Welcome Back Atef Abuelaish 1 Welcome Back Time
Welcome Back Atef Abuelaish 1
Welcome Back Time for Any Question Atef Abuelaish 2
Chapter 03 PROCESS Costing and Atef Abuelaish 3
Chapter 03 PROCESS Costing and Analysis Atef Abuelaish 4
Process Operations Atef Abuelaish 5
Process Operations § Used for production of small, identical, lowcost items. § Mass produced in automated continuous production process. § Costs cannot be directly traced to each unit of product. C 1 Atef Abuelaish 6
Comparing Process and Job Order Costing Systems Atef Abuelaish 7
Comparing Job Order and Process Operations Job Order Systems Process Systems § Custom orders § Repetitive operations § Heterogeneous products § Homogeneous products § Low production volume § High product flexibility § Low to medium standardization A 1 Atef Abuelaish § High production volume § Low product flexibility § High standardization 8
Comparing Job Order and Process Operations A 1 Atef Abuelaish 9
NEED-TO-KNOW Complete the following table with either a yes or no regarding the attributes of job order and process costing systems. Use direct materials, direct labor, and overhead costs Use job cost sheets to accumulate costs Typically use several Work in Process Inventory accounts Yield a cost per unit of product A 1 Atef Abuelaish Job Order Process Yes Yes No No Yes Yes 10
Equivalent Units of Production Atef Abuelaish 11
Equivalent Units of Production (EUP) EUP must be calculated for the Work in Process account. C 2 Atef Abuelaish 12
EUP for Materials and Conversion Costs C 2 Atef Abuelaish 13
Weighted Average versus FIFO C 2 Atef Abuelaish 14
Process Costing Atef Abuelaish 15
Process Costing Illustration Gen. X uses a weighted average cost flow system with the following four steps: Determine physical flow of units. Compute equivalent units of production. Compute cost per equivalent unit. Assign and reconcile costs. C 3 Atef Abuelaish 16
Overview of Gen. X Company’s Process Operation C 3 Atef Abuelaish 17
Process Operations – Gen. X C 3 Atef Abuelaish 18
Step 1: Determine Physical Flow of Units C 3 Atef Abuelaish 19
Step 2: Compute Equivalent Units of Production C 3 Atef Abuelaish 20
NEED-TO-KNOW A department began the month with 8, 000 units in work in process inventory. These units were 100% complete with respect to direct materials and 40% complete with respect to conversion. During the month, the department started 56, 000 units and completed 58, 000 units. Ending work in process inventory includes 6, 000 units, 100% complete with respect to direct materials and 70% complete with respect to conversion. Use the weighted-average method of process costing to: 1. Compute the department’s equivalent units of production for the month for direct materials. 2. Compute the department’s equivalent units of production for the month for conversion. 64, 000 62, 200 Work in Process Inventory - Units Beginning Units Started Total Units 8, 000 56, 000 64, 000 Transferred out Ending Units 6, 000 Units Schedule (Physical Flow Reconciliation) Units in Beginning Inventory 8, 000 Units Started 56, 000 Total Units to Account For 64, 000 Transferred out Ending Inventory Total units C 3 Atef Abuelaish Physical Units 58, 000 64, 000 58, 000 Units completed and transferred out Units in Ending Inventory Total Units Accounted For 58, 000 64, 000 % Completion EUP Materials Conversion 100% 58, 000 100% 70% 6, 000 4, 200 64, 000 62, 200 21
Step 3: Compute Cost per Equivalent Unit C 3 Atef Abuelaish 22
Step 4: Assign and Reconcile Costs C 3 Atef Abuelaish 23
NEED-TO-KNOW A department began the month with conversion costs of $65, 000 in its beginning work in process inventory. During the month, the department incurred $55, 000 of conversion costs. Equivalent units of production for conversion for the month was 15, 000 units. The department completed and transferred 12, 000 units to the next department. 1. Compute the department’s cost per equivalent unit for conversion for the month. $8. 00 2. Compute the department’s conversion cost of units transferred to the next department for the month. $96, 000 Work in Process Inventory Beginning Inventory DL and OH 65, 000 55, 000 120, 000 Transferred out Ending Inventory Total units Cost per Equivalent Unit 96, 000 24, 000 EUP Conversion 12, 000 3, 000 15, 000 Cost per EUP $8. 00 Cumulative Costs Total EUP Allocated Cost $96, 000 24, 000 $120, 000 15, 000 $8. 00 per equivalent unit of conversion C 3 Atef Abuelaish 24
Process Cost Summary C 3 Atef Abuelaish 25
Cost Data For Gen. X C 3 Atef Abuelaish 26
Accounting for Materials Costs Atef Abuelaish 27
Accounting for Material Costs P 1 Atef Abuelaish 28
Accounting for Labor Costs Atef Abuelaish 29
Accounting for Labor Costs P 2 Atef Abuelaish 30
Accounting for Factory Overhead Atef Abuelaish 31
Accounting for Factory Overhead P 3 Atef Abuelaish 32
NEED-TO-KNOW Tower Mfg. estimates it will incur $200, 000 of total overhead costs during the year. Tower allocates overhead based on machine hours; it estimates it will use a total of 10, 000 machine hours during the year. During February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred actual overhead costs as follows during February: indirect materials, $1, 800; indirect labor, $5, 700; depreciation on factory equipment, $8, 000; factory utilities, $500. 1. Compute the company’s predetermined overhead rate for the year. Predetermined Overhead Rate = = Estimated Overhead Costs Estimated Activity Base $20 per machine hour Machine Hours Used Assembly Dept. $20 per machine hour 375 hours x Predetermined OH rate x $20 per hour $200, 000 10, 000 machine hours = OH Applied = $7, 500 OH applied Factory Overhead Actual OH Incurred OH Applied to Production P 3 Atef Abuelaish 33
NEED-TO-KNOW Tower Mfg. estimates it will incur $200, 000 of total overhead costs during the year. Tower allocates overhead based on machine hours; it estimates it will use a total of 10, 000 machine hours during the year. During February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred actual overhead costs as follows during February: indirect materials, $1, 800; indirect labor, $5, 700; depreciation on factory equipment, $8, 000; factory utilities, $500. 2. Prepare journal entries to record (a) overhead applied for the assembly department for the month and (b) actual overhead costs used during the month. a) b) General Journal Work in Process Inventory Factory Overhead (375 machine hours x $20 per MH) Factory Overhead Raw Materials Inventory Factory Wages Payable Accumulated Depreciation - Factory Equipment Utilities Payable Debit 7, 500 Credit 7, 500 16, 000 1, 800 5, 700 8, 000 500 Factory Overhead Actual OH Incurred Ind. Materials Ind. Labor Fact. Deprec. Fact. Utilities OH Applied to Production 1, 800 5, 700 8, 000 500 16, 000 7, 500 Underapplied P 3 Atef Abuelaish 8, 500 34
Accounting for Transfers across Departments Atef Abuelaish 35
Accounting for Transfers P 4 Atef Abuelaish 36
Trends in Process Operations Process design Customer orientation Automation Services P 4 Just-intime production Continuous Processing Atef Abuelaish 37
Chapter 04 Activity- Based Costing and Atef Abuelaish 38
Chapter 04 Activity-Based Costing and Analysis Atef Abuelaish 39
Distinguish between the plantwide overhead rate method, the departmental overhead rate method, and the Activity-Based Costing method. Atef Abuelaish 40
Assigning Overhead Costs Indirect Materials Direct Indirect Factory Allocate Overhead Labor C 1 Direct Goods in Process Finished Goods Cost of Goods Sold
Assigning Overhead Costs Overhead can be assigned to production in one of three ways: Single plant. Departmental wide overhead rates rate C 1 Activity-based - costing
Allocate overhead costs to products using the plantwide overhead rate method. Atef Abuelaish 43
Plantwide Overhead Rate Method (Exhibit 4. 2) Indirect Costs Overhead Cost Allocation Base Single Plantwide Overhead Rate Cost Objects P 1 Product 2 Product 3
Plantwide Overhead Rate Method Illustration (exhibits 4. 3 & 4. 4) P 1
Plantwide Overhead Rate Method Illustration Plantwide Total budgeted overhead costs overhead = Total budgeted DLH rate P 1
Plantwide Overhead Rate Method Illustration Plantwide overhead = rate = $4, 800, 000 100, 000 DLH $48/DLH Overhead allocated to each unit produced = $48 x DLH per unit P 1
Plantwide Overhead Rate Method Illustration P 1
Allocate overhead costs to products using the departmental overhead rate method. Atef Abuelaish 49
Departmental Overhead Rate Method (exhibit 4. 5) Overhead Cost Department A Overhead Rate P 2 Product 1 Department B Overhead Rate Product 2 Product 3 Indirect Costs Cost Pools Cost Allocation Base Cost Objects
Departmental Overhead Rate Method: First Step Overhead Cost $4, 800, 000 Machining Dept. $4, 200, 000 P 2 Assembly Dept. $600, 000
Departmental Overhead Rate Method: Second Step Machining Dept. Overhead Rate based on machine hours (MH) Product 1 P 2 Assembly Dept. Overhead Rate based on direct labor hours (DLH) Product 2 Product 3
Departmental Overhead Rate Method: Second Step P 2
Departmental Overhead Rate Method: Third Step (Exhibit 4. 6) Departmental Overhead = Rate P 2 Total budgeted departmental overhead costs Total amount of departmental allocation base
Departmental Overhead Rate Method: Third Step Machining Department = Overhead Rate Assembly Department = Overhead Rate P 2 $4, 200, 000 = $60/MH 70, 000 MH $600, 000 30, 000 DLH = $20/DLH
Departmental Overhead Rate Method: Fourth Step P 2
NEED-TO-KNOW A manufacturer reports the following budgeted data for its two production departments. Manufacturing overhead costs Machine hours to be used (MH) Direct labor hours to be used (DLH) Machining $600, 000 20, 000 Assembly $300, 000 0 5, 000 1. What is the company’s single plantwide overhead rate based on direct labor hours? Total Plant Overhead Costs Total Direct Labor Hours $900, 000 25, 000 DLH $36 per DLH 2. What are the company’s departmental overhead rates if the machining department assigns overhead based on machine hours and the assembly department assigns overhead based on direct labor hours? Overhead Costs - Machining Dept. Machine Hours - Machining Dept. $600, 000 20, 000 MH $30 per MH Overhead Costs - Assembly Dept. Direct Labor Hours - Assembly Dept. $300, 000 5, 000 DLH $60 per DLH 3. Using the departmental overhead rates from part 2, how much overhead should be assigned to a job that uses 16 machine hours in the machining department and 5 direct labor hours in the assembly department? Overhead Costs - Machining Dept. Overhead Costs - Assembly Dept. Total Overhead Cost assigned to Job P 2 Atef Abuelaish 16 MHs x $30 per MH = 5 DLHs x $60 per DLH = $480 300 $780 57
Identify and assess advantages and disadvantages of the plantwide overhead and departmental overhead rate methods. Atef Abuelaish 58
Plantwide Overhead Rate Method Advantages and Disadvantages Advantages • Information is readily available • Easy to implement • Consistent with GAAP and can be used for external reporting needs A 1 Atef Abuelaish Disadvantages • Overhead costs may not bear any relationship with direct labor hours • All products may not use overhead costs in the same proportion 59
Departmental Overhead Rate Method Advantages and Disadvantages Advantages • More accurate overhead allocations • More refined than the plantwide overhead rate method A 1 Disadvantages • Can distort product costs • Assumes that products are similar in volume, complexity, batch size • Assumes that departmental overhead costs are proportional to the allocation base
Explain cost flows for Activity-Based Costing. Atef Abuelaish 61
Cost Flows Under Activity-Based Costing Method (Exhibit 4. 9) Overhead Cost Activity Cost Pool X Activity Overhead rate Product 1 C 2 Activity Cost Pool Y Activity Overhead rate Product 2 Indirect Costs Activity Cost Pool Z Activity Overhead rate Product 3 Cost Pools Cost Allocation Base Cost Objects
Allocate overhead costs to products using activity-based costing. Atef Abuelaish 63
Applying Activity-Based Costing 4 STEPS: 1. Identify activities and the costs they cause. 2. Trace overhead costs to cost pools. 3. Determine activity rates. 4. Assign overhead costs to cost objects (products). P 3
Step One: Identify Activities and the Costs They Cause Machine setup Machine repair Factory maintenance P 3 Engineer salaries Assembly line power Heating and lighting
Step One: Identify Activities and the Costs They Cause P 3
Step Two: Trace Overhead Costs to Cost Pools Overhead Cost Activity Cost Pool (Craftsmanship) P 3 Activity Cost Pool (Setup) Activity Cost Pool (Design Modification) Activity Cost Pool (Plant Services)
Step Two: Trace Overhead Costs to Cost Pools P 3
Step Three: Determine Activity Rates Activity Cost Pool (Setup) (Craftsmanship) Activity Overhead rate ? Activity Overhead Rate ? Activity Cost Pool (Design Modification) Activity Overhead rate ? Activity Cost Pool (Plant Services) Activity Overhead rate ? Step 3 is to compute the activity rates used to assign overhead costs to final cost objects such as products. P 3
Step Three: Determine Activity Rates Proper determination of activity rates depends on: Proper identification of the factor that drives the cost P 3 and Proper measures of activities
Step Three: Determine Activity Rates Cost Pool Activity Rate = Overhead costs assigned to pool Expected activity level For example: Craftsmanship cost pool activity rate= $600, 000 / 30, 000 DLH = $20 per DLH P 3
Step Three: Determine Activity Rates P 3 =
Step Four: Assign Overhead Costs to Cost Objects Activity Overhead rate Product 1 Activity Overhead rate Product 2 Activity Overhead rate Product 3 Step 4 is to assign overhead costs in each activity cost pool to final cost objects using activity rates. P 3
Step Four: Assign Overhead Costs to Cost Objects • To illustrate, the overhead costs in the craftsmanship pool are allocated to standard gokarts as follows: Overhead allocated from craftsmanship pool to standard go-kart = Activities consumed X Activity rate 25, 000 DLH x $20 per DLH = $500, 000 P 3
Step Four: Assign Overhead Costs to Cost Objects P 3
Step Four: Assign Overhead Costs to Cost Objects P 3
Comparison of Overhead Allocations by Method (Exhibit 4. 15) P 3
Identify and assess advantages and disadvantages of Activity. Based Costing. Atef Abuelaish 78
Activity-Based Costing Advantages and Disadvantages Advantages: • Advantages (Continued) • More accurate overhead cost allocation • Costs of Quality • More effective overhead cost control Disadvantages: • Focus on relevant factors • Costs to implement Not and maintain accepta • Better management of activities A 2 • Uncertainty with decisions remains ble under GAAP
NEED-TO-KNOW A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6, 000 Basic snowmobiles and 2, 000 Deluxe snowmobiles. Activity Cost Pool Machine setup Materials handling Machine depreciation Activity Cost Driver Cost Assigned to Pool Basic Number of setups $150, 000 200 setups Number of parts 250, 000 10 parts per unit Machine hours (MH) 720, 000 1 MH per unit $1, 120, 000 Deluxe 300 setups 20 parts per unit 1. 5 MH per unit 1. Compute overhead activity rates for each cost pool using ABC. Machine setup costs Number of setups (200 + 300) $150, 000 500 setups $300. 00 per setup Materials handling costs Number of parts (6, 000 x 10) + (2, 000 x 20) $250, 000 100, 000 parts $2. 50 per part Depreciation cost Number of MHs (6, 000 x 1) + (2, 000 x 1. 5) $720, 000 9, 000 MHs $80. 00 per MH 2. Compute the total amount of overhead cost to be allocated to each of the company’s product lines using ABC. Activity Cost Pool Machine setup Materials handling Machine depreciation Totals A 2 Atef Abuelaish Activity Pool Rate $300 per setup $2. 50 per part $80 per MH Basic Deluxe 200 setups x $300 $60, 000 300 setups x $300 $90, 000 60, 000 parts x $2. 50 150, 000 40, 000 parts x $2. 50 100, 000 6, 000 MHs x $80 480, 000 3, 000 MHs x $80 240, 000 $690, 000 $430, 000 80
NEED-TO-KNOW A manufacturer makes two types of snowmobiles, Basic and Deluxe, and reports the following data to be used in applying activity-based costing. The company budgets production of 6, 000 Basic snowmobiles and 2, 000 Deluxe snowmobiles. 3. Compute the overhead cost per unit for each product line using ABC. Activity Cost Pool Machine setup Materials handling Machine depreciation Totals A 2 Atef Abuelaish Activity Pool Rate $300 per setup $2. 50 per part $80 per MH Basic Deluxe 200 setups x $300 $60, 000 300 setups x $300 $90, 000 60, 000 parts x $2. 50 150, 000 40, 000 parts x $2. 50 100, 000 6, 000 MHs x $80 480, 000 3, 000 MHs x $80 240, 000 $690, 000 $430, 000 Units produced 6, 000 2, 000 Cost per unit $115/unit $215/unit 81
Describe the four types of activities that cause overhead costs. Atef Abuelaish 82
Four types of activities that cause overhead costs Unit-level Batch-level Product-level C 3 Atef Abuelaish Facility-level 83
Levels of Activities 1) Unit-level activities are performed on each product unit; for example, providing electricity to power machinery in the machining department is needed to produce each unit of product. C 3 Atef Abuelaish 84
Levels of Activities 2) Batch-level activities are performed only on each batch or group of units. C 3 Atef Abuelaish 85
Levels of Activities 3) Product-level activities are performed on each product line and are not affected by either numbers of units or batches. C 3 Atef Abuelaish 86
Levels of Activities 4) Facility-level activities are performed to sustain facility capacity as a whole and are not caused by any specific product. C 3 Atef Abuelaish 87
Homework assignment Ø Using Connect – 8 Questions for 60 Points; Chapter 3. 3 Ø Using Connect – 7 Questions for 60 Points; Chapter 4. 4 Ø Complete EXAM # 1 on Connect – 3 parts for 60 Points, at Home; from 7/17 to 7/18 at 11: 59 PM. Ø Prepare chapters: v 5 “Cost Behavior and Cost-Value-Profit Analysis. ” v 6 “Variable Costing and Analysis. ” Happiness is having all homework up to date Atef Abuelaish 88
Thank you and See You On Wednesday at the Same Time, Take Care Atef Abuelaish 89
- Slides: 89