Fundamentals of Product and Service Costing Chapter 6 Copyright © 2011 by The McGraw-Hill...
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Fundamentals of Product and Service Costing Chapter 6 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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Transcript of Fundamentals of Product and Service Costing Chapter 6 Copyright © 2011 by The McGraw-Hill...
Fundamentals of Productand Service Costing
Chapter 6
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Cost Management SystemsL.O. 1 Explain the fundamental themes underlying
the design of cost systems.
• The objective of the cost management systemis to provide information about costs relevantfor decision making.
• The cost system accumulates and reports costsabout processes, products, and services.
6 - 2
Reasons to Calculate Productor Service Costs
• For decision making
• For deciding what to sell
• For setting prices
• For knowing the cost of goods sold
• For knowing the cost of inventory
LO1
6 - 3
Cost Allocation and Product CostingL.O. 2 Explain how cost allocation is used
in a cost management system.
Basic Cost Flow Diagram
Directmaterials
Directlabor
Manufacturingoverhead
Alpha Beta
Costpools
Costobjects
Costallocation
rule
Indirect
(allocated by direct
labor cost)Direct
6 - 4
Basic Cost Flow Model
L.O. 3 Explain how a basic product costing system works.
• How costs and units move through inventories:
• This is true for the following accounts:– Raw Materials (RM)– Work-in-Process (WIP)– Finished Goods (FG)
6 - 5
Costing with No Work-in-Process Inventories
• Baxter Paint begins production on April 1.
• It starts and completes production of 100,000gallons of paint in April and has no endingwork-in-process inventory.
Materials $ 400,000Labor 100,000Manufacturing overhead 500,000
Total $1,000,000
Cost of resources used in April:
LO3
6 - 6
Costing with No Work-in-Process Inventories
• What are the costs at the end of the period?
• $1,000,000 was added to work-in-processand then transferred out to finished goods.
• Since Baxter produced 100,000 gallons ofpaint, then the cost per gallon of paint is $10.
LO3
6 - 7
Costing with Work-in-Process Inventories
Beginning inventory -0-Started in May 110,000
Total 110,000Ending WIP (50% complete) 20,000Transferred out 90,000
Production for Baxter Paint for May follows (gallons):
LO3
6 - 8
Costing with Work-in-Process Inventories
FG
LO3
6 - 9
Costing with Work-in-Process Inventories
• How do we cost Baxter’s 20,000 gallons of paint thatare only half finished?
• 20,000 gallons half finished is equivalent to 10,000gallons finished.
• 90,000 gallons transferred out plus 10,000 equivalent gallonsof finished paint equals 100,000 equivalent gallons of paint.
Gallons of paint transferred out 90,000Equivalent gallons of finished paint 10,000Total equivalent gallons of paint 100,000
LO3
6 - 10
Costing with Work-in-Process Inventories
Direct material + Direct labor + Overhead($990,000)
Finished goodsinventory$891,000
Work-in-processinventory$99,000
Equivalent gallons90,000gallons(90%)
10,000gallons(10%)
LO3
6 - 11
Predetermined Overhead Rates
L.O. 4 Understand how overhead cost is allocated to products.
• Indirect costs are allocated using a predeterminedoverhead rate (POHR).
• POHR is the cost per unit of the allocation base usedto charge overhead to products.
POHR = $ ÷ Base
6 - 12
Multiple Allocation Basesand Two-Stage Systems
L.O. 5 Explain the operation of a two-stage allocationsystem for product costing.
• We can use two or more allocation bases to allocatemanufacturing overhead to products.
6 - 13
Multiple Allocation Basesand Two-Stage Systems
Manufacturing overhead
Machine-relatedcosts
Direct labor-relatedcosts
C-27s C-20s
Costpool
Costobjects
Costallocation
rules
Indirect costs Indirect costs
(allocated in proportionto machine hours)
(allocated in proportionto direct labor costs)
Secondstage
First stage
LO5
6 - 14
Multiple Allocation Basesand Two-Stage Systems
Costpool
Cost allocationrule
Intermediatecost pools
Overhead$180,000
Labor-related$108,000
Machine-related$72,000
Direct laborcosts
Machinehours
LO5
6 - 15
Product Costing Systems
L.O. 6 Describe the three basic types of product costingsystems: job order, process, and operations.
• Job costing:– An accounting system that traces costs to individual units
or to specific jobs, contracts, or batches of goods.(custom homes, movies, services)
• Process costing:– An accounting system used when identical units are
produced through a series of uniform production steps.(cornflakes, facial tissues, paint)
6 - 16
End of Chapter 6
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
