TwoStage Cost Systems Agenda Traditional cost systems Twostage

  • Slides: 21
Download presentation
Two-Stage Cost Systems

Two-Stage Cost Systems

Agenda • Traditional cost systems • Two-stage systems • Examples – Detroit Lofts –

Agenda • Traditional cost systems • Two-stage systems • Examples – Detroit Lofts – Ross Parts • Takeaway

Mapping Resources to Products • Product costs arise from products’ use of resources –

Mapping Resources to Products • Product costs arise from products’ use of resources – Dedicated Resources – Shared Resources • More accurate costing systems – Better track the products’ use of shared resources • Design of more accurate costing systems – 2 stage-costing systems

Traditional Cost Systems Materials Direct Labor Overhead Direct % Labor Cost Doors Mufflers Manifolds

Traditional Cost Systems Materials Direct Labor Overhead Direct % Labor Cost Doors Mufflers Manifolds

Two Stage Cost Systems • Traditional Systems – Assumes that all shared resources exist

Two Stage Cost Systems • Traditional Systems – Assumes that all shared resources exist to support direct labor • Modern Manufacturing and Service Technologies – Shared resources could include • Machines and Technical Personnel • Product and Service Designers • Two Stage Costing Systems – A more sophisticated method of mapping shared resources to individual products

Example: Detroit Lofts, Inc. • A small loft at 3930 Cass Ave. in Detroit

Example: Detroit Lofts, Inc. • A small loft at 3930 Cass Ave. in Detroit – Originally a VFW bar – Now houses two office spaces A and B of 600 sq. ft. and 400 sq. ft. respectively – Each office space is used by one person • The joint utility bill is $800, of which $500 is for heat, and $300 is for water – Electricity and Comcast are billed individually • What is the utility cost of each office space?

Traditional System • Use square footage as the allocation basis • Both offices together

Traditional System • Use square footage as the allocation basis • Both offices together have 1, 000 sq. ft. – So each sq. ft. costs $800 ÷ 1000 = $0. 80 • Office costs – A: $0. 80 x 600 = $480 – B: $0. 80 x 400 = $320 • Do the costs properly reflect resource use by the two offices?

Two-Stage Costing System • One approach is to adopt a “two-stage” cost system –

Two-Stage Costing System • One approach is to adopt a “two-stage” cost system – First stage • Split overhead into the two departments (heat and water) – Second stage • Calculate separate overhead rates using different allocation bases (cost drivers) Note: use allocation base levels that combine all offices’ usage • Calculate individual office costs using the new rates

Two-Stage Cost System Electricity Direct Comcast Internet Overhead Direct Heat Square feet Office A

Two-Stage Cost System Electricity Direct Comcast Internet Overhead Direct Heat Square feet Office A Office B Water Headcount

Detroit Lofts: Resource Usage • First stage – Total utilities bill is $800 =

Detroit Lofts: Resource Usage • First stage – Total utilities bill is $800 = $500 (heat) + $300 (water) • Second stage – Heat allocated by square footage (allocation base) • Heat rate = $500 ÷ (600 + 400) = $0. 50 per sq. ft. – Water allocated by headcount (allocation base) • Water rate = $300 ÷ (1 + 1) = $150 person • Office A cost = $0. 50 x 600 + $150 = $450 (down from $480) • Office B cost = $0. 50 x 400 + $150 = $350 (up from $320) • A better reflection of the offices’ true usage of shared resources

Agenda • Traditional cost systems • Two-stage systems • Examples – Detroit Lofts –

Agenda • Traditional cost systems • Two-stage systems • Examples – Detroit Lofts – Ross Parts • Takeaway

Another Example: Ross Parts • Ross Parts produces two products through two production departments

Another Example: Ross Parts • Ross Parts produces two products through two production departments (machining and assembly) – Product 1 (“Cutting Edge”) is a new product that requires many hours in Machining – Product 2 (“Old Faithful”) is a standard product that requires few hours in Machining – Both products require the same time in Assembly

Ross Parts • Product and cost data Old Faithful Direct materials cost Cutting Edge

Ross Parts • Product and cost data Old Faithful Direct materials cost Cutting Edge $30 Machine hours – Machining 1 2 Labor hours – Machining 2 2 Machine hours – Assembly 0 0 Labor hours – Assembly 2 2 1, 000 2, 000 Estimated production (units) Direct labor rate – All depts. $25/hour Overhead cost – Machining $120, 000 Overhead cost – Assembly $30, 000

Ross Parts • Ross Parts uses a traditional cost system and allocates all overhead

Ross Parts • Ross Parts uses a traditional cost system and allocates all overhead costs using direct labor costs • What is the reported cost for the two products?

Ross Parts • Overhead rate: Total overhead cost ($120, 000 + $30, 000) =

Ross Parts • Overhead rate: Total overhead cost ($120, 000 + $30, 000) = $150, 000 Total labor cost (1, 000 x 4 + 2, 000 x 4) x $25 = $300, 000 Overhead rate ($150, 000 ÷ $300, 000) = 50% • Product costs (per unit): Old Faithful Cutting Edge Direct materials $30 Direct labor (@$25) 100 50 50 $180 Overhead (@50% of labor cost) Product cost

Do the Reported Costs Make Sense? • Unit costs are the same for each

Do the Reported Costs Make Sense? • Unit costs are the same for each product • Cutting Edge “uses” twice as much of the Machining Department resources – Old Faithful requires 1 machine hour per unit – Cutting Edge requires 2 machine hours per unit • How can we better reflect the physical resource usage?

Ross Parts Cost System Materials Direct Labor Overhead Direct 50 % Labor Cost Old

Ross Parts Cost System Materials Direct Labor Overhead Direct 50 % Labor Cost Old Faithful: Materials $30 Labor $100 Overhead $50 Cutting Edge: Materials $30 Labor $100 Overhead $50

Two-Stage Cost System Materials Direct Overhead Labor Direct Machining Machine Hours Old Faithful Cutting

Two-Stage Cost System Materials Direct Overhead Labor Direct Machining Machine Hours Old Faithful Cutting Edge Assembly % Labor Cost

Two-Stage System • Overhead rates: Machining Department Total overhead cost Total machine hours Overhead

Two-Stage System • Overhead rates: Machining Department Total overhead cost Total machine hours Overhead rate $120, 000 (1, 000 x 1 + 2, 000 x 2) = ($120, 000 ÷ 5, 000 hours) = 5, 000 $24/machine-hour Assembly Department Total overhead cost Total labor cost Overhead rate $30, 000 (1, 000 x 2 + 2, 000 x 2) x $25 = ($30, 000 ÷ $150, 000) = $150, 000 20%

Two-Stage System • Product costs Old Faithful Cutting Edge Direct materials $30 Direct labor

Two-Stage System • Product costs Old Faithful Cutting Edge Direct materials $30 Direct labor – Machining 50 50 Direct labor – Assembly 50 50 Machining (@$24/machine-hour) 24 48 Assembly (@20% Assembly labor) 10 10 $164 $188 Overhead Total

Takeaway • Traditional cost systems are an “easy” and intuitive approach to cost allocation

Takeaway • Traditional cost systems are an “easy” and intuitive approach to cost allocation – Usually adequate for financial reporting – However, traditional systems assume all shared resources exist to support the same input factor (e. g. , direct labor) • Two-stage systems – More complex – Offer a better mapping scheme from shared resources to products

Literature Genres Traditional Traditional Often a traditional storyLiterature Genres Traditional Traditional Often a traditional story
Literature Genres Traditional Traditional Often a traditional storyLiterature Genres Traditional Traditional Often a traditional story
SPANISH TRADITIONAL COSTUMES SPANISH TRADITIONAL COSTUMES The traditionalSPANISH TRADITIONAL COSTUMES SPANISH TRADITIONAL COSTUMES The traditional
An Introduction to Traditional Tales Traditional Tales TraditionalAn Introduction to Traditional Tales Traditional Tales Traditional
Traditional Chinese Festival Traditional Chinese Festival Chinese traditionalTraditional Chinese Festival Traditional Chinese Festival Chinese traditional
Traditional Vs Authentic Assessment Traditional Assessment Definition TraditionalTraditional Vs Authentic Assessment Traditional Assessment Definition Traditional
Maintenance Cost Maintenance Cost Total Cost Maintenance costMaintenance Cost Maintenance Cost Total Cost Maintenance cost
COST MANAGEMENT BASICS Cost Controlling Agenda Cost ControllingCOST MANAGEMENT BASICS Cost Controlling Agenda Cost Controlling
COST MANAGEMENT BASICS COST ANALYSIS Agenda Cost EstimatingCOST MANAGEMENT BASICS COST ANALYSIS Agenda Cost Estimating
Economic Systems Traditional Command Market Traditional u AdvantagesEconomic Systems Traditional Command Market Traditional u Advantages
TYPES OF ECONOMIC SYSTEMS Traditional Economic Traditional economyTYPES OF ECONOMIC SYSTEMS Traditional Economic Traditional economy
THREE ECONOMIC SYSTEMS Traditional Command Market TRADITIONAL ECONOMYTHREE ECONOMIC SYSTEMS Traditional Command Market TRADITIONAL ECONOMY
Economic Systems Traditional Command Market Traditional 1 WhatEconomic Systems Traditional Command Market Traditional 1 What
Economic Systems Traditional Economy In traditional economy skillsEconomic Systems Traditional Economy In traditional economy skills
Chapter 4 ActivityBased Costing Systems Traditional Costing TraditionalChapter 4 ActivityBased Costing Systems Traditional Costing Traditional
London Traditional break fast Its a traditional dishLondon Traditional break fast Its a traditional dish
Chinese Landscape Painting Watercolor Traditional Painting Traditional ChineseChinese Landscape Painting Watercolor Traditional Painting Traditional Chinese
Traditional Bento Boxes Bento Box Traditional bento boxTraditional Bento Boxes Bento Box Traditional bento box
Department of Traditional Affairs Presentation on Traditional andDepartment of Traditional Affairs Presentation on Traditional and
Intellectual Property and Traditional Knowledge Wendland Director TraditionalIntellectual Property and Traditional Knowledge Wendland Director Traditional