Podcast
Questions and Answers
Which of the following best describes work-in-progress inventory?
Which of the following best describes work-in-progress inventory?
The cost of salt used in baking a pizza would be classified as:
The cost of salt used in baking a pizza would be classified as:
What costs are combined to calculate conversion costs?
What costs are combined to calculate conversion costs?
Which of these is classified as a period cost?
Which of these is classified as a period cost?
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What does the term 'equivalent units of production' (EUP) measure?
What does the term 'equivalent units of production' (EUP) measure?
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Which step in the preparation of a production cost report involves expressing output in terms of fully complete units?
Which step in the preparation of a production cost report involves expressing output in terms of fully complete units?
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A company manufactures tables. The cost of the wood used to make a table is considered a:
A company manufactures tables. The cost of the wood used to make a table is considered a:
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If direct material costs are $10,000, direct labor costs are $20,000, and manufacturing overhead costs are $5,000, what are the prime costs?
If direct material costs are $10,000, direct labor costs are $20,000, and manufacturing overhead costs are $5,000, what are the prime costs?
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Which of the following is a primary purpose of a standard cost system?
Which of the following is a primary purpose of a standard cost system?
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What is the key difference between a static budget and a flexible budget?
What is the key difference between a static budget and a flexible budget?
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In the context of variance analysis, what does a favorable variance indicate?
In the context of variance analysis, what does a favorable variance indicate?
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What is the formula to calculate cost variance?
What is the formula to calculate cost variance?
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Which formula accurately calculates efficiency variance?
Which formula accurately calculates efficiency variance?
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What does operating cash flow include?
What does operating cash flow include?
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Why are sunk costs considered irrelevant in investment decisions?
Why are sunk costs considered irrelevant in investment decisions?
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Which statement best describes opportunity costs in capital budgeting?
Which statement best describes opportunity costs in capital budgeting?
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Study Notes
Inventory Types
- Raw Materials Inventory (RM): Materials used to create a product
- Work-in-Progress Inventory (WIP): Goods in the manufacturing process but not complete
- Finished Goods Inventory (FG): Completed goods not yet sold
Costs
- Direct Cost: Cost easily and efficiently traced to a cost object (e.g., flour for a pizza)
- Indirect Cost: Cost not easily or efficiently traced to a cost object (e.g., electricity to bake a pizza)
Manufacturing Costs
- Direct Materials Cost (DM): Raw material costs in production (e.g., cheese)
- Direct Labor Cost (DL): Labor costs in production (e.g., worker salaries)
- Manufacturing Overhead Cost (MOH): Indirect product costs (e.g., salt in pizza, cleaning staff salaries, factory costs, rent, utilities, and insurance)
Prime Costs
- Direct materials and direct labor combined
Conversion Costs
- Direct labor and manufacturing overhead combined
Period Costs
- Non-manufacturing costs (e.g., selling expenses, interest expense, income tax expenses, administrative expenses)
Product Costs
- Manufacturing costs (e.g., direct materials, direct labor, manufacturing overhead)
Equivalent Units of Production (EUP)
- Measures the amount of materials added or work done on partially completed units during a period
- Expressed in terms of fully complete units of output
Production Cost Report
- Calculates physical and cost flows of products in four steps:
- Summarize physical unit flow
- Compute output in equivalent units of production (EUP)
- Compute cost per equivalent unit of production
- Assign costs to completed and in-progress units
Process Costing
- Figuring out the cost of producing something
Budget Components
- Master Budget Components - Merchandising Company
- Sales budget
- Inventory, Purchases, and Cost of Goods Sold budget
- Selling and Administrative expense budget
- Operating budget
- Capital expenditures budget
- Cash budget
- Budgeted income statement
- Budgeted balance sheet
- Financial budget
Standard Cost System
- Accounting system using standards for product costs (direct materials, direct labor, manufacturing overhead)
- Each input has a cost standard and an efficiency standard
Static Budget
- Prepared for one level of sales volume (based on expected number of units)
Flexible Budget
- Prepared for various sales volume levels within a relevant range
- Useful for what-if analysis
Variances
- Difference between actual and budgeted amounts
- Favorable (F): When actual costs are less than budgeted costs or revenues are greater than budgeted revenues.
- Unfavorable (U): When actual costs are more than budgeted costs or revenues are less than budgeted revenues.
Cost Variance
- Measures how well the business keeps unit costs of materials and labor within standards (comparing actual to standard costs).
- Calculate: (Actual Cost - Standard Cost) * Actual Quantity
Efficiency Variance
- Measures how efficiently the business uses its resources. (comparing actual to standard quantities).
- Calculate: (Actual Quantity - Standard Quantity) * Standard Cost
Operating Cash Flows (OCF)
- Includes marginal revenues and marginal costs during the investment period
Terminal Cash Flow
- Includes the sale of a fixed asset at the end of an investment project
Types of Cash Flows
- Sunk Costs: Past outlays that cannot be recovered
- Opportunity Costs: Cash flows forgone from using an asset for another alternative
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Description
This quiz focuses on different types of inventory and associated costs in manufacturing. It covers raw materials, work-in-progress, finished goods, and the classification of direct and indirect costs. Test your understanding of prime costs, conversion costs, and period costs as well.
