Chapter 19 Study Guide

Cost accounting systems measure, record, and report product costs. Managers use product costs for setting product prices, controlling
operations, and developing financial statements.

The two main types of cost accounting systems for manufacturing operations are:

1.

2.

What does a job order cost system provide?

What does a process cost system provide?

Job Order Cost Systems for Manufacturing Businesses

Draw the Flow of Manufacturing Costs Diagram:

Define the following:

Materials

Receiving Report

Materials Requisition

Actual Factory Overhead vs. Applied Factory Overhead

The Factory Overhead Account is:

Debited for?

Credited for?

Will the factory overhead balance be carried over to the next year?

Work in Process Inventory is debited for the following:

1.

2.

3.

When will the product be moved into Finished Goods Inventory?

What are the two journal entries that will be made when the product is sold?

On the exam you will want to be able to answer the following:

The correct flow of manufacturing costs.

Calculate the predetermined overhead rate.

Closing over/under applied overhead into cost of goods sold would cause net income to increase/decrease by?

The document authorizing the issuance of materials from the storeroom is?

What is the entry to record the flow of direct materials into production?
 The entry to record direct labor costs into production?

What is the journal entry to transfer costs from Finished Goods Inventory to Cost of Goods Sold?

Calculate the predetermined overhead rate?

You will be given a listing of several production jobs, such as the following:

Balance
Job 1 $300
Job 2 $1,500
Job 3 $400
Job 4 $700
Job 5 $500
Jobs 1, 2, 3, & 4 were completed. Jobs 1 & 2 were sold at a profit of $100 on each job.

What is the ending balance of Work in Process Inventory (WIP) at the end of the quarter?

What is the ending balance of Finished Goods Inventory?

What is the ending balance of Cost of Goods sold?

What is the Sales balance?

What is the Gross Margin (ie, Gross Profit)?

Chapter 20 Study Guide

Process Cost Systems

A process manufacturer produces products that are indistinguishable from each other using a continuous production process, such as an oil
refinery. The cost accounting system used is called the process cost system. A process cost system records product costs for each
manufacturing department or process.

Review the Cost of Production Report on pages 925 and 926. Note that the report has a Units and Costs Section. Notice how the total units
shown in cells C16 and D16 are copied into cells C22 and D22 to use in determining the Cost per Equivalent Unit.

On Exam 3 your written portion of the exam will be to create a Cost of Production Report.

Here are some assumptions to use for the entire chapter:

1. FIFO
2. All materials are added at the beginning of the process.
3. Conversion (Direct Labor and Factory Overhead) costs are incurred evenly throughout the melting process.

A Cost of Production Report is prepared using the following four steps:

1. Determine the units to be assigned costs.

2. Compute equivalent units of production.
3. Determine the cost per equivalent unit.
4. Allocate costs to units transferred out and partially completed units.
Step 1: Determine the units to be assigned cost
Three categories to be assigned cost
1. Units in the beginning in-process
2. Units started and completed during the process
3. Units in ending-in-process inventory
Step 2: Calculate Equivalent Units of Production

 Equivalent units of production are the number of units that could have been completed within a given period.
 In contrast, whole units are the number of units in production during a period, whether or not completed.
 Equivalent units for materials and conversion costs are usually determined separately because they are often introduced
at different times or at different rates.
 Exercise 20-5 (page 931)We’ll work in class

Exercise 20-6 (page 931) We’ll work in class

Step 3: Determine the Cost per Equivalent Unit

Step 4: Allocate Costs to Transferred and Partially Completed Units

Bringing it all together – Production Report

 Ex 20-16 (page 934)-- Template found in Blackboard’s Little Miss Helpful, Chapter 20
 P20-2A (page 939) – Template found in Blackboard’s Little Miss Helpful, Chapter 20.

Journal Entries for Process Cost System

P20-1A (page 938)

Chapter 21 Study Guide

TWO IMPORTANT ADDITIONS ARE IN BLACKBOARD, LITTLE MISS HELPFUL, CHAPTER 21. THEY ARE THE FORMULAS FOR CHAPTER 21 AND FOUR
PROBLEMS AND THEIR SOLUTIONS.

Cost Behavior

Variable Costs vary in proportion to changes in the activity base. (Draw the graphs in Exhibit 1 on page 949.) Notice that the total
variable cost increases, while the per unit variable cost remains the same.

Fixed Costs remain the same in total dollar amount, while the per unit cost changes. (Draw the graphs in Exhibit 2 on page 951.)

Mixed Costs are costs that have characteristics of both a variable and fixed cost. (Draw the graph in Exhibit 3 on page 951.)

High-Low Method (page 952) Know how to calculate. Work Ex 21-7 on page 983.

Cost-Volume-Profit Relationships

Contribution Margin = Sales – Variable Costs

Sales
-Variable Costs
Contribution Margin
-Fixed Costs
Income from Operations
(Once fixed costs are covered, any additional Contribution Margin increases Income from Operations.)

Contribution Margin Ratio = Sales – Variable Costs/Sales

This ratio indicates the % of each sales dollar available to cover the fixed costs and to provide income from operations.
This ratio is most useful when the increase or decrease in sales volume is measured in sales dollars.
In percentages: Variable Cost + Contribution Margin = 100%

Work Exercise 21-9, page 984.

 Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit
This margin is most useful when the increase or decrease in sales volume is measured in sales units.

Mathematical Approach to Cost-Volume-Profit Analysis

Break-even Point
Break-even sales (units) = Fixed Costs/Unit Contribution Margin
Work Exercise 21-11 on page 984
Break-even sales (dollars) = Fixed Cost/Contr. Margin Ratio

Review the Summary of Effects of Changes on Break-Even Point on page 960

On page 963, what do you call the intersection of the Sales line and the Total Cost line?
Target Profit
Sales (units) = Fixed Costs + Target Profit/Unit Contribution Margin
Work Problem 21-2A on page 989

You’ll need to know the following:

Use the high-low method to calculate fixed costs per month.

As production increases, what would you expect to happen to fixed cost per unit?

Be able to calculate the contribution margin ratio.

How much will operating income change is sales increase by ____ units?

What is the break-even sales (units) if fixed costs are reduced by ____?

What amount of units must be sold in order to realize an operating income of ______?

Be able to calculate the break-even point (dollars).

Chapter 22 Study Guide

Objectives of Budgeting

Planning

Directing

Controlling

Budgeting Systems

Static Budget – shows the expected results of a responsibility center for only one activity level.

Flexible Budget – shows the expected results of a responsibility center for several activity levels.
Work Exercise 22-4 on page 1025:
Master Budget

For a manufacturing company, the master budget begins with preparing operating budgets, which form the budgeted income
statement. The sales budget will be the first budget prepared.

Work Exercise 22-6 on page 1025:

The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels. Use
the template on page 1006
 For the exam be able to:

Calculate the selling expenses in a budget.

Production budgets are used to prepare which budgets?

Principal components of a master budget include which of the following?

The first budget customarily prepared as part of an entity’s master budget?

Using the Production Budget template on page 1006, be able to calculate the units to be produced.