3
Kinney Questions 1. The two choices for cost accumulation are the job order and process costing systems. A company should use job order costing when it is necessary and possible to trace costs to products made for individual customers, and when the products made for one customer are very different from those made for other customers. A process costing system is appropriate for those production environments that make homogeneous products, usually in large quantities, in batch or continuous flow systems. 2. The three valuation methods are actual, normal, and standard costing. In actual costing, the actual amounts of material, labor, and overhead costs are assigned to production. In normal costing, the actual amounts of material and labor are assigned to production; however, overhead is applied to products using a predetermined overhead rate (rather than using the actual amount). In standard costing, standard (or “expected norm”) amounts are established for material, labor and overhead costs and/or quantities and are charged to production rather than the actual costs. The standard for overhead is the predetermined rate (or rates) for the company. Actual costs are accumulated in a standard costing system so that they may be compared with standard costs to determined favorable and unfavorable variances.

Kinney

Embed Size (px)

DESCRIPTION

SM

Citation preview

Page 1: Kinney

Kinney

Questions

1. The two choices for cost accumulation are the job order and process costing systems. A company should use job order costing when it is necessary and possible to trace costs to products made for individual customers, and when the products made for one customer are very different from those made for other customers.

A process costing system is appropriate for those production environments that make homogeneous products, usually in large quantities, in batch or continuous flow systems.

2. The three valuation methods are actual, normal, and standard costing. In actual costing, the actual amounts of material, labor, and overhead costs are assigned to production. In normal costing, the actual amounts of material and labor are assigned to production; however, overhead is applied to products using a predetermined overhead rate (rather than using the actual amount).

In standard costing, standard (or “expected norm”) amounts are established for material, labor and overhead costs and/or quantities and are charged to production rather than the actual costs. The standard for overhead is the predetermined rate (or rates) for the company. Actual costs are accumulated in a standard costing system so that they may be compared with standard costs to determined favorable and unfavorable variances.

3. The principal documents are job order cost sheets, material requisition forms, and employee time sheets. A job order cost sheet provides all details for a specific job and is used to track the actual costs of direct material and direct labor, and either actual or applied manufacturing overhead associated with a particular job; such amounts may be compared to budgeted costs. Material requisition forms are used to initiate the removal of the material from inventory for use in a particular job. Employee time sheets are used to track the time worked by individual employees to specific jobs.

Page 2: Kinney

4. When standards are used in a job order costing system, cost and quantity standards may not be able to be determined for material and labor. Standards can only be used if elements of the jobs produced have some common characteristics. Thus, if many jobs use the same direct material, a price standard might be developed for that material. However, the jobs may use very different quantities of that material and, thus, no quantity standard can be developed. Alternatively, a company may pay the same wage rate to all workers performing tasks in a specific department and all jobs flow through that department; in such a case, a labor wage standard can be determined but possibly not a labor hour quantity standard.

5. In a standard costing system, variances identify the areas of efficiency and inefficiency in production operations. Managers, using the concept of management by exception, focus their attention on the significant variances and attempt to determine causes of those variances (both favorable and unfavorable). Additionally, managers will look for interactions between or among the variances. By concentrating on the significant variances, mangers are able to concentrate on the aspects of operations that are “out of control” and try to correct the causes.

6. Job order costing information allows managers to better estimate the costs of producing their products and of serving specific customers. This information can be used to manage costs, identify which customers generate the most profitable business, and set prices for products and services.

7. If normal spoilage is generally anticipated on all jobs in a job order costing system, the estimated overhead used in setting the predetermined overhead rate should include an amount for the net cost of the spoilage. This treatment allows the cost of normal spoilage to be spread over all jobs produced. In contrast, if spoilage is related to a single job, the cost of that spoilage should be assigned to the job that gave rise to the spoilage.

8. Normal spoilage refers to an expected reduction in production quantity based on a company’s production technology, quality of material and labor used, and production practices. The level of such a loss may be established from management or engineering; given cost/benefit analysis, management has generally concluded that a certain level of defects is less expensive than trying to prevent all defects from occurring. Because normal spoilage is expected, an estimate for the loss is generally included in the development of the predetermined overhead rate.

Page 3: Kinney

Alternatively, abnormal spoilage refers to a loss level above that which is normally expected. Such losses are more likely to be preventable and, thus, need to be brought to management’s attention by showing the amount of the loss as a period cost.