 + $30,000 + $22,500 = $65,500. Applied = 4,000 × $18 = $72,000. Difference = $6,500 Overallocated. (Sales commissions and admin are NOT MOH!)
| Transaction | Debit | Credit |
|---|---|---|
| Purchase raw materials | Materials Control | Accounts Payable |
| Use DM in production | WIP Control | Materials Control |
| Record direct labor | WIP Control | Wages Payable |
| Apply MOH to WIP | WIP Control | MOH Control |
| Record actual MOH | MOH Control | Various (Cash, Accum Depr…) |
| Complete a job | Finished Goods | WIP Control |
| Sell a job | COGS / A/R | FG Control / Revenue |
The MOH Control account does NOT appear on any financial statement. Costs in production but not complete → WIP Control account.
| Feature | Job Costing | Process Costing |
|---|---|---|
| Products | Custom, unique, identifiable | Identical, homogeneous, mass-produced |
| Examples | Wedding rings, consulting, CPA firms | Gasoline, milk, T-shirts, candles |
| Cost tracking | Per individual job | Averaged across all units |
Chapter 9: Activity-Based Costing
| Feature | Traditional | ABC |
|---|---|---|
| MOH Pools | Single plant-wide pool | Multiple activity pools |
| Cost Drivers | One driver (e.g., DLH) | Multiple activity-specific drivers |
| Accuracy | Less accurate (broad averages) | More accurate (cause-effect) |
| Cost | Simpler, cheaper | More complex, expensive |
| DM & DL | Traced to product | Traced to product (same) |
ABC divides a large cost pool into smaller pools representing activities, each with its own cost driver. This gives better product costs.
Consumes LOW resources → Reports HIGH cost. Price set too high → may lose sales.
Consumes HIGH resources → Reports LOW cost. Price set too low → losing money per unit.
Cross-subsidization = one product subsidizes another due to inaccurate cost allocation from broad averages.
| Level | Description | Examples |
|---|---|---|
| 1. Unit-Level | Per unit produced | DM, DL, machine costs, selling |
| 2. Batch-Level | Per batch/production run | Setup costs, purchasing (per PO), shipping |
| 3. Product-Sustaining | Supports a product line | Advertising for specific product, product design |
| 4. Facility-Sustaining | Supports entire facility | Rent, CEO salary, HR, IT, accounting, insurance |
Facility-sustaining costs are the most challenging to allocate because they support the entire organization — no clear cause-and-effect link to individual products. Think: CEO, HR, IT, executive management.
Three Brothers Example (Wall Mirror, 40,000 units):
| Activity | Rate | Usage | Applied MOH |
|---|---|---|---|
| Facility ($400K ÷ 50K sqft) | $8/sqft | 12,000 | $96,000 |
| Setup ($200K ÷ 8K setups) | $25/setup | 1,000 | $25,000 |
| Automation ($800K ÷ 40K MH) | $20/MH | 8,000 | $160,000 |
| Manual ($750K ÷ 100K DLH) | $7.50/DLH | 10,000 | $75,000 |
| Total MOH | $356,000 | ||
Total cost per unit = ($560K DM + $250K DL + $356K MOH) ÷ 40,000 = $29.15. Previously thought $5 MOH/unit → product was undercosted.
- Theoretical Capacity: Maximum output, 100% efficiency, no downtime
- Practical Capacity: Max output allowing for normal stoppages (maintenance, breaks)
- Normal Capacity: Average output over several periods (accounts for demand)
TDABC simplifies ABC: Cost per unit of time × Estimated time per activity. More accurate because it measures actual time used, not employee survey estimates.
Chapter 10: Variance Analysis
"The variance diagram is really good — put it on your cheat sheet and use it to answer any questions."
Purpose of budgeting and variance analysis: Plan and control operations, evaluate performance, motivate employees, troubleshoot problems.
The cycle: Plan & Control → Evaluate Performance & Troubleshoot → Motivate & Benchmark
One planned activity level. Does NOT adjust for actual volume.
Recalculates at ACTUAL output. Budgeted prices × actual volume. "Apples to apples."
Fixed costs carry from master to flexible budget unchanged (within relevant range).
(AP − SP) × AQ
Did we pay more or less per unit of input than planned?
(AQ − SQ) × SP
Did we use more or less input than allowed for actual output?
| Variance | Favorable (F) | Unfavorable (U) |
|---|---|---|
| Price/Rate | Actual < Standard (paid less) | Actual > Standard (paid more) |
| Efficiency | Used less than allowed | Used more than allowed |
Impact: Favorable → increases operating income (decreases COGS). Unfavorable → decreases operating income (increases COGS).
Direct Labor (Problem Packet): SP=$16, SQ=2 DLH/unit, TO=21,000, AO=20,000, AQ=41,000 hrs, AP=$15.50
Direct Materials: Key difference — purchased ≠ used!
- Price Variance → recorded at PURCHASE (uses AQ purchased)
- Efficiency Variance → recorded during PRODUCTION (uses AQ used)
Relationship: Buying cheaper (lower quality) materials → favorable price variance BUT may cause unfavorable efficiency variance (more waste).
DM — When Purchased:
| Account | Debit | Credit | Note |
|---|---|---|---|
| Materials Inventory | $480,000 | At standard price | |
| DM Price Variance | $19,200 | Unfavorable (debit) | |
| Accounts Payable | $499,200 | Actual cost |
DM — When Used:
| Account | Debit | Credit | Note |
|---|---|---|---|
| WIP Control | $400,000 | Standard input for actual output | |
| DM Efficiency Var. | $50,000 | Unfavorable (debit) | |
| Materials Inventory | $450,000 | Used at standard price |
Unfavorable variances = DEBIT (increase COGS when closed).
Favorable variances = CREDIT (decrease COGS when closed).
WIP always debited at standard cost. Payable/Wages credited at actual.
Variable MOH — same framework as DM/DL:
- Spending Variance = Actual − (AQ × SP)
- Efficiency Variance = (AQ − SQ) × SP
Fixed MOH — different (fixed costs don't flex):
- Spending Variance = Actual FMOH − Budgeted FMOH
- Volume Variance = Budgeted FMOH − Applied FMOH (capacity utilization)
Volume variance: Produced more than planned → Favorable (overallocated). Produced less → Unfavorable (underallocated, unused capacity).
- Standard Costing System: Uses budgets at the unit level as product costs in the G/L. Materials recorded at standard cost.
- Ideal Standards: Perfect efficiency, zero tolerance for breakdowns or breaks.
- Practical Standards: Efficient but achievable; allows for normal downtime and waste.
Chapter 11: Process Costing
Expect one FIFO equivalent units question, one weighted-average cost per EU question, and one COGM calculation (use a T-account). Also know operation costing and journal entries for transfers.
Used for mass production of identical products. Costs averaged across ALL units. Conversion Costs = DL + MOH.
Examples: Gasoline, milk, T-shirts, candles, soap, peanuts, chewing gum.
This must always balance. When working problems ask: What department? When is input added? Does WIP have beginning/ending balance?
Step 1: Determine total units to account for (physical flow)
Step 2: Compute equivalent units for DM and CC
Step 3: Summarize total costs to account for
Step 4: Calculate cost per equivalent unit
Step 5: Assign costs to completed units and ending WIP
Verify: Total costs assigned = Total costs to account for.
| Feature | FIFO | Weighted-Average |
|---|---|---|
| Approach | Separates prior from current work | Blends beg. inv. + current work |
| EU calculation | Only current period work | All equivalent units |
| Cost per EU | Current costs ÷ current EU | All costs ÷ total EU |
| Accuracy | More accurate | Less precise when costs change |
| Complexity | More complex (3 unit groups) | Easier (2 unit groups) |
| Beg WIP info | Needs % complete | Ignores beg. WIP % complete |
FIFO EU has 3 components:
Weighted-Average EU has 2 components:
Beg WIP: 300 units (DM 100%, CC 30%). Started: 22,000. Completed: 21,300. End WIP: 1,000 (DM 100%, CC 60%).
FIFO — CC Equivalent Units:
| Category | Physical | CC % | CC EU |
|---|---|---|---|
| Beg WIP to complete | 300 | 70% | 210 |
| Started & completed | 21,000 | 100% | 21,000 |
| Ending WIP | 1,000 | 60% | 600 |
| Total | 21,810 |
Cost per EU (CC): $4,362 ÷ 21,810 = $0.20
Weighted-Average — CC Equivalent Units:
| Category | Physical | CC % | CC EU |
|---|---|---|---|
| Completed & TO | 21,300 | 100% | 21,300 |
| Ending WIP | 1,000 | 60% | 600 |
| Total | 21,900 |
Cost per EU (CC): ($456 + $4,362) ÷ 21,900 = $0.22
| Transaction | Debit | Credit |
|---|---|---|
| Transfer DM to WIP | WIP Inventory | RM Inventory |
| Record conversion costs | WIP Inventory | Cash / MOH Control |
| Complete units → FG | FG Inventory | WIP Inventory |
| Transfer between depts | WIP – Dept. 2 | WIP – Dept. 1 |
Transferred-In costs in Dept. 2 are treated like DM — 100% complete upon entry.
Operation Costing: Hybrid of job + process costing. Used when different products go through different combinations of operations. DM traced per job; conversion costs allocated per operation rate.
📖 Abbreviations & Key Terms
Every abbreviation used across Chapters 8, 9, 10, and 11 — organized by category. Bookmark this tab for fast lookup while studying.
| Abbreviation | Full Term | What It Means |
|---|---|---|
| DM | Direct Materials | Raw materials that can be directly traced to a product (e.g., wood for furniture, flour for bread) |
| DL | Direct Labor | Labor costs that can be directly traced to a product (e.g., assembly worker hours) |
| MOH | Manufacturing Overhead | Indirect manufacturing costs that cannot be easily traced — must be allocated (rent, utilities, depreciation on factory, indirect labor) |
| VMOH | Variable Manufacturing Overhead | MOH costs that change with production volume (e.g., indirect supplies, variable portion of utilities) |
| FMOH | Fixed Manufacturing Overhead | MOH costs that stay constant regardless of volume (e.g., factory rent, depreciation, insurance) |
| CC | Conversion Costs | DL + MOH — the costs to "convert" raw materials into finished goods. Used heavily in process costing (Ch 11) |
| TI | Transferred-In (Costs) | Costs transferred from a prior department in process costing. Treated like DM at 100% complete upon entry |
| Abbreviation | Full Term | What It Means |
|---|---|---|
| ABC | Activity-Based Costing | A costing method that divides MOH into many smaller activity pools, each with its own cost driver, for more accurate product costs (Ch 9) |
| TDABC | Time-Driven Activity-Based Costing | A simplified version of ABC that uses cost per unit of time × estimated time per activity, instead of surveying employees (Ch 9) |
| FIFO | First-In, First-Out | Process costing method that separates prior-period work from current-period work. More accurate but more complex (Ch 11) |
| JO | Job Order (Costing) | Costing system for unique, custom products — costs tracked per individual job (Ch 8) |
| Abbreviation | Full Term | What It Means |
|---|---|---|
| AQ | Actual Quantity | The actual amount of input used (hours, pounds, etc.) |
| AP | Actual Price | The actual price paid per unit of input |
| SQ | Standard Quantity | The standard (budgeted) quantity of input allowed for the actual output achieved |
| SP | Standard Price | The standard (budgeted) price per unit of input |
| AO | Actual Output | The actual number of units produced |
| TO | Target Output | The budgeted/planned number of units to produce |
| F | Favorable (Variance) | Increases operating income compared to budget (actual < standard for costs, or actual > standard for revenue) |
| U | Unfavorable (Variance) | Decreases operating income compared to budget (actual > standard for costs, or actual < standard for revenue) |
| FBV | Flexible Budget Variance | Difference between actual results and the flexible budget — isolates price/cost differences (holds volume constant) |
| SAV | Sales Activity Variance | Difference between flexible budget and master budget — isolates volume differences (holds price constant) |
| MBV | Master Budget Variance | Total difference between actual results and the master (static) budget |
| Abbreviation | Full Term | What It Means |
|---|---|---|
| WIP | Work-in-Process (Inventory) | Inventory account for goods currently in production but not yet complete |
| FG | Finished Goods (Inventory) | Inventory account for completed products ready for sale |
| RM | Raw Materials (Inventory) | Inventory account for materials purchased but not yet used in production |
| COGS | Cost of Goods Sold | Expense account for the cost of products that have been sold to customers |
| COGM | Cost of Goods Manufactured | Total manufacturing cost of goods completed during the period: Beg WIP + DM + DL + MOH − End WIP |
| A/R | Accounts Receivable | Asset account for amounts owed to the company by customers |
| A/P | Accounts Payable | Liability account for amounts the company owes to suppliers |
| G/L | General Ledger | The main accounting record containing all accounts |
| Abbreviation | Full Term | What It Means |
|---|---|---|
| EU | Equivalent Units | A measure that converts partially completed units into the equivalent number of fully completed units. Example: 1,000 units at 60% complete = 600 EU |
| TO | Transferred Out | Units completed and moved to the next department or to Finished Goods |
| S&C | Started and Completed | Units that were both started AND finished in the current period (used in FIFO). Calculated as: Total Completed − Beginning WIP |
| Beg WIP | Beginning Work-in-Process | Units left partially complete at the end of last period, now carried into the current period |
| End WIP | Ending Work-in-Process | Units still in production at the end of the current period — not yet complete |
| Dept. | Department | A processing area in process costing. Each department has its own WIP account. Dept 2+ may have transferred-in costs |
| Abbreviation | Full Term | What It Means |
|---|---|---|
| DLH | Direct Labor Hours | A common cost driver / allocation base for applying MOH |
| MH | Machine Hours | Another common cost driver for MOH allocation, especially in automated environments |
| PO | Purchase Order | A document authorizing a purchase; used as a batch-level cost driver in ABC (# of POs) |
| VOH | Variable Overhead | Same as VMOH — variable portion of manufacturing overhead |
| FOH | Fixed Overhead | Same as FMOH — fixed portion of manufacturing overhead |
| SG&A | Selling, General & Administrative | Period costs — NOT part of manufacturing costs. Includes sales commissions, admin salaries, office rent |
| GAAP | Generally Accepted Accounting Principles | The standard framework for financial reporting. Traditional costing and ABC-for-MOH-only are GAAP; full ABC is for management decisions only |
📝 40-Question Practice Exam
Select your answer, then click "Submit Answers" at the bottom to see your score and explanations.
Q1–10 cover Chapter 8 (Job Costing), Q11–20 cover Chapter 9 (ABC), Q21–30 cover Chapter 10 (Variances), Q31–40 cover Chapter 11 (Process Costing). Select your answer, then click "Submit Answers" at the bottom.