Managerial Accountin Chapter 6

6

Fundamentals of Product and Service Costing

Solutions to Review Questions

6-1. Cost allocation is the assignment of costs in cost pools to cost objects. The cost objects may be products, services, customers, processes, or anything for which we want to know the cost. Product costing uses cost allocation to calculate product costs. Product costing is an application of cost allocation where products are the cost objects. 6-2. Cost management systems should satisfy the following criteria: • • • 6-3. Cost flow diagrams serve two purposes. First, they help describe how a cost management system works, just like a flow chart helps you understand how a process works. Second, cost flow diagrams help managers identify and understand quickly the effect of changes in the system design on reported costs. 6-4. A job costing accounting system traces costs to individual units or to specific jobs (typically custom products). A process costing accounting system is used when identical units are produced through a series of uniform production steps. Operation costing is used when goods have some common characteristics (process costing) and some individual characteristics (job costing). 6-5. The predetermined overhead rate is the value at which overhead is applied to one unit of the cost allocation base. It is used in product costing to apply the overhead to the units produced.

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Cost systems should have a decision focus. Different cost information is used for different purposes. Cost information for managerial purposes must meet the cost-benefit test.

6-6. Continuous flow processing is used when a single product is mass produced in a continuing process. Examples would include products such as paint, gasoline, paper, or any others that are mass produced in a continuing process. 6-7. The basic cost flow model appears as follows: Beginning balance + Transfers in – Transfers out = Ending balance Beginning...