Cost Classifications Overview

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Questions and Answers

What is the formula for calculating the Cost of Goods Manufactured (COGM)?

  • COGM = Direct Materials Used + Direct Labor + MOH + Beginning Work in Process + Ending Work in Process
  • COGM = Direct Materials Used + Direct Labor + MOH + Beginning Work in Process - Ending Work in Process (correct)
  • COGM = Direct Materials Used + Direct Labor + MOH + Beginning Finished Goods - Ending Finished Goods
  • COGM = Direct Materials Used + Direct Labor + MOH - Beginning Work in Process + Ending Work in Process

If the applied overhead is less than the actual overhead, what is this situation called and how does it impact the income statement?

  • Overapplied Overhead; Increases COGS, Decreases Income
  • Underapplied Overhead; Decreases COGS, Increases Income
  • Underapplied Overhead; Increases COGS, Decreases Income (correct)
  • Overapplied Overhead; Decreases COGS, Increases Income

Which of the following accurately describes the relationship between Applied Overhead and Actual Overhead, and how they are related to the Predetermined Overhead Rate (POHR)?

  • Applied Overhead is calculated by multiplying the POHR by the actual cost driver. Actual Overhead is the total overhead incurred during the period, and it can be either more or less than the Applied Overhead. (correct)
  • Applied Overhead is the total overhead incurred during the period, and it can be either more or less than the Actual Overhead. Actual Overhead is the total overhead incurred during the period, and it can be either more or less than the Applied Overhead.
  • Actual Overhead is calculated by multiplying the POHR by the actual cost driver. Applied Overhead is the total overhead incurred during the period, and it can be either more or less than the Actual Overhead.
  • Applied Overhead is the total overhead incurred during the period, and it can be either more or less than the Actual Overhead. Actual Overhead is calculated by multiplying the POHR by the actual cost driver.

What type of cost is factory rent?

<p>Fixed Cost (B)</p> Signup and view all the answers

Which of the following is NOT a component of the total job cost?

<p>Selling and Administrative Expenses (A)</p> Signup and view all the answers

Which of the following is NOT considered a manufacturing overhead cost?

<p>Direct labor (A)</p> Signup and view all the answers

What is the formula for calculating the total manufacturing cost (TMC)?

<p>Direct Materials + Direct Labor + Manufacturing Overhead (D)</p> Signup and view all the answers

Which of the following is NOT a factor in determining the predetermined overhead rate (POHR)?

<p>Actual total manufacturing overhead (A)</p> Signup and view all the answers

A company uses a single predetermined overhead rate (POHR) for all of its products. Which of the following would make this approach less accurate?

<p>Different departments have significantly different overhead rates. (D)</p> Signup and view all the answers

What is the contribution margin (CM)?

<p>The difference between sales revenue and variable costs (B)</p> Signup and view all the answers

Which of the following costs would be classified as a period cost?

<p>Advertising expenses (A)</p> Signup and view all the answers

What is the formula for calculating the cost of goods sold (COGS)?

<p>Beginning Inventory + Purchases - Ending Inventory (D)</p> Signup and view all the answers

Which of the following costs is a variable cost?

<p>Raw materials used in production (D)</p> Signup and view all the answers

Flashcards

Job Costing Formula

Total Job Cost = Direct Materials + Direct Labor + Applied Overhead

Applied Overhead

Overhead is applied based on POHR multiplied by actual cost driver.

Cost of Goods Manufactured (COGM)

COGM = Direct Materials Used + Direct Labor + MOH + Beginning WIP - Ending WIP

Overapplied MOH

When applied overhead is greater than the actual overhead incurred.

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Cost Behavior Types

Variable Costs change with production, Fixed Costs remain constant, Mixed Costs contain both.

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Direct Costs

Costs easily traced to a specific cost object, like materials or labor.

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Indirect Costs

Costs that cannot be traced directly to a specific cost object, such as utilities or rent.

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Prime Costs

The combined total of direct materials and direct labor used in production.

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Conversion Costs

Total of direct labor and manufacturing overhead costs.

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Fixed Costs

Costs that remain constant regardless of production level, like rent or salaries.

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Variable Costs

Costs that change with the level of production, such as raw materials.

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Total Manufacturing Cost (TMC)

Total of direct materials, direct labor, and manufacturing overhead.

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Predetermined Overhead Rate (POHR)

Rate used to allocate manufacturing overhead based on estimated total costs.

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Study Notes

Cost Classifications

  • Direct Costs: Easily traceable to a specific product or cost object; examples include direct materials (wood for furniture) and direct labor (assembly line wages).
  • Indirect Costs: Not easily traceable to a specific product or cost object; examples include factory utilities and supervisor salaries.
  • Prime Costs: Sum of direct materials and direct labor. Formula: Direct Materials + Direct Labor = Prime Cost
  • Conversion Costs: Sum of direct labor and manufacturing overhead. Formula: Direct Labor + Manufacturing Overhead = Conversion Cost
  • Manufacturing Overhead (MOH): Indirect costs associated with production (factory rent, depreciation, indirect materials, indirect labor, utilities). Excludes selling, general, and administrative (SG&A) expenses.
  • Product Costs: Costs related to making the product (direct materials, direct labor, manufacturing overhead).
  • Period Costs: Non-manufacturing costs (selling, general, and administrative expenses).
  • Fixed Costs: Remain constant regardless of production levels (rent, salaries).
  • Variable Costs: Change with production levels (raw materials, commissions).
  • Mixed Costs: Contain both fixed and variable elements (utility bills).

Manufacturing Overhead (MOH) Treatment

  • Manufacturing overhead includes indirect costs, but excludes direct materials and direct labor.
  • Direct materials and direct labor are directly traced to products.
  • Indirect materials and labor are part of MOH, and are allocated to jobs.

Key Calculations

  • Direct Manufacturing Cost: Direct Materials + Direct Labor
  • Total Manufacturing Cost (TMC): Direct Materials + Direct Labor + Manufacturing Overhead
  • Purchases for the Period: Ending Inventory + Cost of Goods Sold (COGS) - Beginning Inventory
  • Contribution Margin (CM): Revenue after covering variable costs; contributes to fixed costs. Formula: Sales Revenue - Variable Costs

Overhead Application & Predetermined Overhead Rate (POHR)

  • POHR Formula: Estimated Total Manufacturing Overhead / Estimated Total Cost Driver (e.g., labor hours, machine hours)
  • A single POHR may be inaccurate if different departments have varying overhead rates.
  • Departmental Overhead Rates: More accurate than a single POHR; accounts for departmental differences.

Job Costing & Overhead Allocation

  • Total Job Cost: Direct Materials + Direct Labor + Applied Overhead
  • Overhead is applied based on POHR multiplied by the actual cost driver. This aids in cost estimation before actual overhead is known.

"T" Accounts & Journal Entries

  • Raw Materials "T" Account: Tracks raw materials used in production.
  • MOH "T" Account: Tracks applied versus actual overhead.
  • Cost of Goods Manufactured (COGM): Direct Materials Used + Direct Labor + Manufacturing Overhead + Beginning Work-in-Process (WIP) - Ending WIP
  • Cost of Goods Sold (COGS): Beginning Finished Goods (FG) + COGM - Ending Finished Goods.

Overapplied & Underapplied MOH

  • Overapplied MOH: Applied overhead exceeds actual overhead. Decreases COGS (increases income).
  • Underapplied MOH: Applied overhead is less than actual overhead. Increases COGS (reduces income).

Cost Behavior Analysis

  • Variable Costs: Change with production levels (materials).
  • Fixed Costs: Remain constant (factory rent).
  • Mixed Costs: Contain both fixed and variable elements (maintenance).

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