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What is the main purpose of a product costing system in a manufacturing environment?
Accumulates production costs and assigns them to final products
Describe the cost flow in a manufacturing environment according to the text.
Manufacturing costs are added to work-in-process inventory, then transferred to finished goods inventory, and recorded as cost of goods sold upon sale of products.
Why are product costs significant in managerial accounting?
For planning, decision-making, and cost management purposes
Differentiate between job-order costing and process costing systems based on their applications.
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What is the importance of accurate tracking and assignment of manufacturing costs in a job-costing system?
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Explain the significance of allocating direct and indirect costs in a job-costing system.
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What are the two alternatives for the disposition of underapplied or overapplied overhead at the end of an accounting period?
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How does underestimation or overestimation of the predetermined overhead rate affect COGS, work-in-process inventory, and finished goods inventory?
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What are some examples of costs that grow over time?
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What is the difference between budgeted cost and actual cost?
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Why would electricity and labor costs have variances?
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How can you determine if a variance in costs is good or not?
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What are the procedures outlined for in the text?
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Explain the concept of cost pooling mentioned in the text.
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What are the two alternatives presented for handling underapplied or overapplied overhead?
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What is the significance of tracking direct labor costs through time records?
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What does Purchases refer to in the context of cost management?
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What is the purpose of a product costing system in financial accounting?
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What are the two types of product costing systems mentioned in the text?
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What is the flow of costs provided by the cost of goods sold statement?
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What is each distinct batch of production called in job-order costing?
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What are the two basic sets of procedures used in product costing systems?
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What is the purpose of a material requisition form (MRF) in job-order costing systems?
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How are direct labor costs assigned to jobs in job-order costing systems?
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What is manufacturing overhead and why is it essential to allocate these costs to jobs?
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What is a predetermined overhead rate (POHR) used for in job-costing systems?
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Why is it important to accurately record time spent on production jobs?
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What is the goal of allocating manufacturing overhead costs to jobs?
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What causes underapplied or overapplied overhead in job-order costing systems?
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What is the process of overhead application in job-order costing systems?
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How does a material requisition form (MRF) impact the accounting entries in job-order costing systems?
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What type of costs are included in manufacturing overhead?
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Study Notes
Product Costing Systems
- The main purpose of a product costing system in a manufacturing environment is to accurately determine the cost of goods sold and inventories.
Cost Flow
- The cost flow in a manufacturing environment involves the flow of costs from raw materials to work-in-process inventory to finished goods inventory and finally to cost of goods sold.
Importance of Product Costs
- Product costs are significant in managerial accounting as they are used to make decisions about pricing, profitability, and performance evaluation.
Job-Order Costing vs. Process Costing
- Job-order costing is used for customized or batch production, where each job is unique, and costs are tracked individually.
- Process costing is used for mass production, where identical products are produced in large quantities, and costs are averaged over the entire production process.
Importance of Accurate Tracking and Assignment of Manufacturing Costs
- Accurate tracking and assignment of manufacturing costs is crucial in a job-costing system to ensure accurate product costing and decision-making.
Allocating Direct and Indirect Costs
- Allocating direct costs, such as direct labor and materials, to jobs helps in accurate product costing.
- Allocating indirect costs, such as manufacturing overhead, to jobs helps in accurate product costing and decision-making.
Disposition of Underapplied or Overapplied Overhead
- The two alternatives for the disposition of underapplied or overapplied overhead at the end of an accounting period are:
- Allocating it to cost of goods sold and inventory accounts.
- Recognizing it as a gain or loss on the income statement.
Effect of Underestimation or Overestimation of Predetermined Overhead Rate
- Underestimation or overestimation of the predetermined overhead rate affects COGS, work-in-process inventory, and finished goods inventory.
Costs that Grow Over Time
- Examples of costs that grow over time include labor and material costs.
Budgeted Cost vs. Actual Cost
- Budgeted cost is the estimated cost of a product or service.
- Actual cost is the actual amount spent on producing a product or service.
Variance in Costs
- Variance in costs occurs when actual costs differ from budgeted costs.
- Electricity and labor costs may have variances due to changes in usage or prices.
Determining Variance in Costs
- A variance in costs is good if it results in cost savings, and bad if it results in increased costs.
Procedures Outlined
- The procedures outlined in the text include allocating direct and indirect costs, tracking direct labor costs, and allocating underapplied or overapplied overhead.
Cost Pooling
- Cost pooling involves grouping costs into a single cost pool for allocation to jobs.
Alternatives for Handling Underapplied or Overapplied Overhead
- The two alternatives for handling underapplied or overapplied overhead are:
- Allocating it to cost of goods sold and inventory accounts.
- Recognizing it as a gain or loss on the income statement.
Significance of Tracking Direct Labor Costs
- Tracking direct labor costs through time records is essential to accurately assign labor costs to jobs.
Purchases
- In the context of cost management, Purchases refer to the acquisition of raw materials or goods.
Purpose of a Product Costing System in Financial Accounting
- The purpose of a product costing system in financial accounting is to accurately value inventory and cost of goods sold.
Types of Product Costing Systems
- The two types of product costing systems mentioned in the text are job-order costing and process costing.
Cost of Goods Sold Statement
- The cost of goods sold statement provides the flow of costs from raw materials to cost of goods sold.
Job-Order Costing
- In job-order costing, each distinct batch of production is called a job.
Basic Sets of Procedures
- The two basic sets of procedures used in product costing systems are:
- Allocating direct and indirect costs to jobs.
- Tracking and recording production costs.
Material Requisition Form (MRF)
- A Material Requisition Form (MRF) is used to track and record the issue of raw materials to production jobs.
Assigning Direct Labor Costs to Jobs
- Direct labor costs are assigned to jobs based on time records and labor rates.
Manufacturing Overhead
- Manufacturing overhead includes indirect costs such as electricity, rent, and maintenance.
- Allocating manufacturing overhead costs to jobs is essential to accurately value inventory and cost of goods sold.
Predetermined Overhead Rate (POHR)
- A predetermined overhead rate (POHR) is used to allocate manufacturing overhead costs to jobs.
Importance of Accurately Recording Time Spent on Production Jobs
- Accurately recording time spent on production jobs is essential to accurately assign direct labor costs to jobs.
Allocating Manufacturing Overhead Costs to Jobs
- The goal of allocating manufacturing overhead costs to jobs is to accurately value inventory and cost of goods sold.
Causes of Underapplied or Overapplied Overhead
- Underapplied or overapplied overhead occurs when the actual overhead costs differ from the estimated overhead costs.
Process of Overhead Application
- The process of overhead application involves allocating manufacturing overhead costs to jobs based on a predetermined overhead rate.
Impact of Material Requisition Form (MRF) on Accounting Entries
- A Material Requisition Form (MRF) impacts the accounting entries by increasing the work-in-process inventory account and decreasing the raw materials account.
Manufacturing Overhead Costs
- Manufacturing overhead costs include indirect costs such as electricity, rent, and maintenance.
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Test your knowledge on the procedures for accumulating direct material, direct labor, and manufacturing overhead for a job, including the use of material requisition forms, time records, and material-requirements planning (MRP) in job-order costing systems.