ACCY202 Exam 2 Study Guide
ACCY202 Exam 2 Study Guide ACCY 202
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This 20 page Study Guide was uploaded by Mallory McClurg on Sunday October 16, 2016. The Study Guide belongs to ACCY 202 at University of Mississippi taught by Barton in Fall 2016. Since its upload, it has received 157 views. For similar materials see Introduction to Accounting Principles II in Accounting at University of Mississippi.
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ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Chapter 16 – Process Costing and Analysis Equivalent Units of Production (EUPs): a term for the number of units that could have been started and completed given the cost incurred during the period • Note: When calculating EUPs and Cost per EUP, keep Direct Materials separate from and Direct Labor and Overhead (Conversion) because % 0f completion may be different between them. • Conversion Costs per Equivalent Unit of Production – combined costs of direct labor and factory overhead per equivalent unit • Why do we use EUPs? – they are used to assign costs to: 1. Good completed and transferred out to Finished Goods Inventory (or another department) 2. Ending Goods in Process Inventory for items that haven’t finished production at the end of the period. • Calculating EUPs with the weighted-average method: EQUIVALENT UNITS OF PRODUCTION (EUPs) = # of UNITS COMPLETED AND TRANSFERRED OUT + # of UNITS IN ENDING WIP INVENTORY • Process Cost Summary – reports manufacturing costs per equivalent unit of a process or department Computing EUPs in a problem: Equivalent Units of Production Direct Materials Conversion Units Completed and Transferred Out (# of units x (# of units x 100%) 100%) + Units in Ending WIP Direct Materials (# of units x % completion) Conversion (# of units x % completion) Equivalent Units of Production = (ADD^) (and) (ADD^) ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Computing Cost per EUP in a problem: Cost Per Equivalent Unit of Production Direct Materials Conversion Costs of Beginning WIP inventory (Given) (Given) + Costs Incurred this period (Given – “Direct (Given – “Direct Materials Added”) Labor Added” + “Overhead Applied”) Total Costs (^) (^) ÷ Equivalent Units of Production (Computed above!) (Computed above!) Costs per Equivalent Unit of Production (Cost per EUP) (Cost per EUP) Journal Entries to record Direct Materials and Direct Labor when they enter production: Work in Process Inventory – Dept. $$$ (i.e. Raw Materials Inventory) $$$ (OR) (i.e. Factory Payroll Payable) $$$ Journal Entries to record Overhead Expenses like Indirect Materials, Indirect Labor, and other OH expenses: Factory Overhead $$$ (i.e. Prepaid Insurance) $$$ (i.e. Utilities Payable) $$$ (i.e. Accumulated Depreciation) $$$ Journal Entry to record Goods Completed and Transferred Out to Finished Goods Inventory: Finished Goods Inventory $$$ Work in Process Inventory – Dept. $$$ ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Chapter 16 Practice QUESTION! Refer to the following information about the Assembly Department in Lombard Luxury Exports for the month of October: Beginning goods in process inventory: Physical units 10,000 units % complete for materials 75% % complete for labor and overhead 15% Materials cost from September $175,000 Labor and overhead cost from September $41,500 Product started: Physical units 40,000 units Ending goods in process inventory: Physical units 12,000 units % complete for materials 50% % complete for labor and overhead 10% Manufacturing costs for October: Materials $375,000 Labor and overhead $105,500 ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton 1. Assume that the Assembly Department of Lombard Luxury Exports uses the weighted- average method. What is the cost of all units that were completed and transferred to finished goods in October? What is the total cost of ending goods in process? Cost of Units Completed Transferred Out Physical Units Percent of Completion Equivalent Units Direct Materials: Completed Units 7,500 units 100% 7,500 EUPs Ending Goods in Process 12,000 units 50% 6,000 EUPs Total Units 53,500 EUPs Direct Labor and Overhead: Completed Units 1,500 units 100% 1,500 EUPs Ending Goods in Process 12,000 units 10% 1,200 EUPs Total Units 42,700 EUPs Direct Materials Cost: Direct Materials in Beginning Goods in Process $175,000 Direct Materials Costs Added During October $375,000 Total Direct Material Costs $550,000 Cost Per Equivalent Unit for Materials $10.28 per EUP Direct Labor and Overhead Cost: Direct Labor and Overhead in Beginning Goods in Process $41,500 Direct Labor and Overhead Added During October $105,500 Total Direct Labor and Overhead Costs $147,000 Cost Per Equivalent Unit for Direct Labor and Overhead $3.44 per EUP Assignment of Costs to Finished Goods Equivalent Units Cost per EUP Total Cost Cost of goods completed and transferred Direct materials 7,500 EUPs $10.28 per EUP $77,100 Direct labor and overhead 1,500 EUPs $3.44 per EUP $5,160 Total cost of goods completed $82,260 Cost of goods in ending goods in process Direct materials 6,000 EUPs $10.28 per EUP $61,680 Direct labor and overhead 1,200 EUPs $3.44 per EUP $4,128 Total costs of goods in process $65,808 Journal Entry to transfer Completed Units to Finished Goods Inventory: Date Finished Goods Inventory $148,068 Work in Process Inv. – Assembly Dept. $148,068 ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Chapter 17 – Activity-Based Costing and Analysis Why do we need methods of allocated overhead? – Because we need a way to assign the right amount of overhead to the amount of production done in the factory. Allocation Method Overhead Allocations Overhead Allocation Based On Rates Based On Plantwide Rate One Rate Volume-based measures (direct labor hours, machine hours) Departmental Rate Two or more Rates Volume-based measures (direct labor hours, machine hours) Activity-Based Costing At Least Two Rates Activities that drive costs (batches, purchase orders) • Plantwide Overhead Rate Method – o The usefulness of this method depends on the assumption that overhead costs change with the allocation base (such as direct labor hours), and all products use overhead costs in the same proportions. o Not reasonable to use when a company has many different products, or those with products that use overhead costs in very different ways. TOTAL BUDGETED OVERHEAD COSTS ÷ TOTAL BUDGETED (MACHINE or DIRECT LABOR) HOURS = PLANTWIDE OVERHEAD RATE PLANTWIDE OVERHEAD RATE x (MACHINE or DIRECT LABOR) HOURS PER UNIT = OVERHEAD ALLOCATED TO EACH UNIT OF PRODUCT ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton • Departmental Overhead Rate Method - o Assumes that different products are similar in volume, complexity, and batch size, and that the departmental overhead costs are directly proportional to the department allocation base (such as direct labor hours or machine hours). o Not reasonable when products differ in batch size and complexity, because they would usually consume different amounts of overhead costs. This method would fail to allocate overhead costs that are not driven by production volume. TOTAL BUDGETED DEPARTMENTAL OVERHEAD COST ÷ TOTAL AMOUNT OF DEPARTMENTAL ALLOCATION BASE = DEPARTMANTAL OVERHEAD RATES DEPARTMENTAL OVERHEAD RATE x (MACHINE or DIRECT LABOR) HOURS PER UNIT = OVERHEAD ALLOCATED TO EACH UNIT OF PRODUCT • Activity-Based Costing (ABC) Rate Method - o Assigns overhead costs based on individual activities (tasks, operations, or procedures where costs are incurred) instead of a single rate, making it often more accurate than departmental or plantwide rates, easier to control costs, and allows for better management and to focus on relevant factors. o When two activities have the same cost-driver (batches, purchase orders, square feet), you can group them together in the same pool. OVERHEAD COSTS ASSIGNED TO POOL ÷ EXPECTED ACTIVITY LEVEL = COST POOL ACTIVITY RATE ACTIVITIES CONSUMED x ACTIVITY RATE = OVERHEAD FROM POOL ALLOCATED TO SPECIFIC PRODUCT ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Chapter 17 Practice question! A sign company produces 3 products: Hotty Toddy, Roll Tide, and Geaux Tigers. Historically, the company has used a single, plantwide overhead rate based upon direct labor hours to allocate overhead costs to inventory. There are two departments in the company: Print and Finish. The company has experienced growth and is interested in implementing more sophisticated inventory cost techniques and identifying ways to improve their profit margins. The company is considering the departmental overhead rate method of applying overhead costs. They budget that the Print Department will incur about $50,000 overhead costs and will use machine hours to allocate overhead costs. They budget that the Finish Department will incur about $40,000 overhead costs and will use direct labor hours to allocate overhead costs. Estimated machine hours and direct labor hour usage is below: Hotty Toddy Roll Tide Geaux Tigers Machine hours 2,500 1,650 2,100 Direct labor hours 1,750 1,050 1,200 What amount of overhead would be applied to Hotty Toddy, Roll Tide, and Geaux Tigers inventory in the coming period using departmental rates to apply overhead? Hotty Toddy Roll Tide Geaux Tigers Print Department – $20 per MH $30.30 per MH $23.81 per MH ($50,000 ÷ 2,500 MH) ($50,000 ÷ 1,650 MH) ($50,000 ÷ 2,100 MH) Finish Department – $22.86 per DLH $38.10 per DLH $33.33 per DLH ($40,000 ÷ 1,750 DLH) ($40,000 ÷ 1,050 DLH) ($40,000 ÷ 1,200 DLH) Total $42.86 appl. OH $68.40 appl. OH $57.14 appl. OH The Director of Operations has identified 4 production activities and their cost drivers and has computed the cost per cost driver for each. The budgeted rates and usage levels for each are below: Budgeted Activity Drivers Activity Cost/Driver Hotty Toddy Roll Tide Geaux Tigers Canvas cutting (MH) $15.00 800 650 715 Screen pressing (DLH) $17.50 550 285 475 Stitching (MH) $15.00 420 300 350 Packaging (DLH) $17.50 495 215 350 Assume that the company chooses activity-based costing to assign overhead costs to inventory. What are the cost pools and what amounts of budgeted overhead would be allocated to Hotty Toddy, Roll Tide, and Geaux Tigers inventory? ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Activity Cost PoolCost/Driver Hotty Toddy Roll Tide Geaux Tigers Canvas Cutting $15 per MH $12,000 $9,750 $10,725 Stitching $6,300 $4,500 $5,250 Screen Pressing $17.50 per DLH $9,625 $4,987.50 $8,312.50 Packaging $8,662.50 $3,762.50 $6,125 Totals $36,587.50 $23,000 $30,412.50 ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton CHAPTER 18 – COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS Cost-Volume-Profit (CVP) Analysis - requires management to classify costs as either fixed or variable with respect to production or sales volume, within the relevant range of operations. • Relevant range of operations – normal operating range for a business, which excludes projected times of unusually high and low business • The Five Cost-Volume-Profit Analysis Assumptions: o The behavior of both costs and revenues is linear throughout the relevant range of the activity index. o Costs can be classified accurately as either variable or fixed. o All units produced are sold. o Changes in activity are the only factors that affect costs. o When more than one type of product is sold, the percentage of each product in total sales will remain constant. § Note: the CVP Analysis may be inaccurate if all five assumptions are not valid. • CVP Graphs (break-even graphs)– shows the relationship between costs, volume, and profits o Horizontal Axis – number of units produced and sold o Vertical Axis – dollars of sales and costs § Fixed costs are shown with a horizontal line that runs through the y-axis at the point where the sum of fixed costs lies. § Variable plus fixed costs are represented on the graph with a diagonal line (positive slope) starting from the fixed cost point because total costs equal fixed costs at zero volume. The slope of this total cost line equals the variable cost per unit. § The sales line starts at zero because there are zero units sold and zero dollars of sales at the beginning of the period. The slope of this line is equal to the selling price per unit. o The lines of the graph depict both sales and costs at different output levels ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton • Types of costs in a CVP Analysis: o Fixed Costs – remain unchanged despite variation in the volume of activity within a relevant range § Common fixed costs: rent, depreciation, property taxes, office salaries, and many service department costs § Usually represented as a horizontal line, when production volume and production costs are graphed. o Variable Costs – change in proportion to changes in volume of activity § Common variable costs: direct materials, direct labor (if employees are paid per unit), sales commissions, shipping costs, and some overhead costs § Usually represented by a straight diagonal line (constantly increasing, positive slope) starting from zero, when production volume and costs are graphed. o Step-wise (stair-step) Costs – reflects a step pattern in costs § Common step-wise costs: salaries of production supervisors (if production volume increases to where another supervisor must be hired) § When graphed on a production volume-cost graph, it will look like steps, starting from zero. The flat tops of the steps will signify the different relevant ranges. o Curvilinear Costs – reflects a non-constant linear increase or decrease in costs § Common curvilinear costs: total direct labor costs (when employees are paid by the hour) § On a production volume-cost graph, the nonlinear graph will have a flatter slope when output is higher and will have a steeper slope when there are inefficiencies (such as too many employees getting in each other’s way). § Often treated as variable costs within a relevant range, which is reasonable for most types of curvilinear costs. • Methods for Determining Cost Behavior: o Scatter Diagrams – § Display past cost and unit data in graphical form § Units are plotted on the horizontal axis and costs are plotted on the vertical axis ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton § Each individual point reflects the cost and number of units for a prior period § Estimated Line of Cost Behavior – straight line that best visually “fits” the scattered points and reflecting the relationship between cost and unit volume • How to determine the slope of the estimated line of cost behavior – SLOPE = (FINAL COSTS – INITIAL COSTS) ÷ (FINAL UNITS – INITIAL UNITS) o High-Low Method – § Estimates the cost equation by using two points on a graph, the highest volume level and the lowest volume level; note: this doesn’t reflect the level of costs, it represents production volume § The slope of the line connecting the two points is the variable cost per unit • This method uses the same formula as the scatter diagrams to find the slope of the line on the graph. § To estimate fixed cost per unit, we say that… TOTAL COSTS = FIXED COST + (VARIABLE COST PER UNIT x # OF UNITS) o Least-Squares Regression – § A statistical method for identifying cost behavior of total fixed costs and variable unit cost § Don’t need to know how to work these…just know what it is. o Comparison of Cost Estimation Methods: o Estimates from a scatter diagram are based on visual fit, and therefore is subject to interpretation. o Estimates from the high-low method use only two sets of values corresponding to the lowest and highest unit volumes; however, sometimes these two extreme activity levels do not reflect the more usual conditions that are likely to recur. ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton This method is easy to apply, and useful for obtaining a quick cost equation estimate. o Estimates from the least-squares regression method use a statistical and all available data points. o All methods use past data, thus cost estimates resulting from these methods are only as good as the data used for estimation. • Contribution Margin and Break-Even Analysis: o Contribution Margin – the amount by which a product’s unit selling price exceeds its total variable cost per unit CONTRIBUTION MARGIN PER UNIT = SELLING PRICE PER UNIT – TOAL VARIABLE COST PER UNIT o Contribution Margin Ratio – the percent of a unit’s selling price that exceeds total unit variable cost; the percent of each sales dollar that remains after deducting the total unit variable cost CONTRIBUTION MARGIN RATIO = CONTRIBUTION MARGIN PER UNIT ÷ SELLING PRICE PER UNIT o Breakeven point – the sales level at which a company neither earns a profit not incurs a loss; when total sales cover total costs BREAK EVEN POINT (in units) = FIXED COSTS ÷ CONTRIBUTION MARGIN PER UNIT BREAK EVEN POINT (in dollars) = FIXED COSTS ÷ CONTRIBUTION MARGIN RATIO ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton o Margin of Safety – the excess of expected sales over the break- even sales level MARGIN OF SAFETY (%) = (EXPECTED SALES – BREAK EVEN SALES) ÷ EXPECTED SALES o Contribution Margin Income Statement for break-even sales – COMPANY Contribution Margin Income Statement (at Break-Even) For Month Ended January 1, 2016 Sales (# of units x selling price per unit) - Variable Costs (# of units x variable cost per unit) Contribution Margin (sales – variable costs) - Fixed Costs (given) Net Income (contribution margin – fixed costs) • Target Pre-tax Income – o Often, managers will ask, “What is the predicted income from a predicted level of sales?” To determine this, we look at the CVP Analysis, and the relation of sales, variable costs, contribution margin, and fixed costs. o Computing Income from Sales and Costs: SALES – VARIABLE COSTS = CONTRIBUTION MARGIN CONTRIBUTION MARGIN – FIXED COSTS = INCOME (Pre-Tax) ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton o Computing Sales for a Target Income: § Many companies’ annual plans are based on certain income targets (sometimes called budgets) DOLLAR SALES AT TARGET INCOME = (FIXED COSTS + TARGET INCOME) ÷ CONTRIBUTION MARGIN RATIO UNIT SALES AT TARGET INCOME = (FIXED COSTS + TARGET INCOME) ÷ CONTRIBUTION MARGIN PER UNIT ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Chapter 18 Practice Question! Best Co. sells two products, vests and jackets. For every vest sold, three jackets are sold (1:3 sales ratio). Best Co.'s total fixed costs are $1,056,250. Selling prices and cost information for both products follow: Product Unit Sales Price Variable Costs per Unit Units Sold in 2015 Vests $75 20 18,000 Jackets $150 60 54,000 a.) Calculate break-even units of both vests and jackets. Vests: Selling Price – Total Variable Costs Per Unit = Contribution Margin Per Unit $75 – 20 = $55 Fixed Cost ÷ Contribution Margin Per Unit = Break-even Point in Units $1,056,250 ÷ $55 = 19,205 vests Jackets: Selling Price – Total Variable Costs Per Unit = Contribution Margin $150 – 60 = $90 Fixed Cost ÷ Contribution Margin Per Unit = Break-even Point in Units $1,056,250 ÷ $90 = 11,737 jackets b.) Calculate Best Co.’s pretax income for 2015. Total Sales – Total Variable Costs = Contribution Margin (($75 x 18,000) + ($150 x 54,000)) – ((20 x 18,000) + (60 x 54,000)) = ($1,350,000 + $8,100,000) – (360,000 + 3,240,000) = $9,450,000 – 3,600,000 = $5,850,000 Contribution Margin – Fixed Costs = Pre-Tax Income $5,850,000 - $1,056,250 = $4,793,750 c.) Calculate the 2015 margin of safety for jackets (rounded to the nearest whole percentage). Jackets: Contribution Margin Per Unit ÷ Selling Price Per Unit = Contribution Margin Ratio $90 ÷ $150 = 60% Fixed Costs ÷ Contribution Margin Ratio = Break-even Point in Dollars $1,056,250 ÷ 60% = $1,775,416.67 (Expected Sales – Break-Even in Dollars) ÷ Expected Sales = Margin of Safety (%) ($8,100,000 - $1,775,416.67) ÷ $8,100,000 = 78% ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton CHAPTER 19 – Variable Costing and Analysis Absorption Costing (full costing) – • All manufacturing costs are assigned to products, consisting of direct materials, direct labor, and factory overhead, both variable and fixed. DIRECT MATERIALS + DIRECT LABOR + VARIABLE OVERHEAD + FIXED OVERHEAD = INVENTORY under ABSORBTION COSTING • “Traditional Method”; widely used for GAAP (external and tax reporting), but can result in misleading product cost information for managerial business decisions. • Fixed overhead is dispensed at the time the units are sold (as a component of cost of goods sold), which means fixed overhead is deferred to a future period. • Absorption Costing Income Statement: COMPANY Income Statement (Absorption Costing) For Year Ended January 1, 2016 Sales (# of units sold x selling price) - Cost of Goods Sold (# of units sold x (direct material cost per unit + direct labor costs per unit + variable overhead costs per unit + (fixed overhead cost ÷ # of units produced in period)) Gross Margin (sales – cost of goods sold) - Selling and Administrative Expenses (fixed S&A expenses + (# of units produced x S&A variable costs per unit)) Net income (gross margin – selling and administrative expenses) ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Variable Costing – only costs that change in total with changes in production level are included in product costs DIRECT MATERALS + DIRECT LABOR + VARIABLE OVERHEAD = INVENTORY under VARIABLE COSTING • Fixed overhead is excluded from the from product costs under variable costing because it will not change with changes in production • Treats fixed factory overhead as a period cost, where it is expensed in the period it is incurred. • Variable Costing Income Statement: COMPANY Income Statement (Variable Costing) For Year Ended January 1, 2016 Sales (# of units sold x selling price) - Variable Expenses Variable Production Costs (# of units sold x (direct material cost per unit + direct labor cost per unit + variable over head costs per unit)) Variable Selling and Administrative Expenses (# of units sold x variable S&A costs per unit) Contribution Margin (sales – (variable production costs + variable S&A Expenses)) - Fixed Expenses Fixed Overhead (fixed overhead cost, given) Fixed Selling and Administration Expenses (fixed s&a expenses, given) Net Income (contribution margin – (fixed overhead + fixed S&A expenses)) ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton • Variable Costing and Special Orders: o In the case of excess production capacity, increases in production levels would increase variable production costs, but not fixed production costs. A manager would then need to accept special orders provided that the special order price exceeds the variable cost. Converting Variable Costing Net Income to Absorption Costing Net Income – • Under absorption costing, income is higher when more units are produced relative to units sold and is lower when fewer units are produced than sold. INCOME UNDER VARIABLE COSTING + FIXED OVERHEAD COST IN ENDING INVENTORY – FIXED OVERHEAD COST IN BEGINNING INVENTORY = INCOME UNDER ABSORPTION COSTING ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton Chapter 19 Practice Question! Elease, Inc. reports the following product cost information: Units Produced 80,000 units Units Sold 65,000 units Unit Sales Price $98 per unit Direct Labor $16.50 per unit Direct Materials $28 per unit Variable Overhead $640,000 in total Fixed Overhead $1,040,000 in total Variable Selling and Administrative Expenses $275,000 in total Fixed Selling and Administrative Expenses $465,000 in total a.) Prepare the absorption costing income statement. Elease, Inc. Income Statement (Absorption) For Year Ended ….. Sales $6,370,000 (65,000 x $98) - Cost of Goods Sold $4,257,500 (65,000 x (28 + 16.50 + (640,000 ÷ 80,000) + (1,040,000 ÷ 80,000)) Gross Margin $2,112,500 (6,370,000 – 4,257,500) - Selling and Administration Expenses $740,000 (465,000 + 275,000) Net Income $1,372,500 (2,112,500 – 740,000) ACCY202 EXAM 2 Study Guide Chapters 16 – 19 Prof. Barton b.) Prepare the variable costing income statement. Elease, Inc. Income Statement (Variable) For Year Ended …. Sales $6,370,000 (65,000 x 98) - Variable Production Costs $3,412,500 (65,000 x (28 + 16.50 + 8)) - Variable Selling and Administrative Expenses $275,000 Contribution Margin $2,682,500 (6,370,000 – 3,412,500 – 275,000) - Fixed Overhead $1,040,000 - Fixed Selling and Administrative Expenses $465,000 Net Income $1,177,500 (2,682,500 – 1,040,000 – 465,000) c.) Determine the cost of ending inventory (in total) using absorption costing. 80,000 x 28 = 2,240,000 80,000 x 16.50 = 1,320,000 640,000 + 1,040,000 $5,240,000 = ending inventory under absorption costing d.) Determine the cost of ending inventory (in total) using variable costing. 80,000 x 28 = 2,240,000 80,000 x 16.50 = 1,320,000 + 640,000 $4,200,000 = ending inventory under variable costing
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