Principles of Accounting/ Financial and Managerial Accounting Chapter 17

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Accounting Systems For Measuring Costs

Chapter

17


Planning andcontrol

functions.

Providingproducts or services tocustomers.

Assessing theefficiency andeffectivenessof operations.

Determining unitmanufacturing

costs.

Cost accounting systems provide information supporting decisions making the business successful.

Cost Accounting Systems


Discloseinventoriesand cost ofgoods sold.

Track resourcesconsumed byproducts and

services.

Manage activitiesthat consume

resources.

Evaluate andreward

employeeperformance.

Cost accounting systems are the proceduresand techniques used by management.

Cost Accounting Systems


ProcessCosting

Job OrderCosting

Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

Basic Cost Accounting Procedures


Typical job order cost applications:

Special-order printing Building construction

Also used in service industry Hospitals Law firms


ProcessCosting

Job OrderCosting


Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.


ProcessCosting

Job OrderCosting


Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill


ProcessCosting

Job OrderCosting


THE JOB

Directmaterials

Direct labor

Traced directly to each job

Traced directly

to each job

Manufacturingoverhead (OH)

Applied to eachjob using a

predeterminedrate (POHR)

Job Order Costing


The primary document for tracking the costs

associated with a given job is the job

cost sheet.

Let’s investigate

Job Order Costing


The Job Cost SheetRoseCo Job Cost Sheet

Job Number A - 143 Date Initiated 3-4-X9Date Completed

Department B3 Units CompletedItem Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate Amount

Cost Summary Units ShippedDirect Materials Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost





Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect LaborManufacturing OverheadTotal CostUnit Cost





Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing OverheadTotal CostUnit Cost

Accumulate direct labor

costs by means of a

work record, such as a time ticket, for each

employee.



Job Number A - 143 Date Initiated 3-4-X9Date Completed 3-5-X9

Department B3 Units Completed 2Item Wooden cargo crate

Direct Materials Direct Labor Manufacturing OverheadReq. No. Amount Ticket Hours Amount Hours Rate AmountX7-6890 116$ 36 8 88$ 8 4$ 32$

Cost Summary Units ShippedDirect Materials 116$ Date Number BalanceDirect Labor 88$ Manufacturing Overhead 32$ Total Cost 236$ Unit Cost 118$

Apply manufacturing overhead to jobs using a predetermined overhead rate (POHR) based on

direct labor hours (DLH).


Let’s summarize the document flow we have

been discussing in a job order

costing system.

Job Order CostingDocument Flow Summary


Materials Ledger CardsMaterials

Ledger CardsMaterials Ledger CardsMaterialsRequisition

Direct materials

The materials requisition

indicates the cost of direct

materialto charge to

jobsand the cost of

indirect material to charge to overhead.

Indirect materials

Job Cost SheetsJob Cost SheetsJob Cost SheetsJob Cost Sheets

Manufacturing Overhead Account



Employee time tickets indicate

the cost of direct labor

to charge tojobs

and the cost of indirect labor

to charge to overhead.

Job Cost Sheets


Job Cost SheetsJob Cost SheetsJob Cost Sheets

Direct Labor

Indirect Labor

Employee Time TicketEmployee Time

TicketEmployee Time TicketEmployee Time

Ticket



EmployeeTime Ticket

MaterialsRequisition

OtherActual OHCharges

IndirectMaterial

IndirectLabor

OverheadApplied

withPOHR


Job Cost Sheets



Let’s examine the cost flows in a

job order costing system. We will use T-accounts and start with

materials.

Flow of Costs in Job CostingFlow of Costs in Job Costing


•MaterialPurchases

•Direct Material

•Direct Material

Mfg. Overhead•Indirect Material

Work in Process(Job Cost Sheet)

•Indirect Material

Materials Inventory

Flow of Costs in Job Costing


Next let’s add labor costs and

applied manufacturing overhead to the job order cost flows. Are you

with me?



•Direct Labor

Mfg. Overhead

Work in Process(Job Cost Sheet)

•Indirect Material

•Direct Material

•OverheadApplied to

Work inProcess

•IndirectLabor

•Direct Labor

•Overhead Applied

•IndirectLabor

the difference is closed to cost of goods sold.

When Actual Applied factory factoryoverhead overhead

=/

Labor



If Manufacturing Effect of Closing toOverhead is . . . Cost of Goods Sold

UNDERAPPLIED INCREASE(Applied OH is less Cost of Goods Sold

than actual OH)

OVERAPPLIED DECREASE(Applied OH is greater Cost of Goods Sold

than actual OH)

Closing Under- or OverappliedManufacturing Overhead


Now let’s complete the

goods and sell them. Still with

me?



•Cost ofGoodsMfd.

Finished Goods

•Cost ofGoodsSold

•Cost ofGoodsMfd.

Cost of Goods Sold

•Cost ofGoodsSold

Work in Process(Job Cost Sheet)•Direct

Material•Direct Labor

•Overhead Applied



Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Process Costing


Job Costing

Custom orders

Heterogeneous products

Low production volume

High product flexibility

Low to medium standardization

Process Costing

Repetitive production

Homogeneous products

High production volume

Low product flexibility

High standardization

Comparing Job and Process Costing


DirectMaterials

FinishedGoods

Cost per unit for

each job

DirectLabor

FactoryOverhead

Jobs

The Work in Process account consists of

individual jobs in job costing.

Job and Process Costing


DirectMaterials

FinishedGoods

DirectLabor

FactoryOverhead

Processes

The Work in Process account consists of specific processes in

process costing.

Cost per unit

processed

Job and Process Costing


Same objective: to determine the cost of products

Same inventory accounts: raw materials, work in process, and finished goods

Same overhead assignment method:predetermined rate times actual activity

Job and ProcessCosting Similarities


Work in ProcessAssembly

Labor

Materials

Indi

rect

Indi

rect

FinishedGoods

FactoryOverhead

Direct

Direct

Deliveredto

Customers

AppliedOverhead

Work in Process

Packaging

Work in Process Accounts — The Key to Process Costing


Costs are accumulated for a period of time by process or department.

Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.

Computing Unit Cost


Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.

If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.

Computing Unit Cost

Costs are accumulated for a period of time by process or department.


Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Two one-half full pitchers are equivalent to one full pitcher.

+ =

Computing and Using Equivalent Units of Production

1


Question For the current period, PencilCo 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 PencilCo have for the period?

a. 10,000b. 11,500c. 1,500d. 15,000


For the current period, PencilCo 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 PencilCo have for the period?

a. 10,000b. 11,500c. 1,500d. 15,000

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

Question


Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost Per Equivalent Unit


Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84b. $2.40c. $2.76d. $2.90

Question


Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84b. $2.40c. $2.76d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Question


Equivalent units may be different for material and labor

and overhead at different stages of a process.

At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only

25% complete.

Stage 1

40% ofMaterial

25% ofLabor andOverhead

Equivalent Units


Stage 2


60% ofMaterial

Stage 1

40% ofMaterial


+

+

=

=

100%

50%

Equivalent Units


Stage 3


The process is now complete.

Stage 2


60% ofMaterial

Stage 1

40% ofMaterial


Equivalent Units


Owl Inc uses FIFO process costing in its Fabrication

Department where a product called Strata is made.

Process Costing andEquivalent Units



Owl Inc Fabrication Department Data For April 2002Beginning Inventory: Units of product 30,000

Percentage of completion - direct material 100%Percentage of completion - direct labor 40%Percentage of completion - overhead 40%

Units started in April 90,000 Units transferred from grinding to mixing 100,000 Ending Inventory:

Units of product 20,000 Percentage of completion - direct material 100%Percentage of completion - direct labor 25%Percentage of completion - overhead 25%






Material is added at thebeginning of the process soit is always 100% complete.







Overhead is applied on the basis of labor, so both are at the

same percentage of completion.



April Fabrication Department Physical Flow

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units transferred from Fabrication to Mixing 100,000 Ending inventory 20,000 Total number of units 120,000

Physical Flow of Units


Fabrication DepartmentDirect Material Equivalent Units of Production - April 2002

Units of Percent Added EquivalentProduct This Period Units

Beginning goods in process 30,000 0% 0Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 100% 20,000 Total units 120,000 90,000

Computing EquivalentUnits of Production





Since materials are added at the beginning of the process, no additional materials are necessary to complete the

beginning inventory.






} 100,000

100,000 units completed and transferred.



Fabrication Department Direct Labor and FactoryOverhead Equivalent Units of Production - April 2002


Beginning goods in process 30,000 60% 18,000 Goods started and completed 70,000 100% 70,000 Ending work in process 20,000 25% 5,000 Total units 120,000 93,000






Since labor and overhead were 40 percent complete in the beginning

inventory, 60 percent of the work must be completed in April.






} 100,000Transferred



Summary of Fabrication DepartmentEquivalent Units of Production - April 2002

Direct Direct FactoryActivities during April 2002 Material Labor OverheadUnits from beginning inventory

processed in current period 0 18,000 18,000

Units started and completedin current period 70,000 70,000 70,000

Units in ending inventory at end of current period 20,000 5,000 5,000

Equivalent units of productionfor period 90,000 93,000 93,000



Fabrication DepartmentApril Work in Process Costs

Beginning work in process 22,380$ Costs added in April: Direct material 45,000 Direct labor 11,160 Overhead 44,640 Total costs to account for 123,180$



Fabrication DepartmentCost Per Equivalent Unit - April 2002

Direct Direct FactoryMaterials Labor Overhead

Total cost of resource for April 45,000$ 11,160$ 44,640$

Equivalent units of productionin April ÷ 90,000 ÷ 93,000 ÷ 93,000

Cost per equivalent unit forApril = 0.50$ = 0.12$ = 0.48$

Cost per Equivalent Unit


We will account for all costs incurred

by assigning unit costs to the: A. 100,000 units completed and

transferred. B. 20,000 units remaining in ending

work in process inventory.

Cost Reconciliation


Fabrication Department Work in ProcessCost Summary for April 2002

Cost of completed unitsFrom beginning work in process

April 1 balance 22,380$ Costs to complete April 1 inventory

Direct materialDirect labor Overhead

Started and completed Total completed and transferred

Cost of ending work in processDirect material Direct labor Overhead

Total cost accounted for





Direct material 0$ Direct labor (18,000 × $0.12) 2,160 Overhead (18,000 × $0.48) 8,640 10,800

Started and completed Total completed and transferred








Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$



$0.12 + $0.48 + $0.50 = $1.10






Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$

Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Direct labor (5,000 × $0.12) 600 Overhead (5,000 × $0.48) 2,400 13,000

Total cost accounted for 123,180$


AB C

ACB

Activity-Based Costing (ABC)


One of the most difficult tasks in

computing accurate unit costs lies in determining the

proper amount of overhead cost to

assign to each job.

Assigningoverhead is

difficult. I agree!



Level of C

omplexity

Overhead Allocation

Plantwide Overhead

Rate

DepartmentalOverhead

Rates

Activity-BasedCosting



In the ABC method, we recognize that many

activities within a department drive overhead costs.A

B CA

CB



Identify activities and assign indirect costs to those activities.

Central idea . . . Products require activities. Activities consume resources. A

B CA

CB



More detailed measures of costs.Better understanding of activities.More accurate product costs for . . .

Pricing decisions. Product elimination decisions. Managing activities that cause costs.

Benefits should always be compared tocosts of implementation.

The Benefits of ABC


Most cost drivers are related to either volume or complexity of production. Examples: machine time, machine setups,

purchase orders, production orders.

Three factors are considered in choosing a cost driver: Causal relationship. Benefits received. Reasonableness.

Identifying Cost Drivers


Overhead Actual Rate Activity×

Rate = Estimated overhead costs in activity cost pool Estimated number of activity units

Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate for each cost pool:

Assign costs to products:

Activity-Based CostingProcedures


Let’s look at anexample comparingtraditional costing

with ABC. We will start with

traditional costing.

Activity-Based Costing


Pear Company manufactures a product in regular and deluxe models. Overhead is assigned on the basis of direct labor hours. Budgeted overhead for the current

year is $2,000,000. Other information:

Deluxe RegularModel Model

Direct Material 150$ 112$ Direct Labor Cost 16 8 Direct Labor Time 1.6 hours 0.8 hoursExpected Volume (units) 5,000 40,000

First, determine the unit cost of each model using traditional costing methods.

Traditional Costing vs. ABCExample


DirectLabor Hours

Deluxe Model 5,000 units @ 1.6 hours 8,000 Regular Model 40,000 units @ 0.8 hours 32,000 Total Direct Labor Hours (DLH) 40,000

Overhead Estimated overhead costs Rate Estimated activity

=

Overhead $2,000,000 Rate 40,000 DLH

= = $50 per DLH

Traditional Costing



Direct Material 150$ 112$ Direct Labor 16 8 Manufacturing Overhead$50 per hour × 1.6 hours 80 $50 per hour × 0.8 hours 40 Total Unit Cost 246$ 160$

ABC will have differentoverhead per unit.

Traditional Costing


Pear Company plans to adopt activity-based costing. Using the following activity center data, determine the unit cost of the two products using

activity-based costing.

OverheadActivity Cost Cost for Units of ActivityCenter Driver Activity Deluxe Regular

Purchasing Orders 84,000$ 400 800 Scrap Rework Orders 216,000 300 600 Testing Tests 450,000 4,000 11,000 Machine Related Hours 1,250,000 20,000 30,000 Total Overhead 2,000,000$



Overhead UnitsActivity Cost Cost for ofCenter Driver Activity Activity Rate

Purchasing Orders 84,000$ 1,200 Scrap Rework Orders 216,000 900 Testing Tests 450,000 15,000 Machine Related Hours 1,250,000 50,000 Total Overhead 2,000,000$

400 deluxe + 800 regular = 1,200 total



Overhead UnitsActivity Cost Cost for ofCenter Driver Activity Activity Rate

Purchasing Orders 84,000$ 1,200 $ 70 per orderScrap Rework Orders 216,000 900 $240 per orderTesting Tests 450,000 15,000 $ 30 per testMachine Related Hours 1,250,000 50,000 $ 25 per hourTotal Overhead 2,000,000$

Rate = Overhead Cost for Activity ÷ Units of Activity



Deluxe Model Regular ModelActual Cost Actual Cost

Units of Allocated Units of AllocatedActivity Rate Activity to Product Activity to Product

Purchasing $ 70/order 400 ? 800 ?Scrap Rework $240/order 300 ? 600 ?Testing $ 30/test 4,000 ? 11,000 ?Machine Related $ 25/hour 20,000 ? 30,000 ?Total Overhead ? ?





Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 ? 600 ? Testing $ 30/test 4,000 ? 11,000 ? Machine Related $ 25/hour 20,000 ? 30,000 ? Total Overhead ? ?

Cost Allocated to Product = Actual Units of Activity × Rate

Let’s completethe table.





Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$






Purchasing $ 70/order 400 28,000$ 800 56,000$ Scrap Rework $240/order 300 72,000 600 144,000 Testing $ 30/test 4,000 120,000 11,000 330,000 Machine Related $ 25/hour 20,000 500,000 30,000 750,000 Total Overhead 720,000$ 1,280,000$


Total overhead = $720,000 + $1,280,000 = $2,000,000Recall that $2,000,000 was the original amount of

overhead assigned to the products using traditional overhead costing.



Overhead Costs Assigned to Products: Deluxe Model $720,000 ÷ 5,000 units = $144 per unit Regular Model $1,280,000 ÷ 40,000 units = $32 per unit


Direct Materials 150$ 112$ Direct Labor 16 8 Manufacturing Overhead 144 32 Total Unit Cost 310$ 152$



This result is not uncommon when activity-based costing is used. Many companies have found that low-

volume, specialized products have greater overhead costs than previously realized.

Traditional Costing ABCDeluxe Regular Deluxe RegularModel Model Model Model

Direct materials 150$ 112$ 150$ 112$ Direct labor 16 8 16 8 Overhead 80 40 144 32 Total cost 246$ 160$ 310$ 152$



Cost Cost DriverMaterials purchasing Number of purchase ordersMaterials handling Number of materials

requisitionsPersonnel processing Number of employees hired

or laid offEquipment depreciation Number of products

produced or hours of useQuality inspection Number of units inspectedIndirect labor for Number of setups required equipment setupsEngineering costs for Number of modifications product modifications

Costs and Cost Drivers inActivity-Based Costing


End of Chapter 17

Principles of Accounting/ Financial and Managerial Accounting Chapter 17

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Transcript of Principles of Accounting/ Financial and Managerial Accounting Chapter 17