Cost Concepts
What is the difference between product costs and period costs, and explain how their treatment differs under GAAP
Product costs (DM, DL, MOH) are capitalized as inventory and expensed when sold; period costs (selling and admin) are expensed in the period in which they are incurred.
What is the main difference between job order costing and process costing?
Job order costing is used for unique, customized products; process costing is used for mass-produced, homogeneous products.
How would an increase in variable cost per unit impact the break-even point and margin of safety?
It increases the break-even point and reduces the margin of safety, since contribution margin per unit decreases.
What is a relevant cost, and why is it important in short-term decision-making?
A relevant cost is one that will differ between decision alternatives and occurs in the future; it impacts the outcome of the decision.
A linked set of budgets that covers all phases of an organization’s planned activities for a specific period.
The master budget
A company incurs material costs that vary with production volume, and also pays a monthly lease on machinery. Classify these costs and explain their behavior.
Material costs are variable; lease is a fixed cost. Variable costs change with activity; fixed costs stay constant in total.
Why do companies use a predetermined overhead rate instead of actual overhead costs?
It lets companies estimate job costs earlier and helps with planning.
What formula is used to calculate the target profit in sales dollars?
(Fixed Costs + Desired Profit) ÷ Contribution Margin Ratio.
What is the purpose of conducting a special order analysis, and what key costs should be considered?
To determine whether accepting a one-time order increases profit, focus on additional revenue and variable costs, excluding fixed costs unless they change.
Why is the sales budget considered the foundational component of the master budget?
All subsequent budgets (production, materials, labor) depend on sales estimates.
Define mixed costs and identify the two methods we discussed for predicting cost behavior.
A mixed cost contains both fixed and variable components (e.g., utility bills). Scattergraph and High-Low Method.
What are two common allocation bases used when applying overhead in job order costing?
Direct labor hours and machine hours.
What is the profit equation method in CVP analysis, and how is it used to calculate profit?
Profit = (Selling Price per Unit - Variable Cost per Unit) × Quantity - Fixed Costs. It models how changes in sales volume impact profit.
How can dropping a product line with a negative net income still reduce overall company profitability?
The product may still contribute positive segment margin that helps cover fixed costs shared by other segments.
How might a manager use variance analysis to make future budgeting decisions?
By identifying patterns or problem areas in spending or efficiency, managers can adjust assumptions and allocate resources more effectively.
Explain the importance of identifying the relevant range when estimating cost behavior.
Cost behavior assumptions (e.g., fixed/variable classification) only hold true within the relevant range; operating outside of it can lead to misleading projections.
What happens when overhead is underapplied, and how does it affect the financial statements?
Underapplied overhead means applied overhead is less than actual; it increases COGS and decreases net operating income.
On a CVP graph, how can you visually identify whether the company is operating at a profit or a loss, and what does the slope of the cost and revenue lines represent?
If the revenue line is above the total cost line, the company is earning a profit; if below, it’s incurring a loss. The slope of the revenue line reflects the selling price per unit, while the slope of the cost line reflects the variable cost per unit.
Why is it important to evaluate the contribution margin per unit of a constrained resource when resources are limited?
It helps maximize profit by prioritizing products that generate the highest return per unit of limited capacity.
Meadow Company produces hand tools. A sales budget for the next four months is as follows: March 10,000 units, April 13,000 units, May 16,000 units, and June 21,000 units. Meadow Company's ending finished goods inventory policy is 10% of the following month's sales. March 1 beginning inventory is projected to be 1,400 units. How many units will be produced in April?
13,000 + (10% × 16,000) − (10% × 13,000) = 13,300.
Robin Company reported the following costs for the current month:
Direct materials used 19,000
Direct labor 21,750
Sales salaries 11,250
Indirect labor 1,900
Production manager's salary 6,050
Marketing costs 8,350
Factory lease 4,020
What is Robin's total manufacturing cost?
$52,720 = $19,000 + $21,750 + $1,900 + $6,050 + $4,020.
Jackson Company had the following information for the year:
Direct materials used $295,000
Direct labor incurred (9,000 hours) 245,000
Actual manufacturing overhead incurred 343,000
Jackson Company used a predetermined overhead rate using estimated overhead of $320,000 and 8,000 estimated direct labor hours. Assume the only inventory balance is an ending Finished Goods balance of $19,000. How much overhead was applied during the year?
POHR = $320,000 ÷ 8,000 = $40.00
Applied OH = $40.00 × 9,000 = $360,000
Jasper Corporation has a selling price of $30 and variable costs of $20 per unit. When 12,000 units are sold, profits equal $70,000. How many units must be sold to break even?
Fixed costs: ($30 − $20) × 12,000 − $70,000 = $50,000.
Break-even point (units): $50,000 ÷ ($30 − $20) = 5,000 units.
Cranberry, Incorporated has received a special order for 100 units of its product at a special price of $2,100. The product normally sells for $2,800 and has the following manufacturing costs:
Cost per Unit
Direct materials $840
Direct labor $420
Variable manufacturing overhead $560
Fixed manufacturing overhead $700
Total unit cost $2,520
Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit?
($2,100 − $840 − $420 − $560) × 100 = $28,000 increase.
Swan Company has a direct labor standard of 15 hours per unit of output, and a standard wage rate of $14.00 per hour. During March, employees worked 13,100 hours at an average rate of $14.20, producing 800 units of product. What is the direct labor efficiency variance?
$(15,400) unfavorable
[(800 × 15) − 13,100] × $14.00 = (12,000 − 13,100) × $14.00 = 15,400