COST MANAGEMENT Accounting Control HansenMowenGuan Chapter 5 Product

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COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • Chapter 5 Product and Service Costing: Job-Order

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • Chapter 5 Product and Service Costing: Job-Order System COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning and South-Western are trademarks used herein under license. 1

Study Objectives 1. Differentiate the cost accounting systems of service and manufacturing firms and

Study Objectives 1. Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products. 2. Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment. 3. Explain the difference between job-order and process costing, and identify the source documents used in joborder costing. 4. Describe the cost flows associated with job-order costing, and prepare the journal entries. 5. Explain why multiple overhead rates may be preferred to a single, plantwide rate. 6. Explain how spoilage is treated in a job-order costing system. 2

Manufacturing Firms versus Service Firms • Manufacturing involves joining together direct materials, direct labor,

Manufacturing Firms versus Service Firms • Manufacturing involves joining together direct materials, direct labor, and overhead to produce a new product. The product is tangible and can be inventoried. • A service is intangible. It cannot be separated from the customer and cannot be inventoried. • Managers must be able to track the costs of services rendered just as precisely as they must track the costs of goods manufactured. 3

Unique versus Standardized Products and Services • Firms that produce unique products in small

Unique versus Standardized Products and Services • Firms that produce unique products in small batches that incur different product costs must track the costs of each product or batch separately. This is a… • Job-order costing system – Examples: Cabinet makers, home builders, dental and medical services 4

Unique versus Standardized Products and Services • Some firms produce identical units of the

Unique versus Standardized Products and Services • Some firms produce identical units of the same product. The costs of each unit are also the same. This is a… • Process-costing system – Examples: Food, cement, petroleum and chemicals 5

Setting Up the Cost Accounting System 6

Setting Up the Cost Accounting System 6

Setting Up the Cost Accounting System • Cost Accumulation – The recognition and recording

Setting Up the Cost Accounting System • Cost Accumulation – The recognition and recording of costs. – Source documents can be designed to supply information that can be used for multiple purposes. 7

Setting Up the Cost Accounting System • Cost Measurement – Classifying the costs and

Setting Up the Cost Accounting System • Cost Measurement – Classifying the costs and determining the dollar amounts for direct materials, direct labor and overhead. – Methods of measurement • Actual costing: uses actual costs for direct materials, direct labor, and overhead • Normal costing: uses actual costs for direct materials and direct labor but measures overhead costs on a predetermined basis 8

Setting Up the Cost Accounting System • Cost Assignment – Occurs after costs have

Setting Up the Cost Accounting System • Cost Assignment – Occurs after costs have been accumulated and measured. – Total product costs associated with the units is divided by the number of units produced to determine unit cost. 9

Setting Up the Cost Accounting System • Unit Cost – Used in manufacturing firms

Setting Up the Cost Accounting System • Unit Cost – Used in manufacturing firms to • Value inventory • Determine income • Inform decision making – Used in nonmanufacturing firms to • Determine profitability • Determine feasibility of new services 10

Setting Up the Cost Accounting System • Unit cost is made up of –

Setting Up the Cost Accounting System • Unit cost is made up of – Direct materials – Direct labor – Overhead Traced directly to units 11

Setting Up the Cost Accounting System • Overhead is applied using a predetermined rate

Setting Up the Cost Accounting System • Overhead is applied using a predetermined rate based on budgeted overhead costs and budgeted amount of driver. • Commonly used drivers include – – – Units produced Direct labor hours Direct labor dollars Machine hours Direct materials dollars or cost 12

Setting Up the Cost Accounting System • Activity level – Must be predicted for

Setting Up the Cost Accounting System • Activity level – Must be predicted for the coming year to calculate the predetermined overhead rate. • Predicting activity – Reflective of consumer demand • Normal activity level • Expected activity level – Reflective of production capabilities • Theoretical activity level • Practical activity level 13

Job-Order Costing: Overview • Job-order industries produce a wide variety of products or jobs

Job-Order Costing: Overview • Job-order industries produce a wide variety of products or jobs that are distinct. • Costs are accumulated by job in a joborder costing system. • Each job is documented on a job-order cost sheet. 14

Job-Order Costing: Overview • Total manufacturing costs for the job are divided by the

Job-Order Costing: Overview • Total manufacturing costs for the job are divided by the number of units produced to determine unit cost. • The work-in-process inventory is the collection of all job-order cost sheets. 15

Job-Order Costing: General Description 16

Job-Order Costing: General Description 16

Job-Order Costing: General Description 17

Job-Order Costing: General Description 17

Job-Order Costing: General Description 18

Job-Order Costing: General Description 18

Job-Order Costing: General Description Overhead is assigned to jobs using a predetermined overhead rate.

Job-Order Costing: General Description Overhead is assigned to jobs using a predetermined overhead rate. The actual amount of the driver used as a base must be collected and recorded. 19

Job-Order Costing: Specific Cost Flow Description 20

Job-Order Costing: Specific Cost Flow Description 20

Job-Order Costing: Specific Cost Flow Description 21

Job-Order Costing: Specific Cost Flow Description 21

Job-Order Costing: Specific Cost Flow Description 22

Job-Order Costing: Specific Cost Flow Description 22

Job-Order Costing: Specific Cost Flow Description 23

Job-Order Costing: Specific Cost Flow Description 23

Job-Order Costing: Specific Cost Flow Description 24

Job-Order Costing: Specific Cost Flow Description 24

Statement of Cost of Goods Manufactured 25

Statement of Cost of Goods Manufactured 25

Statement of Cost of Goods Manufactured 26

Statement of Cost of Goods Manufactured 26

Statement of Cost of Goods Manufactured 27

Statement of Cost of Goods Manufactured 27

Statement of Cost of Goods Manufactured 28

Statement of Cost of Goods Manufactured 28

Statement of Cost of Goods Manufactured 29

Statement of Cost of Goods Manufactured 29

Statement of Cost of Goods Sold 30

Statement of Cost of Goods Sold 30

Summary of Manufacturing Cost Flows 31

Summary of Manufacturing Cost Flows 31

Income Statement 32

Income Statement 32

Single versus Multiple Overhead Rates • Single (plantwide) rate $240, 000 ÷ 20, 000

Single versus Multiple Overhead Rates • Single (plantwide) rate $240, 000 ÷ 20, 000 DLHr = $12 per DL hour • Multiple (departmental) rates – Department A labor-intensive $60, 000 ÷ 15, 000 DLHr = $4 per DL hour – Department B machine-intensive $180, 000 ÷ 15, 000 MHr = $12 per M hour 33

Single versus Multiple Overhead Rates Usingle overhead application rate: 34

Single versus Multiple Overhead Rates Usingle overhead application rate: 34

Single versus Multiple Overhead Rates • Single (plantwide) rate $240, 000 ÷ 20, 000

Single versus Multiple Overhead Rates • Single (plantwide) rate $240, 000 ÷ 20, 000 DLHr = $12 per DL hour • Multiple (departmental) rates – Department A labor-intensive $60, 000 ÷ 15, 000 DLHr = $4 per DL hour – Department B machine-intensive $180, 000 ÷ 15, 000 MHr = $12 per M hour 35

Single versus Multiple Overhead Rates Using multiple overhead application rates: 36

Single versus Multiple Overhead Rates Using multiple overhead application rates: 36

Single versus Multiple Overhead Rates Using multiple overhead application rates: 37

Single versus Multiple Overhead Rates Using multiple overhead application rates: 37

Single versus Multiple Overhead Rates Comparison of Overhead Assigned: Job 23 Job 24 Single

Single versus Multiple Overhead Rates Comparison of Overhead Assigned: Job 23 Job 24 Single rate 500 DLH @ 1 DLH @ $12 = $6, 000 $12 = $12 Multiple rates 500 DLH @ $4 500 MH @ = $2, 000 $12 = $6, 000 38

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • End Chapter 5 COPYRIGHT © 2009 South-Western

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • End Chapter 5 COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning and South-Western are trademarks used herein under license. 39