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Unformatted text preview: CHAPTER 5 DISCUSSION QUESTIONS 5-1 Q5-1. The cost attached to a product is an amount assigned by the costing methods usedan amount controlled by the circumstances, assumptions, and limitations of the method under which it was compiled. Product costs are composites of historical outlay that have, perhaps, been modified by estimates or stan-dards, by processes assigning or prorating expenditures to periods, or by tracing the direct costs and allocating the indirect costs to particular products so that the total period outlay is spread over the aggregate output. Despite these shortcomings, product costs are useful in costing inventories, comparing prices and total unit cost, measuring current profit or loss, and indicating the minimum cost below which a sales price cannot go in the long run. Some confusion will result at times in using cost information in making manage-ment decisions unless information relevant only to the decision is used. Q5-2. The primary objective in job order costing is to determine the cost of materials, labor, and factory overhead used to produce a specific order or contract. Cost estimates are made when the order is taken, and the job order procedures are designed to reveal costs as the order goes through production, thereby giving an opportunity to control costs. Q5-3. The type of cost accumulation method used by a company will be determined by the type of manufacturing operations performed. A manufacturing company should use process cost accumulation for product costing pur-poses when like units are continuously mass produced; when custom-made or unique goods are produced, job order costing would be more appropriate. Process costing is often used in industries such as chemicals, food processing, oil, mining, rubber, and electrical appliances. With a continuous mass produc-tion of like units, the center of attention is the individual process (usually a department). The unit costs by cost category as well as total unit cost for each process (department) are necessary for product costing purposes. Q5-4. A job order cost sheet is used: (a) to keep track of the direct materials and direct labor used on a job plus an appro-priate share of factory overhead; (b) to compare actual costs to estimated costs; (c) as a subsidiary ledger for the work in process account. Q5-5. The work in process account is a control account in the general ledger, reflecting total costs assigned or applied to jobs. The individ-ual job cost sheets form the work in process accounts subsidiary ledger, indicating the direct materials, direct labor, and factory over-head charged to each job. Q5-6. Job order cost sheets serve a control func-tion. Comparisons are made between esti-mates of job costs and costs actually accumulated for the job. In addition, cost con-trol is enhanced by accumulating direct mate-rials and labor as well as factory overhead costs by cost centers or departments, and by comparing the actual costs to cost center budgets....
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- Spring '11