EMBA 5403 Costing Systems

8/12/2019 EMBA 5403 Costing Systems

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Costing Systems

EMBA 5403

Fall 2010


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Fall 2010 Mugan 2/37

Available costing systems

Absorption costing

Actual Costing

Normal Costing

Standard Costing

Variable costing

Actual Costing

Normal Costing

Standard Costing


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Costing systems

Costcomponent

Actual Normal Standard

material Actual Actual Standard

labor cost Actual Actual Standard

ManufacturingOverhead-

Variable

Actual Applied Standard

ManufacturingOverhead-Fixed

Actual Applied StandardApplied


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Variance

Differences between the costsaccording to the costing system usedand actual amounts

Actual amounts are reflected in thefinancial statements


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Product Costing Proceduresin Organizations

ProcessCosting

Job-orderCosting

Distinct jobs or batches of units.Costs accumulated separately by job.

Typical job order cost applications:Special-order printingBuilding construction

Also used in service industryHospitals

Law firms


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Product Costing Proceduresin Organizations

ProcessCosting

Job-orderCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill


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Job-Order Costing

The

Job

Directlabor

Direct

materials

Manufacturing

overhead (MOVH)

Applied (added) to

eachjob using a

predeterminedrate


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Job-Order Costing

Part of thejob cost

MaterialsRequisition and

Time tickets

Directmaterial

sand

labor

Indirectmaterialsand labor

ManufacturingOverheadControlAccount

Raw materialscould be used asdirect or indirect

product cost.

An employeestime may be eitherdirect or indirect.


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Job-Order Costing

wages

Job-OrderCost

Sheets

Materialusage

OtherActual OHCharges

Indirect

Materials

Indirect

Labor

Applied

Overhead

ManufacturingOverheadControl

Account


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Job-Order Cost Sheet

XYZ Job-Order Cost Sheet

Job Number A - 143 Date Initiated 17 September 2008

Date Completed

Department A4 Units Completed 2

Item Steel water tank

Direct Materials Direct Labor Manufacturing Overhead

Req. No. Amount Ticket Hours Amount Hours Rate Amount

MR 1041 TL 1200 20 8 TL 160 8 TL 6 TL 48

Cost Summary Units Shipped

Direct Materials TL 1200 Date Number Balance

Direct Labor TL 160

Manufacturing Overhead TL 48

Total Cost 1408

Unit Cost 704 11/17/08 1 1

17-Nov-08


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Job-Order System Cost Flows

DirectLabor

Mfg. Overhead

Salaries andWages Payable

Work-in-Process(Job Cost Sheet)

DirectMaterials

OverheadApplied to

Work inProcess

IndirectLabor

DirectLabor

OverheadApplied

IndirectLabor

IndirectMaterials

Actual Appl ied If actual and appliedmanufacturing overheadare not equal, a year-endadjustment is required.


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Job-Order System Cost Flows

Cost of

GoodsMfd.

Finished Goods

Cost ofGoods

Sold

Cost of

GoodsMfd.

Cost of Goods Sold

Cost of

GoodsSold

Work-in-Process(Job Cost Sheet)

DirectMaterials

DirectLabor

OverheadApplied


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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


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Over- and UnderabsorbedOverhead

Overabsorbed overhead

Underabsorbed overhead

Applied

Overhead

Costs

Actual

Overhead

Costs


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Over- and UnderabsorbedOverhead

SOLUTIONApplied Overhead = POHR Actual Direct Labor Hours

Applied Overhead = TL 6.00 per DLH 100,000 DLH = TL 600,000

XYZsactualoverhead for the year was TL650,000and a total of 100,000 direct labor hours were

worked.

Using XYZs predetermined overhead rate ofTL 6.00 per direct labor hour, how much overhead

was appliedto XYZs jobs during the year?


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Accounting for Over- andUnderabsorbed 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 theperiod.


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Accounting for Over- andUnderabsorbed Overhead

Alternative 1 Alternative 2

If Manufacturing Close to Cost

Overhead is . . . of Goods Sold Allocation

UNDERABSORBED INCREASE INCREASE

Cost of Goods Sold Work-in-Process

(Applied OH is less Finished Goods

than actual OH) Cost of Goods Sold

OVERABSORBED DECREASE DECREASE

Cost of Goods Sold Work-in-Process

(Applied OH is greater Finished Goods

than actual OH) Cost of Goods Sold


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Allocation Base

Products

ApplicationRate

If overheadcosts are

accumulated ina single costpool and

allocated usinga single

allocation base.

Single OverheadCost Pool


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Many companies use Activity Based Costing where multiple costpools and a different allocation base for each cost pool.

Products

Application

Rate A

OverheadCost Pool

A

OverheadCost Pool

B

OverheadCost Pool

C

Application

Rate B

Application

Rate C

Multiple Allocation Bases


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Improves planning and control.

Activity Based Costing (ABC)is onemethod of using multiple allocationbases.

ABC and Multiple AllocationBases


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Multistage Allocation Processes

OverheadCost Pool 1

OverheadCost Pool 2

OverheadCost Pool 3

OverheadCost Pool 4

Separate

Application Rates

Department A Department CDepartment B

Products

Dept. ApplicationRates

Dept. ApplicationRates


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Process Costing

Identical units of product areproduced

in a continuous flow through a seriesof manufacturing steps orprocesses.

Costs are assigned to completed units

transferred out of the process and toincompleteunits remaining in the

process.


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Costs are accumulated for a period oftimefor products in work-in-process

inventory.

Equivalent unitsis a conceptexpressing these partially completed

products as a smaller number of

fully completed products.

Process Costing


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Two one-half completed products areequivalent to one completed product.

+ =

So, 8,000 units 70 percent completeare equivalentto 5,600 complete units.

Equivalent Units


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For the current period, Ames started 15,000units 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

Equivalent Units Question


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For the current period, Ames started 15,000units 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

10,000 units + (5,000 units .30)= 11,500 equivalent units



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Calculating and UsingEquivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period


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Now assume that Ames incurred $27,600 inproduction costs for the 11,500 equivalent

units. What was Ames average cost perequivalent unit for the period?

a. $1.84

b. $2.40c. $2.76

d. $2.90



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Now assume that Ames incurred $27,600 inproduction costs for the 11,500 equivalent

units. What was Ames average cost perequivalent unit for the period?

a. $1.84

b. $2.40c. $2.76

d. $2.90

$27,600 11,500 equivalent units

= $2.40 per equivalent unit



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What portion of the $27,600 in productioncosts was assigned to work-in-process

inventory and what amount was assignedto completed units for the period?

a. $0 and $27,600

b. $7,600 and $20,000c. $3,600 and $24,000

d. $12,000 and $15,600



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What portion of the $27,600 in productioncosts was assigned to work-in-process

inventory and what amount was assignedto completed units for the period?

a. $0 and $27,600

b. $7,600 and $20,000c. $3,600 and $24,000

d. $12,000 and $15,600

Work-in-process:

1,500 equivalent units @ $2.40 = $3,600

Completed units:10,000 equivalent units @ $2.40 = $24,000



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Equivalent Units

When there are partially completed unitsin beginning inventory, work efforts

during the period can be categorized asfollows:

Work to complete beginning work-in-process

Work on units started and completed duringthe period

Work on units in ending work-in-process


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Equivalent Units - Example

ACE started June with 250 partially completedunits in work-in-process (30% complete).

During June, ACE completed the units in work-

in-process and started an additional 1,200units.

There were 300 units in ending work-in-processon June 30. They were 40% complete.

How many total equivalent unitsdid ACE produce during June?

Continue


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units

% of work

done this

period

Equivalent

units

Work to complete

beginning work-in-process250 70% 175


Since 30% of the work was done onthese units in May, the remaining 70% of

the work is done in June.


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units

% of work

done this

period

Equivalent

units

Work to complete


Work on units started and

completed900 100% 900


Since 1,200 units were started during June, and 300 ofthose units are still in work-in-process on June 30,900 units were started and completed during June.


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units

% of work

done this

period

Equivalent

units

Work to complete


Work on units started and

completed900 100% 900

Work on ending work-in-process 300 40% 120

Total equivalent units 1,195

40% of the work was done on these units in June.

EMBA 5403 Costing Systems

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