Costing Systems EMBA 5403 Fall 2010 Available costing
Costing Systems EMBA 5403 Fall 2010
Available costing systems o Absorption costing n n n o Actual Costing Normal Costing Standard Costing Variable costing n n n Fall 2010 Actual Costing Normal Costing Standard Costing Mugan 2
Costing systems Cost component Actual Normal Standard material Actual Standard labor cost Actual Standard Manufacturing Overhead. Variable Actual Applied Standard Manufacturing Overhead-Fixed Actual Applied Standard Applied Fall 2010 Mugan 3
Variance o o Differences between the costs according to the costing system used and actual amounts Actual amounts are reflected in the financial statements Fall 2010 Mugan 4
Absorption Costing Cost of Goods Manufactured Absorption costing allocates variable and fixed overhead costs to products. Cost of Goods Sold Fall 2010 Mugan Finished Goods Inventory Valuation 5
Product Costing Procedures in Organizations Process Costing Job-order Costing n Distinct jobs or batches of units. • Costs accumulated separately by job. • Typical job order cost applications: • Special-order printing • Building construction • Also used in service industry • Hospitals Fall 2010 Mugan • Law firms 6
Product Costing Procedures in Organizations Process Costing Job-order Costing Typical process cost applications: Fall 2010 n Petrochemical refinery n Paint manufacturer n Paper mill Mugan 7
Job-Order Costing Manufacturing overhead (MOVH) Applied (added) to Direct materials Direct labor Fall 2010 Tra ced dire to e ctly ach job tly c e ir d ed b c o a j r T ch a e to Mugan each job using a predetermined rate The Job 8
Job-Order Costing Direct materials and labor Raw materials could be used as direct or indirect product cost. Part of the job cost Materials Requisition and Time tickets An employee’s time may be either direct or indirect. Fall 2010 Indirect materials and labor Mugan Manufacturing Overhead Control Account 9
Job-Order Costing wages Other Actual OH Charges Material usage Fall 2010 Indirect Labor Manufacturing Applied Overhead Control Account Job-Order Cost Sheets Indirect Materials Mugan 10
Job-Order Cost Sheet Fall 2010 Mugan 11
Job-Order System Cost Flows Salaries and Wages Payable Direct Labor l. Indirect Labor l Mfg. Overhead Actual Applied l. Indirect l. Overhead Materials Applied to Work in Mugan l. Indirect Fall 2010 Labor Process Work-in-Process (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l If actual and applied manufacturing overhead are not equal, a year-end adjustment is required. 12
Job-Order System Cost Flows Work-in-Process (Job Cost Sheet) Direct Materials l. Direct Labor l. Overhead Applied l l Cost of Goods Mfd. Finished Goods l Cost of Goods Mfd. l Cost of Goods Sold l Fall 2010 Cost of Goods Sold Mugan 13
Allocation Process Define the cost objects. Accumulate indirect costs in cost pools. Choose an allocation base. Estimate an application rate. Allocate indirect costs based on use of the allocation base Fall 2010 Mugan 14
Over- and Underabsorbed Overhead Overabsorbed overhead Underabsorbed overhead Fall 2010 Mugan 15
Over- and Underabsorbed Overhead XYZ’s actual overhead for the year was TL 650, 000 and a total of 100, 000 direct labor hours were worked. Using XYZ’s predetermined overhead rate of TL 6. 00 per direct labor hour, how much overhead was applied to XYZ’s jobs during the year? SOLUTION Applied Overhead = POHR × Actual Direct Labor Hours Applied Overhead = TL 6. 00 per DLH × 100, 000 DLH = TL 600, 000 Fall 2010 Mugan 16
Accounting for Over- and Underabsorbed Overhead Three basic approaches Prorate among work-in-process, finished goods, and cost of goods sold. Adjust cost of goods sold. Recalculate the application rate and apply to all the jobs during the period. Fall 2010 Mugan 17
Accounting for Over- and Underabsorbed Overhead Fall 2010 Mugan 18
Allocation Base If overhead costs are accumulated in a single cost pool and allocated using a single allocation base. Single Overhead Cost Pool Application Rate Products Fall 2010 Mugan 19
Multiple Allocation Bases Many companies use Activity Based Costing where multiple cost pools and a different allocation base for each cost pool. Overhead Cost Pool A Application Rate A Fall 2010 Overhead Cost Pool B Overhead Cost Pool C Application Rate B Products Mugan Application Rate C 20
ABC and Multiple Allocation Bases o o Improves planning and control. Activity Based Costing (ABC) is one method of using multiple allocation bases. Fall 2010 Mugan 21
Multistage Allocation Processes Overhead Cost Pool 1 Overhead Cost Pool 2 Overhead Cost Pool 3 Overhead Cost Pool 4 Separate Application Rates Department A Department B Dept. Application Rates Fall 2010 Department C Dept. Application Rates Products Mugan 22
Process Costing Identical units of product are produced in a continuous flow through a series of manufacturing steps or processes. Costs are assigned to completed units transferred out of the process and to incomplete units remaining in the process. Fall 2010 Mugan 23
Process Costing Costs are accumulated for a period of time for products in work-in-process inventory. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. Fall 2010 Mugan 24
Equivalent Units Two one-half completed products are equivalent to one completed product. + = So, 8, 000 units 70 percent complete are equivalent to 5, 600 complete units. Fall 2010 Mugan 25
Equivalent Units Question For the current period, Ames started 15, 000 units and completed 10, 000 units, leaving 5, 000 units in process 30 percent complete. How many equivalent units of production did Ames have for the period? a. 10, 000 b. 11, 500 c. 13, 500 d. 15, 000 Fall 2010 Mugan 26
Equivalent Units Question For the current period, Ames started 15, 000 units and completed 10, 000 units, leaving 5, 000 units in process 30 percent complete. How many equivalent units of production did Ames have for the period? a. 10, 000 units + (5, 000 units ×. 30) b. 11, 500 = 11, 500 equivalent units c. 13, 500 d. 15, 000 Fall 2010 Mugan 27
Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit Fall 2010 = Costs for the period Equivalent units for the period Mugan 28
Equivalent Units Question Now assume that Ames incurred $27, 600 in production costs for the 11, 500 equivalent units. What was Ames’ average cost per equivalent unit for the period? a. $1. 84 b. $2. 40 c. $2. 76 d. $2. 90 Fall 2010 Mugan 29
Equivalent Units Question Now assume that Ames incurred $27, 600 in production costs for the 11, 500 equivalent units. What was Ames’ average cost per equivalent unit for the period? a. $1. 84 $27, 600 ÷ 11, 500 equivalent units b. $2. 40 = $2. 40 per equivalent unit c. $2. 76 d. $2. 90 Fall 2010 Mugan 30
Equivalent Units Question What portion of the $27, 600 in production costs was assigned to work-in-process inventory and what amount was assigned to completed units for the period? a. $0 and $27, 600 b. $7, 600 and $20, 000 c. $3, 600 and $24, 000 d. $12, 000 and $15, 600 Fall 2010 Mugan 31
Equivalent Units Question Work-in-process: What portion of the $27, 600 in production 1, 500 equivalent units @ $2. 40 = $3, 600 costs was assigned to work-in-process inventory and what amount was assigned Completed units: 10, 000 equivalent $2. 40 = $24, 000 to completed units forunits the @ period? a. $0 and $27, 600 b. $7, 600 and $20, 000 c. $3, 600 and $24, 000 d. $12, 000 and $15, 600 Fall 2010 Mugan 32
Equivalent Units When there are partially completed units in beginning inventory, work efforts during the period can be categorized as follows: Ê Work to complete beginning work-in-process Ë Work on units started and completed during the period Ì Work on units in ending work-in-process Fall 2010 Mugan 33
Equivalent Units - Example ACE started June with 250 partially completed units in work-in-process (30% complete). During June, ACE completed the units in work-in -process and started an additional 1, 200 units. There were 300 units in ending work-in-process on June 30. They were 40% complete. How many total equivalent units did ACE produce during June? Continue Fall 2010 Mugan 34
Equivalent Units - Example Since 30% of the work was done on these units in May, the remaining 70% of the work is done in June. Fall 2010 Mugan 35
Equivalent Units - Example Since 1, 200 units were started during June, and 300 of those units are still in work-in-process on June 30, 900 units were started and completed during June. Fall 2010 Mugan 36
Equivalent Units - Example 40% of the work was done on these units in June. 37 Mugan Fall 2010
- Slides: 37
