Question 1. What Is The Difference Between Product Costs And Period Costs?
A producer's product charges are the direct materials, direct hard work, and manufacturing overhead used in making its products. (Manufacturing overhead is also called manufacturing unit overhead, indirect production costs, and burden.) The product charges of direct materials, direct hard work, and production overhead also are "inventoriable" fees, when you consider that those are the essential expenses of manufacturing the products.
Period costs aren't a important a part of the manufacturing technique. As a result, length costs cannot be assigned to the products or to the value of stock. The length charges are normally related to the promoting function of the business or its fashionable administration. The period charges are mentioned as costs within the accounting length in which they 1) fine in shape with revenues, 2) when they expire, or three) inside the present day accounting duration. In addition to the selling and preferred administrative costs, most interest cost is a duration fee.
Question 2. What Is The Difference Between A Cost Center And A Profit Center?
A price center is a subunit of a employer this is accountable best for its charges. Example of price facilities are the manufacturing departments and the carrier departments within a manufacturing facility and administrative departments such as IT and accounting.
A profit center is a subunit of a corporation this is liable for revenues and expenses. Often a department of a organisation is a profit middle because it has manipulate over its revenues, expenses, and the resulting profits.
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Question three. What Is Sg&a?
SG&A is the acronym for selling, fashionable and administrative. SG&A are the fees incurred to 1) sell, promote, and supply a employer's services and products, and a couple of) manage the overall enterprise.
SG&A will seem as working prices at the profits statement for the length in which the expenses happened. Hence, SG&A expenses are said to duration charges rather than product charges. This manner that SG&A costs aren't assigned to the fee of goods bought or to the products in inventory.
Examples of SG&A consist of income commissions, advertising and marketing, promotional materials, compensation of the corporation's officers as well as the advertising, sales, finance and office staffs, the rent, utilities, supplies, computer systems, and so on. Which can be outdoor of the producing function. (SG&A will not encompass interest cost in view that hobby cost is said as a nonoperating fee.)
Question four. What Is Cost Allocation?
Cost allocation is the assigning of a common value to several price gadgets. For example, a company might allocate or assign the price of an highly-priced pc system to the three most important areas of the agency that use the device. A company with best one electric meter may allocate the electricity invoice to several departments within the agency.
Allocation implies that the assigning of the value is somewhat arbitrary. Some people describe the allocation as the spreading of fee, due to the arbitrary nature of the allocation. Efforts have been made through the years to improve the bases for allocation. In production, the overhead allocations have moved from plant-huge rates to departmental quotes, from direct exertions hours to machine hours to interest based totally costing. The goal is to allocate or assign the prices based on the root reasons of the commonplace costs as opposed to merely spreading the expenses.
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Question five. What Is A Cost Center?
A fee middle is usually a branch inside a corporation. The manager and employees of a fee middle are accountable for its costs but aren't chargeable for revenues or funding selections.
A producer's fee centers encompass each of its production departments in addition to the manufacturing carrier departments inclusive of the maintenance department or high-quality manage branch. Other examples of value centers include the human useful resource branch, the IT department, the accounting department, and so on.
Cost facilities are not constrained to departments. There might be several cost facilities within a department. For instance, every meeting line will be a fee middle. Even a special machine could be a fee middle.
Cost facilities are commonly related to the topic of decentralization, obligation accounting, and making plans and manipulate.
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Question 6. What Are Direct Costs?
Direct prices may be traced immediately to a fee item which include a product or a branch. In different words, direct prices do no longer should be allocated to a product, department, or different fee item.
For instance, if a business enterprise produces artisan fixtures, the fee of the wooden and the fee of the craftsperson are direct charges—they are without a doubt traceable to the production department and to each object produced—no allocation changed into wanted. On the other hand, the rent of the constructing that houses the production region, warehouse, and workplace isn't an instantaneous price of both the manufacturing branch or the items produced. The lease is an oblique price—an indirect price of working the manufacturing branch and an oblique value of crafting the product.
To calculate the overall price of the manufacturing branch or to calculate every product's general cost, it is important to allocate a number of the rent (and other indirect expenses) to the branch and to the product.
Question 7. Are Salaries And Wages Part Of Expenses On The Income Statement?
Salaries and wages of the modern accounting length are reported as costs on a service corporation's cutting-edge earnings statement.
Salaries and wages of a manufacturer are greater complex. The salaries and wages of people within the administrative and selling capabilities are suggested as prices at the modern profits declaration. However, the salaries and wages of human beings in the production departments are assigned to the goods synthetic. When the goods are offered, their manufacturing charges (inclusive of the producing salaries and wages) will appear at the profits declaration as a part of the price of products offered. The merchandise now not offered are said as inventory at the stability sheet at their production costs (including the manufacturing salaries and wages).
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Question 8. What Is Responsibility Accounting?
Responsibility accounting entails a organisation's inner accounting and budgeting. The objective is to assist inside the making plans and manage of a company's responsibility facilities—which includes decentralized departments and divisions.
Responsibility accounting usually involves the preparation of annual and month-to-month budgets for each obligation middle. Then the company's actual transactions are categorized through responsibility middle and a monthly document is ready. The reports will present the real amounts for every finances line item and the variance between the price range and actual amounts.
Responsibility accounting lets in the company and every supervisor of a duty middle to obtain month-to-month feedback at the manager's performance.
Question nine. Are Direct Costs Fixed And Indirect Costs Variable?
Direct product charges which includes uncooked materials are variable costs. Variable product charges increase in total as extra gadgets of merchandise are synthetic.
Costs that are direct to a branch may be variable or fixed. For example, a supervisor within the painting department could be a right away cost to the painting department. Since the supervisor's income is in all likelihood to be the same amount each month regardless of the quantity of products synthetic, it's miles a hard and fast value to the department. The resources furnished to the painting department may be a right away cost to the department, but can be a variable value to the branch if the total quantity of resources used inside the department will increase as the extent or interest within the branch increases.
An oblique product fee is the electricity used to perform a manufacturing gadget. The fee of the power is variable due to the fact the full energy used is greater while more merchandise are synthetic on the machine. Depreciation on the production device is also an indirect product price, besides it is also a hard and fast value. That is, the system's overall depreciation fee is the identical every yr irrespective of volume produced at the device.
As you could see, costs may be direct and oblique relying on the cost item: product, branch, and others together with division, consumer, geographic market. The fee is constant if the full quantity of the cost does now not exchange as quantity changes. If the total price does alternate in proportion to the change inside the interest or volume, it's far a variable fee.
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Question 10. What Is A Responsibility Center?
A responsibility middle is a component or subunit of a business enterprise for which a supervisor has authority and duty. The employer's specific employer chart is a logical source for figuring out obligation centers. The most common obligation facilities are the departments inside a employer.
When the manager of a obligation middle can control best expenses, the duty center is known as a fee middle. If a manager can manipulate both expenses and revenues, the obligation center is called a profit center. If a supervisor has authority and responsibility for fees, sales, and investments the obligation center is known as an investment center.
Question eleven. What Is Elastic Demand?
Elastic call for approach that call for for a product is sensitive to fee modifications. For example, if the promoting charge of a product is multiplied, there can be fewer units offered. If the selling rate of a product decreases, there may be an growth inside the number of units sold. Elastic call for is also called the price elasticity of demand.
The time period inelastic demand method that the call for for a product isn't always sensitive to price changes.
Elastic call for is a chief concern for a producer that attempts to set product costs based totally on costs. For instance, if the manufacturer's manufacturing and income have declined and it fails to reduce constant prices, the producer will be worse off by way of increasing selling fees.
Use the quest container on AccountingCoach.Com for our Q&A on demise spiral that's pertinent to elastic demand.
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Question 12. Is Rent Expense A Period Cost Or A Product Cost?
When a organisation incurs rent for its production operations, the hire is a product fee. It is not unusual for the rent to be included inside the manufacturing overhead with a purpose to be allotted or assigned to the goods. That hire as part of the manufacturing overhead price will hang to the products. If the products continue to be in inventory, the lease is protected inside the manufacturing overhead part of the product's cost. When products are bought, the rent allotted to those products can be expensed as a part of the cost of goods offered.
If the lease is for gadgets concerned in the selling characteristic (hire for office space, equipment, automobiles, etc.) or if the lease is for objects within the administrative characteristic of the enterprise, the lease is a length cost and might be expensed inside the period whilst the fee is incurred. These rents will now not be allocated to the goods for external economic statements.
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Question 13. Why Is The Distinction Between Product Costs And Period Costs Important?
The distinction among product prices and length charges is critical for 1) well measuring internet profits in the course of a time period and 2) reporting the right cost of inventory at the balance sheet.
Product charges hang to the units of merchandise bought or synthetic. If a unit is unsold, the product charges might be reported as inventory, a cutting-edge asset on the stability sheet. The product fees for a retailer might be the amount paid to the provider plus any freight-in. Product costs for a producer can be the direct materials, direct labor, and manufacturing overhead. Product charges will be said on the earnings declaration because the value of products bought cost inside the period that the units of product are offered.
Period expenses do not dangle or connect to the units of product and could not be protected inside the fee of inventory. For example, the hobby incurred by using a store to finance its operations will be expensed in the period in which the interest happens. Interest isn't deferred by using including it to the value of the gadgets in stock. Similarly, promoting costs and wellknown administrative salaries are expensed inside the duration that the personnel earn the ones salaries, the identical period in which the business enterprise incurs the salaries expense. The coverage charges that a company will pay for nonmanufacturing protection will be expensed in the period wherein the insurance premiums expire. (Insurance rates for the manufacturing facility building will be included within the production overhead as a way to be a part of the products' cost.)
Question 14. Is The Rental Cost Of A Building Considered Overhead?
The apartment value of a constructing used in production is part of production overhead. Manufacturing overhead is an oblique product value. Indirect product fees are allocated or assigned to products on a few affordable basis. As a end result, the condominium value of a production building will hang to the products synthetic. If the goods synthetic are in stock, some of the lease of the manufacturing facility is in inventory. When a product is offered, the manufacturing rent this is blanketed in the product fee may be part of the value of products sold.
The condo price of a constructing that is not used for manufacturing (e.G. Rent for a sales office, rent for the overall administrative workplace) is not a part of the producing overhead. This hire does now not hold to the goods and could not be a part of the fee of an object in stock. The lease for nonmanufacturing facilities is at once expensed in the accounting period while the building is rented.
If a rented building is used for both manufacturing and nonmanufacturing sports, the hire ought to be allotted to each (perhaps on the premise of square pictures).
Question 15. Under Accrual Accounting, How Are Worker Comp Premiums Handled?
Worker comp insurance premiums ought to be charged to the areas where the associated wages and salaries are charged.
Let's anticipate that the internet price of employee comp insurance after discounts and dividends is 5% of the wages and salaries of direct and oblique production personnel. If for the month of January the direct labor is $40,000, then $2,000 of the employee comp fee have to be covered as direct labor. If indirect labor for January is $60,000 then $three,000 of worker comp cost have to be included as the value of the oblique exertions.
If the general office employee comp quotes are 0.2% of the overall workplace wages and salaries, then 0.2% of January's popular office wages and salaries could be expensed as employee comp insurance fee.
If the business enterprise remits each month's employee comp value to its insurance enterprise every accounting length, there can be no prepaid insurance nor will there be a legal responsibility for accrued employee comp expense.
If the enterprise remits employee comp premiums to the coverage organization earlier of the value associated with wages and salaries, the quantity that is pay as you go as of the balance sheet date should be pronounced as Prepaid Insurance, a cutting-edge asset. If the company has remitted less than the employee comp value associated with the wages and salaries, the amount owed to the insurance company as of the stability sheet date is suggested as a contemporary legal responsibility consisting of Accrued Worker Comp Payable.
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Question sixteen. What Is Meant By The Full Cost Of A Product?
Many (perhaps most) accountants use the time period complete price to intend the overall production or production price of a product. To those accountants this means a product's cost of substances, labor, and both variable and fixed production overhead. These accountants do no longer encompass promoting, administrative, or hobby fees in their definition of the full cost of a product. Their view is regular with the way that inventory and the price of products bought are pronounced on a organization's monetary statements.
Some accountants use the term full fee to mean more than a product's manufacturing or production charges (along with constant production overhead). These accountants use complete fee to mean the producing cost plus an allotted part of the company's promoting, administrative, and hobby costs. These accountants are worried that a few merchandise require a bigger part of promoting and administrative fees at the same time as other merchandise require a small component. Only when a product's promoting and administrative costs are combined with the product's production costs will they be capable of decide whether or not every product's selling rate is enough or is aligned with its "complete value".
Question 17. What Are Nonmanufacturing Overhead Costs?
Nonmanufacturing overhead prices are the business charges which might be outdoor of a employer's production operations. These are regularly known as the promoting, wellknown and administrative (SG&A) charges plus the employer's interest cost. Examples of the nonmanufacturing overhead charges consist of the salaries and different charges for the following commercial enterprise activities: selling, distribution, marketing, finance, IT, human assets, criminal, and so forth. (We have additional examples within our AccountingCoach.Com topic Nonmanufacturing Overhead.)
Since these costs are out of doors of the producing characteristic, they're not considered to be expenses of the goods. As a result, the nonmanufacturing charges are not allocated to the goods for determining the charges for stock or for the fee of products bought. Instead, the nonmanufacturing expenses are straight away expensed within the accounting duration in which they may be incurred. That is why accountants say that the nonmanufacturing costs are duration fees or length expenses. (Only the manufacturing fees of direct materials, direct hard work and manufacturing overhead are product charges.)
While the nonmanufacturing overhead expenses are not allotted to the products, the organization have to have its selling costs and sales sales sufficient to cover each the product charges and the duration costs to be able to avoid a terrible net earnings.
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Question 18. Are Insurance Premiums A Fixed Cost?
The price of the insurance charges for a agency's assets coverage is likely to be a fixed fee. The cost of worker reimbursement coverage is probable to be a variable cost. Whether a value is a hard and fast cost, a variable fee, or a blended fee relies upon at the impartial variable.
Let's illustrate this by means of searching on the value of property insurance. The value of insuring the manufacturing unit constructing is a set price while the impartial variable is the variety of units produced in the manufacturing facility. In other words, the manufacturing unit's belongings insurance is probably $6,000 consistent with yr whether its output is two million devices, three million gadgets, or 5 million units. On the other hand, if the impartial variable is the substitute fee of the manufacturing facility buildings, the insurance fee may be a variable price. The motive is the insurance fee on $12 million of manufacturing facility homes may be more than the insurance cost on $9 million of manufacturing unit homes, and less than the coverage premiums on $18 million of factory homes.
In the case of worker compensation coverage, the value will range with the quantity of payroll bucks (apart from extra time top rate) in every class of people. For example, if the worker comp charges are $5 in keeping with $one hundred of factory labor fee, then the worker comp premiums might be variable with recognize to the dollars of manufacturing facility labor price. If the devices of output in the manufacturing facility correlate with the direct hard work charges, then the worker reimbursement value can also be variable with recognize to the range of units produced. On the opposite hand, the employee reimbursement cost for the workplace group of workers is commonly a miles smaller rate and that employee reimbursement value will now not be variable with respect to the range of units of output in the factory. However, the worker reimbursement price of the workplace staff could be variable with recognize to the quantity of workplace staff salaries and wages.
As you have visible, determining which prices are constant and which might be variable can be a piece complicated.
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Question 19. How Can A Manufacturer Determine The Precise Cost Of Its Products?
A manufacturer might also by no means be able to decide the appropriate price of its individual merchandise. The purpose is that maximum of the manufacturing costs (aside from substances and some hard work) are oblique fees. This method that maximum of the producing costs aren't directly traceable to man or woman merchandise and will need to be allocated to them. Examples of oblique manufacturing fees include the rent, belongings taxes, depreciation, warmth, lights, oblique production people pay and advantages, maintenance, upkeep, and others that arise inside the manufacturing unit.
In addition to the manufacturing charges, there are promoting, widespread and administrative (SG&A) fees and possibly interest fee. Generally, accountants do no longer take into account those fees to be product prices. As a end result those charges are pronounced at the earnings declaration when they occur and without any allocation to the goods. However, those expenses are related to some or all of the products.
The producer can try to calculate the prices and expenses of every of its products, but I do not assume the end result will be the actual, unique cost. In addition to the allocations (which are considered as arbitrary), remember that changes in quantity will affect a product's fee. For example, if a agency's total fixed prices continue to be consistent but its volume of products decreases by using 20%, the fee of every product will growth. If volume will increase, the fee of every product will lower.
Activity-based totally costing (ABC) is an try to improve the allocation of expenses by figuring out extra of the foundation reasons of the fees (as opposed to simply spreading charges to merchandise primarily based on machine hours). Even with ABC there may be arbitrary allocations so that you can prevent understanding every product's specific fee.
Question 20. Should A Manufacturer's Selling Prices Be Based On Costs?
A manufacturer's promoting fees should no longer be based totally on fees by myself. One cause is that the actual value of each product isn't regarded with precision. At quality, each product's price is a median that resulted from allocations of the indirect production prices. In addition, there are selling, popular and administrative charges that are even greater tough to associate with character merchandise.
A greater compelling purpose that selling fees must no longer be based totally solely on fees is the market for a product. If a product is unique, blanketed by means of a patent and trademark, and the call for for the product is excessive, customers may additionally accept a selling rate that is strangely excessive. In other phrases, the value of the product is a lot greater than the costs identified with the product plus a regular profit or markup.
At other times the market will encompass competition supplying a similar product at lower selling expenses due to efficiencies, lower fees, or inaccurate value calculations. Perhaps any other competitor will promote a comparable product at a lower promoting price in hopes of attracting clients who will purchase extra, more profitable merchandise. These situations will possibly save you the producer from accomplishing sizable sales at promoting prices that are based totally on charges plus a favored income.
Given the complexity of a producer's operations and the opposition in the market vicinity, it is rare for a producer to have promoting expenses based on its genuine prices plus a uniform charge of earnings.
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Question 21. In Least Squares Regression, What Do Y And A Represent?
Here are the meanings of the components or symbols used within the least squares equation of y = a + bx:
y is the established variable, consisting of the predicted or predicted overall value of electricity throughout a month. The amount of y is dependent upon the quantities of a and bx.
A is the predicted general amount of constant electricity fees throughout the month. It is the price of y, when x is 0. If the entire value line intersects the y-axis at $1,000 then it's miles assumed that the entire constant fees for a month are $1,000.
B is the predicted variable fee in step with unit of x. It determines the slope of the whole price line. If b is $5, because of this the variable cost part of power is expected to be $five for each unit of x.
X is the independent variable. For example, x should represent the acknowledged range of gadget hours used inside the month.
Bx is the entire variable price of energy. If the corporation's strength cost is expected to be $5 consistent with unit of x, and x is four,000 gadget hours, then the whole variable value of electricity for the month is anticipated to be $20,000.
In our instance the entire envisioned cost of energy (y) in a month when x is four,000 device hours can be $21,000.
Question 22. Why Does A Cost System Developed For Inventory Valuation Distort Product Cost Information?
The cost gadget for stock valuation may additionally had been evolved to provide an affordable total value of stock and an affordable overall fee of products offered with a purpose to have moderately accurate financial statements. If a business enterprise has small stock quantities and huge sales, a simple cost device that spreads production overhead expenses entirely on the idea of machine hours can bring about a fairly correct balance sheet and earnings assertion.
While a easy cost machine the usage of just one price driver (device hours) may additionally bring about correct monetary statements, it often fails to offer the true fee of character merchandise that vary in complexity. For instance, one product may require only a few machine hours but would require many hours of unique handling. The expenses assigned on the idea of gadget hours alone will be too low in dating to the true value of manufacturing this product. Another product might require many system hours however no other sports. This product's price will be overstated due to the fact the charge assigned thru the gadget hours will include an quantity for different activities that typically occur for the alternative products manufactured.
A price machine evolved for inventory valuation is restrained to the value of direct materials, direct labor, and manufacturing overhead. The total cost of supplying products to a patron may even include nonmanufacturing prices. One consumer would possibly require a agency to incur additional selling, turning in, storing, and administrative prices. Another patron may not require any of these activities and their associated costs.
Activity primarily based costing attempts to calculate the proper cost of a product and client via assigning expenses and prices based totally on their root reasons. Because there are numerous root reasons, the employer will assign expenses based on many value drivers. This effects in more accuracy for the price and price of a specific product for a specific client than genuinely spreading the producing expenses on the premise of 1 fee driving force inclusive of system hours.